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Tabunda Score:_______
MIDTERM EXAMS
I. Problems.
A. In connection with your examination, the Gorgy Company presented to you the following information
regarding its Cash in Bank account for the month of December, 2005:
a) Balances per bank statements: November 30, P107,800, and December 31, P115,200.
b) Balances of cash in bank account in company’s books: November 30, P82,725, and December 31,
P113,400.
c) Total receipts per books were P1,110,950 of which P6,050 was paid in cash to a creditor on December
24.
d) Total charges in the bank statement during December were P1,094,850.
e) Undeposited receipts were: November 30, P45,300 and December 31, P50,600.
f) Outstanding checks were: November 30, P13,375, and December 31, P9,650, of which a check for
P2,500 was certified by the bank on December 26.
g) NSF checks returned, recorded as reduction of cash receipts, were:
* Returned by bank on December, recorded also in December, P5,200.
* Returned by bank on December but recorded in January, P4,300
h) Collections by bank not recorded by Company were P60,750 in November and
P58,200 in December.
i) Bank service charges not entered in company’s books were: November 30, P3,750 and December 31,
P2,100.
j) A check for P4,750 of Found Company was charged to Pound Company in error.
k) A check drawn for P4,200 was erroneously entered in the books as P2,400.
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted cash balance as of November 30, 2005?
a. P107,800 b. P139,725. c. P75,875 d. P137,225
B. BRAND CO. reported P9,000 of net income for 2007. The correct net income however was P11,000. It
was determined that the ending inventory was overstated by P1,000. The only other error was with the
beginning inventory which must have been:
a. Understated by P1,000
b. Understated by P3,000
c. Overstated by P1,000
d. Overstated by P3,000
C. On December 30, 2007, SWIFT CO. shipped to a customer merchandise with selling price of P37,500;
terms net 30, FOB Shipping Point. The sale which is 125% of cost was recorded in January 2007 when the
check was received from the customer. Ending inventory was determined by physical count on
December 31, 2007.
.As a result of the above transactions, SWIFT CO.’s cost of goods sold for the year ended December 31,
2007 was:
a. Understated by P3,000
b. Overstated by P30,000
c. Overstated by P37,500
d. Correctly stated
D. You are reviewing the notes payable and interest expense accounts of Cole Manufacturing Co. as of
December 31, 2007 and noted that the company regularly borrows from the bank in order to finance
working capital. The following schedule shows loans with 12% interest rate, with interest payable at
maturity. All loans are repaid at its scheduled maturity date and interest expense is 7recorded when the
loans are repaid.
E. Voltron Inc. reported inventory of P360,000 at December 31, 2006. The following data were gathered
to confirm the reported inventory figure.
Inventory, December 31, 2005 P 320,000
Purchases during 2006 1,410,000
Cash sales during 2006 350,000
Shipment received on December 26, 2006 included in physical inventory
but not recorded as purchases 10,000
Deposit made with suppliers, entered as purchased goods
were not received during 2006 20,000
Collections on accounts receivable during 2006 1,800,000
Accounts receivable, December 31, 2005 250,000
Accounts receivable, December 31, 2006 300,000
Gross profit percentage on sales 40%
What is the estimated inventory shortage at December 31, 2006?
a.P60,000 b.P50,000 c.P40,000 d.P 5,000
F. The balance sheet for the Dixie Corporation on December 31, 2007 includes the following receivables
balances:
Notes Receivable P365,000
Less notes discounted 155,000
P210,000
Accounts Receivable P856,000
Less allowance for doubtful accounts 41,500
814,500
Selected transactions during 2008 included the following:
a. Notes received in settlement of accounts totaled P825,000.
b. Notes receivable discounted as of December 31, 2007, were paid at maturity with the exception of
one P30,000 note on which the company had to pay the bank P30,900, which included interest and
protest fees. It is expected that recovery will be made on this note early 2009.
c. Customers’ notes of P600,000 were discounted with recourse during the year, proceeds from their
transfer being P585,000. Of this total, P480,000 matured during the year without notice of protest.
d. Notes receivable collected during the year totaled P270,000 and interest collected was P24,500.
Determine the adjusted balances of the following accounts as of December 31, 2008:
1. Notes Receivable (including notes receivable discounted).
a. P320,000 b. P365,000 c. P165,000 d. P285,000
2.Notes Receivable Discounted
a. P155,000 b. P600,000 c. P120,000 d. P105,000
E. On July 1, 2005, Pir Carding Company acquired 25% of the outstanding shares of
equity of the stock acquired by Pir Carding was only P6,000,000. Pir Carding is willing to
pay more than the book value for the following reasons:
a) Cinderella owned depreciable plant assets (10-year remaining economic life) with a
b) Cinderella owned land with current fair value of P3,000,000 more than its carrying
amount.
c) There are no other identifiable tangible or intangible assets with fair value in excess of
Cinderella earned net income of P5,400,000 evenly over the year ended December 31,
2005. On December 31, Cinderella declared and paid a cash dividend of P1,050,000 to
common stockholders. Market value of Pir Carding’s share of the stock at December 31,
2005 is P7,500,000. Both companies close their accounting records on December 31.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Total amount of goodwill of Cinderella Corporation based on the price paid by Pir
Carding
II. Theories.
1.Which of the following auditor concerns most likely could be so serious that the auditor concludes that
a financial statement audit cannot be performed?
a. Management fails to modify prescribed internal controls for changes in information technology.
b. Internal control activities requiring segregation of duties are rarely monitored by management.
c. Management is dominated by one person who is also the majority stockholder.
d. There is a substantial risk of intentional misapplication of accounting principles.
2.In assessing the objectivity of internal auditors, an independent auditor should:
a. Evaluate the quality control program in effect for the internal auditors.
b. Examine documentary evidence of the work performed by the internal auditors.
c. Test a sample of the transactions and balances that the internal auditors examined.
d. Determine the organizational level to which the internal auditors report.
3. Which of the following relatively small misstatements most likely could have a material effect on an
entity's financial statements?
a. An illegal payment to a foreign official that was not recorded.
b. A piece of obsolete office equipment that was not retired.
c. A petty cash fund disbursement that was not properly authorized.
d. An uncollectible account receivable that was not written off.
4. In auditing the financial statements of Star Corp., Land discovered information leading Land to believe
that Star's prior year's financial statements, which were audited by Tell, require substantial revisions.
Under these circumstances, Land should:
a. Notify Star's audit committee and stockholders that the prior year's financial statements cannot be
relied on.
b. Request Star to reissue the prior year's financial statements with the appropriate revisions.
c. Notify Tell about the information and make inquiries about the integrity of Star's management.
d. Request Star to arrange a meeting among the three parties to resolve the matter
5.To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most
likely would trace:
a. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors'
invoices.
b. Items listed in receiving reports and vendors' invoices to the inventory listing.
c. Inventory tags noted during the auditor's observation to items in the inventory listing.
d. Items in the inventory listing to inventory tags and the auditor's recorded count sheets.
1. A client has a large and active investment portfolio that is kept in a bank safe-deposit
box. If the auditor is unable to count the securities at the balance sheet date, the
a. Request the bank to confirm to the auditor the contents of the safe deposit box at
c. Count the securities at a subsequent date and confirm with bank whether securities
d. Request the client to have a bank seal the safe-deposit box until the auditor can
2. When an auditor is unable to inspect and count a client’s investment securities until
after the balance sheet date, the bank where the securities are held in a safe deposit
a. Verify any differences between the contents of the box and the balances in the
b. Provide a list of securities added and removed from the box between the balance
c. Count the securities in the box so that the auditor will have an independent direct
verification.
d. Confirm that there has been no access to the box between the balance- sheet date
3. Which of the following is not one of the auditor’s primary objectives in an audit of
trading securities?
d. To determine whether securities are properly classified on the balance sheet date.
4. Apol Boba, CPA, observes the count of securities on December 31. She records the
serial numbers of the securities and reconciles them and the number of shares with
a. An investee company declared and paid a stock dividend on December 15. The
stock certificate for the additional shares was received directly by the treasurer who
successfully with the proceeds and replaced the securities on December 29.
d. The treasurer embezzled interest receipts from bonds by having the payments
5. Which of the following is the least effective audit procedure regarding the existence
6. An auditee is holding equity securities as collateral for a debt. The auditor should
a. Determine from data published in the financial press that the auditee has recorded
7. Which of the following is the most effective audit procedure for verification of dividends
8. In confirming with an outside agent, such as a financial institution, that the agent is
holding investment securities in the client’s name an auditor most likely gathers
a. Valuation c. Completeness
the form of publicity traded stock and auditor should inspect the securities or
a. Obtain written representations from management confirming that the securities are
10.An auditor most likely to verify the interest earned on bond investment by
c. Recomputing the interest earned on the basis of face amount, interest rate, and
period held.
11.Which of the following provides the best form of evidence pertaining to the annual
valuation of an investment in which the independent auditor’s client owns a 30% voting
interest?
12.In verifying the amount of goodwill recorded by a client, the most convincing evidence
an auditor can obtain is by comparing the recorded value of assets acquired with the
13.The auditor can best verify a client’s bond sinking-fund transactions and year-end
balance by
discount or premium.