Applied Auditing Quiz #1 (Diagnostic Exam)
Applied Auditing Quiz #1 (Diagnostic Exam)
PROBLEM NO. 1
You have been assigned to audit the financial statements of AYALA MERCHANTS CORPORATION
for the year 2017. The company is a dealer of appliances and has several branches in Metro
Manila. Its main office is located in Makati City. You were given by the company controller the
unadjusted balances of the items to be included in the company’s statement of financial position
and statement of income as of and for the year ended December 31, 2017. Audit findings are as
follows:
I. AUDIT OF CASH
A cash count was conducted by your staff on January 7, 2018. The petty cash fund of P60,000
maintained by the company on an imprest basis reflected a balance of P22,750. Unreplenished
expenses totaled P37,250 of which P9,510 pertains to January 2018.
You were furnished a copy of the company’s bank reconciliation statement with Chartered
Bank as follows:
Balance per bank P277,994
Add: Deposit in transit 248,836
Bank debit memos 712,750
Returned check 63,000
Less: Outstanding checks (174,580)
Book error (72,000)
Balance per books P1,056,000
1. Postdated checks totaling P107,400 were included as part of the deposit in transit. These
represent collections from various customers whose accounts have been outstanding for
less than three months. These checks were actually deposited on January 8, 2018.
2. Included in the deposit in transit is a check from a customer for P63,000 which was
returned by the bank on December 27, 2017 for insufficiency of funds. This account has
been outstanding for over six months. The check was replaced by the customer on January
15, 2018.
3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes
payable including interest of P10,000 due on December 26, 2017. This was not recorded
as of year-end.
4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as
P102,900. This was in payment of accounts payable.
An analysis of the accounts receivable schedule showed that several long outstanding
accounts for more than a year totaling P152,460 should be written-off.
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The securities are listed in the stock exchange. The company follows the fair value accounting.
The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary. This
is covered by a promissory note with interest at 15% per annum dated November 1, 2017.
No interest has been accrued on the note as of December 31, 2017.
V. AUDIT OF PREPAYMENTS
Ayala Merchants renewed its contract with an advertising agency for the annual promotion as
well as the regular advertisement of its products. It paid a total of P640,000, P100,000 of
which is for the Christmas promotion while the balance is for the regular promotion and which
will run for one year starting on August 1, 2017. Payment was made on July 20, 2017, and
the total amount was reflected as prepaid advertising.
The company leases the main office and store in Makati City at a monthly rental of P140,000.
On November 5, 2017, a check for P420,000 was issued in payment of three-month rental as
per renewal contract which was effective on November 1, 2017. Rental deposit remained at
three months and is included under other assets.
The company’s delivery equipment is insured with Fortune Insurance Corporation for a total
coverage of P2.4 million. Total payment made on November 16, 2017 for the renewal
amounted to P490,000 which covers the period from November 1, 2017 to November 1, 2018.
No adjustment has been made as of December 31, 2017.
To take advantage of volume discount ranging from 10% to 20%, the company buys office
and store supplies on a bulk basis. The staff-in-charge bought supplies worth P220,000 on
June 10, 2017 and included the same in their office supplies inventory. As at year-end, unused
office supplies amount to P102,500.
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The company purchased additional equipment worth P268,000 on June 30, 2017. At the date
of purchase, it incurred the following additional costs which were charged to repairs and
maintenance account:
Freight-in P30,400
Installation cost 13,000
Total P43,400
The above equipment has an estimated useful life of ten years and estimated salvage value
of P20,000. Depreciation for the above equipment has been provided based on original cost.
The company discarded some store equipment on October 1, 2017, realizing no salvage value.
The cost of these equipment amounted to P165,520 with an accumulated depreciation of
P138,620 on December 31, 2017. Depreciation booked from October 1, 2017 to year-end was
P10,480. No entry was made on the disposal of the property.
Some expenses for December 2017 were recorded when paid in January 2018 which included
the following data provided are from client’s employees:
Electric bills P73,400
Commission of sales agents 57,000
Telephone charges 42,500
Minor repair of delivery equipment 21,340
Water bills 18,760
Total P231,000
Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6 million at
an interest rate of 16% per annum on October 1, 2017. Accrued interest on this loan was not
taken up at year-end.
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A review of the minutes of meeting showed that a 10% cash dividend was declared to
shareholders of record as of December 15, 2017, payable on January 31, 2018.
Debit Credit
Petty cash fund P 60,000
Cash in bank 1,056,000
Trading securities 483,640
Accounts receivable – trade 3,618,660
Allowance for doubtful accounts P 110,360
Notes receivable 1,300,000
Inventories 7,274,900
Prepaid advertising 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Office supplies inventory 361,000
Furniture and fixtures 1,298,400
Delivery equipment 2,770,000
Accumulated depreciation 1,177,500
Other assets 548,000
Accounts payable – trade 2,356,320
Notes payable 3,300,000
Accrued expenses 169,040
Bonds payable 5,000,000
Discount on bonds payable 500,000
Ordinary share capital 5,400,000
Retained earnings 792,160
Sales 13,078,000
Cost of goods sold 8,034,000
Operating expenses 3,357,000
Other income 1,453,500
Other charges 625,280
P32,836,880 P32,836,880
2. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850
3. Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700
4. Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140
7. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400
8. Prepaid insurance
A. P449,167 B. P408,333 C. P490,000 D. P428,750
9. Prepaid rent
A. P140,000 B. P0 C. P420,000 D. P280,000
18. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500
PROBLEM NO. 2
To substantiate the existence of the accounts receivable balances as at December 31, 2017 of
LUKAS COMPANY, you have decided to send confirmation requests to customers. Below is a
summary of the confirmation replies together with the exceptions and audit findings. Gross profit
on sales is 20%. The company is under the perpetual inventory method.
21. If the necessary adjusting journal entry is made regarding the case of Sven, the net
income will
A. Decrease by P18,000. C. Increase by P18,000.
B. Decrease by P90,000. D. Increase by P90,000.
22. The effect on 2017 net income of Lukas Company of its failure to record the CM involving
transaction with Huskar:
A. P30,000 over. C. P6,000 over.
B. P30,000 under. D. P6,000 under.
PROBLEM NO. 3
Palito, CPA, has just accepted an engagement to audit the financial statements of Crocodile, Inc.
for the year ending December 31, 2017. After obtaining an understanding of the client’s design
of the accounting and internal control systems and their operation, he then proceeded in
performing test of controls related to production cycle.
26. Which of the following auditing procedures probably would provide the most reliable
evidence concerning the entity’s assertion of rights and obligations related to inventories:
A. Trace the test counts noted during the entity’s physical count to the entity’s
summarization of quantities.
B. Inspect agreements to determine whether any inventory is pledged as collateral or
subject to any liens.
C. Select the last few shipping documents used before the physical count and determine
whether the shipments were recorded as sales.
D. Inspect the open purchase order file for significant commitments that should be
considered for disclosure.
27. Which of the following internal control activities most likely addresses the completeness
assertion for inventory?
A. The work-in-process account is periodically reconciled with subsidiary inventory
records.
B. Employees responsible for custody of finished goods do not perform the receiving
function
C. Receiving reports are prenumbered and the numbering sequence is checked
periodically.
D. There is a separation of duties between the payroll department and inventory
accounting personnel.
28. From the auditor’s point of view, inventory counts are more acceptable prior to the year-
end when
A. Internal control is weak.
B. Accurate perpetual inventory records are maintained.
C. Inventory is slow moving.
D. Significant amounts of inventory are held on a consignment basis.
29. A retailer’s physical count of inventory was higher than that shown by the perpetual
records. Which of the following could explain the difference?
A. Inventory items had been counted but the tags placed on the items had not been
taken off and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customers had not been recorded.
C. No journal entry had been made on the retailer’s books for several items returned to
its suppliers.
D. An item purchased FOB shipping point had not arrived at the date of the inventory
count and had not been reflected in the perpetual records.
30. An auditor will usually trace the details of the test counts made during the observation of
physical inventory counts to a final inventory compilation. This audit procedure is
undertaken to provide evidence that items physically present and observed by the auditor
at the time of the physical inventory count are
A. Owned by the client.
B. Not obsolete.
C. Physically present at the time of the preparation of the final inventory schedule.
D. Included in the final inventory schedule.
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PROBLEM NO. 4
Spark Company pays for all operating expenses with cash and purchases all inventory on credit.
During 2017, cash totaling P471,700 was paid on accounts payable. Operating expenses for 2017
totaled P220,000. All sales are cash sales. The inventory was restocked by purchasing 1,500 units
per month and valued by using periodic FIFO. The unit cost of inventory was P32.60 during
January 2017 and increased P0.10 per month during the year. Spark sells only one product. All
sales are made for P50 per unit. The ending inventory for 2016 was valued at P32.50 per unit.
35. Cost of goods sold for the year ended December 31, 2017
A. P609,125 B. P609,700 C. P606,915 D. P603,625
PROBLEM NO. 5
Transactions between January 1, 2014, and December 31, 2017, which were recorded in the
ledger, are as follows.
July 1, 2014 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which
was P400,000. Isidro Mfg. Co. paid the automobile dealer P220,000 cash on the
transaction. The entry was a debit to Trucks and a credit to Cash, P220,000. The
transaction has commercial substance.
Jan. 1, 2015 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Trucks,
P35,000.
July 1, 2016 A new truck (No. 6) was acquired for P420,000 cash and was charged at that amount
to the Trucks account. (Assume truck No. 2 was not retired.)
July 1, 2016 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for
P7,000 cash. Isidro Mfg. Co. received P25,000 from the insurance company. The
entry made by the bookkeeper was a debit to Cash, P32,000, and credits to
Miscellaneous Income, P7,000, and Trucks, P25,000.
Entries for depreciation had been made at the close of each year as follows: 2014, P210,000;
2015, P225,000; 2016, P250,500; 2017, P304,000.
36. What is the total depreciation expense for the year ended December 31, 2014?
A. P180,000 B. P198,000 C. P172,000 D. P228,000
38. What is the net book value of the Trucks on December 31, 2017?
A. P414,000 B. P348,000 C. P228,500 D. P894,000
39. The total depreciation expense recorded for the 4-year period (2014-2017) is overstated
by
A. P185,500 B. P265,500 C. P287,500 D. P275,500
40. The books have not been closed for 2017. What is the compound journal entry on
December 31, 2017 to correct the company’s errors for the 4-year period (2014-2017)?
A. Accumulated depreciation 629,500
Trucks 480,000
Retained earnings 9,500
Depreciation expense 140,000
B. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 45,500
Depreciation expense 140,000
C. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 185,500
D. Accumulated depreciation 665,500
Trucks 665,500
PROBLEM NO. 6
BANK STATEMENT
Date Check Charges Credits
Dec. 1 792 P 7,500 P 25,500
2 802 9,000 33,000
3 - - 63,900
4 804 9,000 60,000
5 EC 243,000 243,000
8 805 36,000 285,000
9 CM 16 - 36,000
10 799 21,150 462,000
11 DM 57 3.900 231,000
12 808 90,000 63,000
15 803 3,000 -
16 809 183,000 255,000
17 DM 61 180 24,000
18 813 60,000 57,000
19 CM 20 - 145,500
22 815 18,000 -
23 816 108,000 141,000
23 811 24,000 -
23 801 6,000 -
26 814 66,000 96,000
28 818 150,000 222,000
28 DM 112 360 -
29 821 9,000 15,000
29 CM 36 - 36,000
29 820 12,000 -
Totals P1,059,090 P2,493,900
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Additional information:
1. DMs 61 and 112 are for service charges.
2. EC is error corrected.
3. DM 57 is for an NSF check.
4. CM 20 is for loan proceeds, net of P450 interest charges for 90 days.
5. CM 16 is for the correction of an erroneous November bank charge.
6. CM 36 is for customers’ notes collected by bank in December.
7. Bank balance on December 31 is P1,776,810
50. The best evidence regarding year-end bank balances is documented in the
A. Cutoff bank statements.
B. Bank reconciliations.
C. Interbank transfer schedule.
D. Bank deposit lead schedule.
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PROBLEM NO. 7
MINA MINING CO. has acquired a tract of mineral land for P50,000,000. Mina Mining estimates
that the acquired property will yield 150,000 tons of ore with sufficient mineral content to make
mining and processing profitable. It further estimates that 7,500 tons of ore will be mined the
first and last year and 15,000 tons every year in between. (Assume 11 years of mining
operations.) The land will have a residual value of P1,550,000.
Mina Mining builds necessary structures and sheds on the site at a total cost of P12,000,000. The
company estimates that these structures can be used for 15 years but, because they must be
dismantled if they are to be moved, they have no residual value. Mina Mining does not intend to
use the buildings elsewhere.
Mining machinery installed at the mine was purchased secondhand at a total cost of P3,600,000.
The machinery cost the former owner P9,000,000 and was 50% depreciated when purchased.
Mina Mining estimates that about half of this machinery will still be useful when the present
mineral resources have been exhausted but that dismantling and removal costs will just about
offset its value at that time. The company does not intend to use the machinery elsewhere. The
remaining machinery will last until about one-half the present estimated mineral ore has been
removed and will then be worthless. Cost is to be allocated equally between these two classes of
machinery.
51. What are the estimated depletion and depreciation charges for the 1st year?
Depletion Depreciation
A. P4,845,000 P870,000
B. P4,845,000 P780,000
C. P2,422,500 P870,000
D. P2,422,500 P780,000
52. What are the estimated depletion and depreciation charges for the 5th year?
Depletion Depreciation
A. P2,422,500 P1,740,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000
53. What are the estimated depletion and depreciation charges for the 6th year?
Depletion Depreciation
A. P2,422,500 P1,560,000
B. P2,422,500 P1,740,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000
54. What are the estimated depletion and depreciation charges for the 7th year?
Depletion Depreciation
A. P2,422,500 P1,380,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,380,000
D. P4,845,000 P1,560,000
55. What are the estimated depletion and depreciation charges for the 11th year?
Depletion Depreciation
A. P4,845,000 P1,380,000
B. P4,845,000 P690,000
C. P2,422,500 P1,380,000
D. P2,422,500 P690,000
PROBLEM NO. 8
The HVR Company included the following in its notes receivable on December 31, 2017:
The following transactions during 2017 and other information relate to the company’s notes
receceivable:
a) On January 1, 2017, HVR Company sold a tract of land to Triple X Company. The land,
purchased 10 years ago, was carried on HVR’s books at P1,500,000. HVR received a
noninterest-bearing note for P2,640,000 from Triple X. The note is due on December 31,
2018. There was no established exchange price for the land. The prevailing interest rate for
this note on January 1, 2017 was 10%.
b) On January 1, 2017, HVR Company received a 5%, P3,600,000 promissory note in exchange
for the consultation services rendered. The note will mature on December 31, 2019, with
interest receivable every December 31. The fair value of the services rendered is not readily
determinable. The prevailing rate of interest for a note of this type was 10% on January 1,
2017.
c) On January 1, 2017, HVR Company sold an old equipment with a carrying amount of
P4,800,000, receiving P7,200,000 note. The note bears an interest rate of 4% and is to be
repaid in 3 annual installments of P2,400,000 (plus interest on the outstanding balance). HVR
received the first payment on December 31, 2017. There is no established market value for
the equipment. The market interest rate for similar notes was 14% on January 1, 2017.
Note: Round off present value factors to four decimal places and final answers to the nearest
hundred.
58. The amount to be reported as noncurrent notes receivable on December 31, 2017 is
A. P7,482,200 B. P6,037,300 C. P5,477,500 D. P7,877,600
59. The amount to be reported as current notes receivable on December 31, 2017 is
A. P4,800,000 B. P2,400,200 C. P4,404,900 D. P7,440,000