Internal Control Measures: Page 1 of 7
Internal Control Measures: Page 1 of 7
1. Additions and dispositions of fixed assets should be properly authorized and approved by the board of directors or
executive committee or person to whom authority has been delegated.
2. A clearly defined and sound policy for differentiation of capital and revenue expenditures should be established.
1. Physically inspect the assets for a sample of property, plant and equipment recorded in the plant ledger.
2. Physically inspect the assets and examine supporting documentation for additions to property, plant and equipment.
3. Verify that existing retirements and disposals are recorded and properly valued.
5. Analyze repairs and maintenance for expenditures that should have been capitalized.
6. Examine lease and loan agreements to identify any liabilities that should be recorded.
Rights and obligations: Property, plant and equipment are owned by the entity
7. Determine whether liens or mortgages have been placed on property, plant and equipment by examining bank
confirmations and reading minutes of the board of directors’ meetings.
Valuation and allocation: Property, plant and equipment are valued in accordance with GAAP
9. Verify depreciation.
Presentation and disclosure: Property, plant and equipment are classified and disclosed in accordance with GAAP
10. Review financial statements and perform analytical procedures to determine whether accounts are classified and
disclosed in the financial statements in accordance with GAAP.
- end -
Page 1 of 7
PROBLEM NO. 1
White Company commenced operations on 1 July 2021. During the following year, the company acquired a tract of
land, demolished the building on the land and built a new factory. Equipment was acquired for the factory and, in March
2022, the plant was ready to commence operation.
REQUIRED:
Compute for the following:
1. Land
2. Land improvements
3. Building
4. Equipment
5. Total depreciable property, plant and equipment
PROBLEM NO. 2
You were engaged in making your second annual examination of Indigo Company. The Machinery and Accumulated
Depreciation accounts are shown below:
Machinery
01/01/22 Balance P 500,000 09/01/22 Sale of machine
No. 3 P 10,000
06/01/22 Machine No. 23 150,000 12/31/22 Balance 644,000
09/01/22 Dismantling of
Machine No. 3 4,000 .
P 654,000 P 654,000
01/01/23 Balance P 644,000
Accumulated Depreciation
12/31/22 Balance P 344,400 01/01/22 Balance P 280,000
. 12/31/22 Depreciation 64,400
P 344,400 P 344,400
01/01/23 Balance P 344,400
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c. Machine No. 3, which was purchased on March 1, 2018, at a cost of P80,000, was sold on September 1, 2022 for
P10,000 cash.
d. Included in charges to Repairs and Maintenance account was an invoice for installation of Machine No. 23, in the
amount of P35,000.
e. It is the company’s policy to take full year’s depreciation in the year of acquisition and none in the year of disposition.
QUESTIONS:
Based on the information presented above and the result of your audit, answer the following:
1. How much is the loss on the sale of Machine no. 3?
a. P38,000 c. P42,000
b. P37,333 d. P 0
2. How much is the adjusted balance of the Machinery account as of December 31, 2022?
a. P644,000 c. P605,000
b. P296,500 d. P609,000
3. How much is the total depreciation expense on machinery for 2022?
a. P64,400 c. P50,000
b. P60,500 d. P58,125
4. How much is the balance of the Accumulated Depreciation account as of December 31, 2022?
a. P308,500 c. P344,000
b. P301,458 d. P340,500
5. The adjusting entry to correct the entry made in recording sale of Machine no. 3 will include a debit to
a. Loss on sale of machinery P42,000
b. Accumulated depreciation P32,000
c. Both a and b
d. No adjusting entry is necessary.
PROBLEM NO. 3
In the audit of the books of Yellow Company for the year 2022, the following items and information appeared in the
Production Machines account of the auditee:
Date Particulars Debit Credit
2022
01/01 Balance–Machines 1, 2, 3, and 4 at P90,000 each
P 360,000
08/31 Machine 5 198,000
Machine 1 P 3,000
09/30 Machine 6 96,000
12/01 Machines 7 and 8 at P216,000 each
432,000
12/01 Machine 2 21,000
12/31 Balance . 1,062,000
P1,086,000 P1,086,000
The Accumulated Depreciation account contained no entries for the year 2022. The balance on January 1, 2022 per your
audit, was as follows:
Machine 1 P 84,375
Machine 2 39,375
Machine 3 33,750
Machine 4 22,500
Total P 180,000
Based on your further inquiry and verification, you noted the following:
1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this date for P3,000.
2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on December 1, 2022. Insurance of
P21,000 was recovered. Machine 7 was to replace Machine 2.
3. Machine 3 was traded in for Machine 6 at an allowance of P12,000; the difference was paid in cash and charged to
Production Machine account.
REQUIRED:
Determine the adjusted balance of the Production Machine as of December 31, 2022 and Depreciation Expense for the
year 2022.
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PROBLEM NO. 4
You requested a depreciation schedule for Semitrucks of Blue Manufacturing Company showing the additions,
retirements, depreciation and other data affecting the income of the Company in the 4-year period 2019 to 2022,
inclusive. The Semitrucks account consists of the following as of January 1, 2019:
Truck No. 1 purchased Jan. 1, 2004, cost P 180,000
Truck No. 2 purchased July 1, 2004, cost 220,000
Truck No. 3 purchased Jan. 1, 2018, cost 300,000
Truck No. 4 purchased July 1, 2018, cost 240,000
P 940,000
The Semitrucks – Accumulated Depreciation account previously adjusted to January 1, 2019, and duly entered to the
ledger, had a balance on that date of P302,000 (depreciation on the 4 trucks from respective date of purchase, based on
five-year life, no salvage value). No charges have been made against the account before January 1, 2019.
Transactions between January 1, 2019 and December 31, 2022, and their record in the ledger were as follows:
July 1, 2019 Truck No. 3 was traded for larger one (No. 5), the agreed purchase price of which was P340,000. Blue
Mfg. Co. paid the automobile dealer P150,000 cash on the transaction. The entry was debit to
Semitrucks and a credit to cash, P150,000.
Jan. 1, 2020 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Semitrucks, P35,000.
July 1, 2021 A new truck (No. 6) was acquired for P360,000 cash and was charged at that amount to Semitrucks
account. (Assume truck No. 2 was not retired.)
July 1, 2021 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for P7,000 cash. Blue
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 Semitrucks P 25,000.
Entries for depreciation had been made for the close of each year as follows: 2019, P203,000; 2020, P211,000; 2021,
P244,500; 2022, P278,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Disregard tax implications)
1. The carrying amount of Semitrucks as of December 31, 2022 is
a. P885,400 c. P284,000
b. P504,000 d. P354,000
2. The 2022 depreciation expense is
a. P138,000 c. P184,000
b. P104,000 d. P140,000
3. The 2019 profit is overstated by
a. P9,000 c. P20,000
b. P31,000 d. P 0
4. The 2020 profit is understated by
a. P16,000 c. P51,000
b. P50,000 d. P 0
5. The 2021 profit is understated by
a. P23,500 c. P94,500
b. P64,500 d. P 0
PROBLEM NO. 5
You are engaged to examine the financial statements of the Olive Manufacturing Corp. for the year ended December
31, 2022. The following schedules for property, plant, and equipment and related accumulated depreciation accounts
have been prepared by your client. The opening balances agree with your prior year’s audit working papers.
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Accumulated Depreciation
Audited Per books
12-31-21 Additions Retirement 12-31-22
Buildings P1,200,000 P103,000 P - P1,303,000
Machinery & equipment 546,500 313,600 - 860,100
P1,746,500 P416,600 P - P2,163,100
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The carrying amount of the buildings on December 31, 2022 is
a. P1,820,250 c. P1,816,250
b. P1,827,400 d. P1,447,000
2. The carrying amount of the land on December 31, 2022 is
a. P650,000 c. P750,000
b. P450,000 d. P545,000
3. The carrying amount of the property, plant and equipment as of December 31, 2022 is
a. P3,860,750 c. P3,955,750
b. P3,755,750 d. P3,312,900
4. The loss on the disposal of the machinery sold for P520,000 is
a. P56,000 c. P152,000
b. P80,000 d. P 0
PROBLEM NO. 6
Magic Corporation constructed a nuclear power plant at a cost of P110 million and started operating it on 1 January 2001.
The plant has a useful life of 40 years. Magic is required to decommission the plant at the end of its useful life at an
estimated amount of P80 million. The risk-adjusted rate is 5 per cent. The entity’s financial year ends on 31 December.
On 31 December 2022, the discount rate has not changed. However, Magic estimates that, as a result of technological
advances, the net present value of the decommissioning liability has decreased by P8 million.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. The amount to be recognized as cost of plant on 1 January 2001 is
a. P190 million c. P110 million
b. P121.36 million d. P 98.64 million
2. The plant should be reported on the entity’s December 31, 2022 statement of financial position at
a. P142.5 million c. P82.5 million
b. P134.5 million d. P83.02 million
3. The decommissioning liability should be reported on the entity’s December 31, 2022 statement of financial position at
a. P10.512 million c. P72 million
b. P16.661 million d. Nil
4. The depreciation amount to be reported for the year ended December 31, 2023 is
a. P4,483,333 c. P2,767,333
b. P2,834,000 d. P2,750,000
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5. The finance cost to be reported for the year ended December 31, 2023 is
a. P833,040 c. P168,000
b. P525,600 d. Nil
PROBLEM NO. 7
The draft statement of financial position of JJ Rapids Corporation as of December 31, 2022 reported the net property,
plant and equipment at P6,270,000. Details of the amount follow:
Land at cost P1,000,000
Building at cost P4,000,000
Less accumulated
depreciation at 12/31/21 ( 800,000) 3,200,000
Plant at cost 5,200,000
Less accumulated
depreciation at 12/31/21 (3,130,000) 2,070,000
P6,270,000
The following matters are relevant
(a) The company policy for all depreciation is that it is charged to cost of sales and a full year’s charge is made in the
year of acquisition or completion and none in the year of disposal.
(b) Included in the sales revenue is P300,000 being the sales proceeds of an item of plant that was sold on June 30,
2022. The plant had originally cost P900,000 and had been depreciated by P630,000 as of December 31, 2021.
Other than recording the proceeds in sales and cash, no other accounting entries for the disposal of the plant have
been made. All plant is depreciated at 25% per annum on the reducing balance basis.
(c) On September 30, 2022, the company completed the construction of a new warehouse. The construction was
achieved using the company’s own resources as follows:
Purchased materials P150,000
Direct labor 800,000
Supervision 65,000
Design and planning costs 20,000
Included in the above figures are P10,000 for materials and P25,000 for labor costs that were effectively lost due to
the foundations being too close to a neighboring property. All the above costs are included in cost of sales. The
building was brought into immediate use upon completion and has an estimated useful life of 20 years (straight-line
depreciation).
(d) At the beginning of the current year, the company had an open market basis valuation of its properties (excluding
the newly constructed warehouse). Land was valued at P1.2 million and the property at P4.8 million. The directors
wish these values to be incorporated into the financial statements. The properties had an estimated remaining life of
20 years at the date of the valuation (straight-line depreciation is used). The company makes a transfer to retained
earnings in respect of the excess depreciation on revalued assets.
(e) Depreciation for the year 2022 has not yet been accounted for the in the draft financial statements.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The carrying amount of the new warehouse as of December 31, 2022 is
a. P1,000,000 c. P950,000
b. P 869,250 d. P987,500
2. The carrying amount of plant as of December 31, 2022 is
a. P1,350,000 c. P1,282,500
b. P1,375,310 d. P1,710,000
3. The total depreciation for the year ended December 31, 2022 is
a. P736,250 c. P380,000
b. P735,750 d. P740,000
4. The revaluation surplus as of December 31, 2022 is
a. P1,720,000 c. P1,800,000
b. P1,710,000 d. P 960,000
PROBLEM NO. 8
Select the best answer for each of the following:
1. Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud because
a. The amounts recorded on the balance sheet for most companies are immaterial.
b. The inherent risk is usually low.
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this account.
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2. Determining that proper amounts of depreciation are expensed provides assurance about management’s assertions
of valuation and
a. Presentation and disclosure.
b. Rights and obligations.
c. Completeness.
d. Existence or occurrence.
3. The auditor may conclude that depreciation charges are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.
4. When few property and equipment transactions occur during the year the continuing auditor usually obtains and
understanding of internal control and performs
a. Tests of controls
b. Analytical procedures to verify current year additions to property and equipment
c. A thorough examination of the balances at the beginning of the year.
d. Extensive tests of current year property and equipment transactions.
5. Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence about fixed
asset addition?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirming ownership and corroborating transactions through inquiries of client personnel.
6. If an auditor tours a production facility, which of the misstatements or questionable practices is most likely to be
detected by the audit procedures specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
8. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion
that all
a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
b. Expenditures for property and equipment have been recorded in the proper period.
c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
d. Expenditures for property and equipment have not been charged expense.
9. In violation of company policy, Coatsen Company erroneously capitalized the cost of painting its warehouse. An
auditor would most likely detect this when
a. Discussing capitalization policies with Coatsen's controller.
b. Examining maintenance expense accounts.
c. Observing that the warehouse had been painted.
d. Examining construction work orders that support items capitalized during the year.
=END=
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