Auditing Problems 2

CRC-ACE REVIEW SCHOOL
The Professional CPA Review School

 7359031 / 7358901
AUDITING PROBLEMS OCTOBER 2007 BATCH
GENERAL INSTRUCTIONS: Select the correct answer for each of the following questions. Mark

only one answer for each item by writing a VERTICAL LINE corresponding to the letter of your choice
on the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use PENCIL NO. 1 or NO. 2
only.
PROBLEM 1
The CRCACE Co. is on a calendar year basis. The following data were found during your audit:
I. Goods in transit shipped FOB Destination by a supplier in the amount of P20,000 had been
excluded from the inventory, and further testing revealed that the purchase had been recorded.
II. Goods costing P10,000 had been received, included in the inventory and recorded as a purchase.
However, upon inspection, the goods were found to be defective and would be immediately
returned.
III. Materials costing P50,000 and billed on December 30 at a selling price of P64,000 had been
segregated in the warehouse for shipment to a customer. The materials had been excluded from
inventory as a signed purchase order had been received from the customer. Terms, FOB
destination.
IV. Goods costing P14,000 was out on consignment with Libra, Inc. Since the monthly statement from
Libra listed those materials as on hand, the items had been excluded from the final inventory and
invoiced on December 31 at P16,000.
V. The sale of P30,000 worth of materials and Costing P24,000 had been shipped FOB point of
shipment on December 31. However, this inventory was found to be included in the final
inventory.
VI. Goods costing P20,000 and selling for P28,000 had been segregated but not shipped at December
31, and were not included in the inventory. A review of the customer’s purchase order set forth
terms as FOB destination. The sale had not been recorded.
VII. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not
arrived as yet. However, these materials costing P34,000 had been included in the inventory
count, but no entry had been made for their purchase.
VIII. Merchandise costing P40,000 had been recorded as a purchase but not included in inventory.
Terms of shipment are FOB shipping point according to the supplier’s invoice which was received
on December 31.
Further inspection of the client’s records revealed the following December 31 balances. Inventory,
P220,000;
Accounts receivable, P116,000; Accounts payable, P138,000; Sales, P1,010,000; Purchases, P640,000;
Net
Income, P102,000.
Compute the adjusted balances of the following items:
1. Inventory
This study source was downloaded by 100000844002337 from CourseHero.com on 03-24-2022 21:25:32 GMT -05:00
https://www.coursehero.com/file/7623086/Auditing-Problems-2/
CRC-ACE/AP: Page 2
a. P310,000 b. P300,000 c. P334,000 d. none of these
2. Accounts receivable
3. Accounts payable
4. Sales
5. Purchases
6. Net income
PROBLEM 2
The account of the XYZ Co. appears as shown below at December 31, 2007:
Motor vehicles
1/1 Balance 7/15 CR15
P8,500,000 P300,000
3/1 V5 79,000
7/1 V 8 654,000
Your examination revealed that P79,000 represents the 2007 registration fees of XYZ’s motor vehicles.
The charge of P654,000 represents the invoice price of a new caragcarag car, including a P14,000
comprehensive car insurance premium for one year. The credit of P300,000 represents the proceeds from
the sale of a truck costing P1,200,000 and had been fully depreciated. Fifty percent (50%) of the
beginning balance represents fully depreciated motor vehicles.
The Co.’s policy on depreciation is detailed as follows:
a. 20% straightline
b. No residual value
c. Full in the year of acquisition and none in the year of disposal
Compute the following items:
7. The adjusted cost of motor vehicle is
a. P7,940,000 b. P4,890,000 c. P8,840,000 d. None of these
8. Insurance expense in 2007 is
a. P0 b. P14,000 c. P7,000 d. None of these
9. Gain on disposal of asset on July 15 is
a. P0 b. P300,000 c. P1,200,000 d. None of these
PROBLEM 3
In conducting your audit of Toyota Corporation, a company engaged in import and wholesale business,
for the fiscal year ended June 30, 2007, you determined that its internal control system was good.
CRC-ACE/AP: Page 3
Accordingly, you observed the physical inventory at an interim date, May 31, 2007 instead of at June 30,
2007.
You obtained the following information from the company’s general ledger:
Sales for eleven months ended May 31, 2007 P 672,000
Sales for the fiscal year ended June 30, 2007 768,000
Purchases for eleven months ended May 31, 2007
(before audit adjustments) 540,000
Purchases for the fiscal year ended June 30, 2007 640,000
Inventory, July 1, 2006 70,000
Physical inventory, May 31, 2007 110,000
Your audit disclosed the following additional information:
(1) Shipments costing P6,000 were received in May and included in the physical inventory but
recorded as June purchases.
(2) Deposit of P2,000 made with vendor and charged to purchases in April, 2007. Product was
shipped in July, 2007.
(3) A shipment in June was damaged through the carelessness of the receiving department. This
shipment was later sold in June at its cost of P8,000.
In audit engagements in which interim physical inventories are observed, a frequently used auditing

procedure is to test the reasonableness of the yearend inventory by the application of gross profit ratios.
10. The gross profit ratio for eleven months ended May 31, 2007 is
a. 20% b. 25% c. 30% d. 35%
11. The cost of goods sold during the month of June 2007 using the gross profit ratio method is
a. P22,000 b. P44,000 c. P74,000 d. P88,000
12. The June 30, 2007 inventory using the gross profit method is
a. P 88,000 b. P 114,000 c. P 174,000 d. P 130,000
PROBLEM 4
The CARR Corporation manufactures a highly flammable product. On June 30, 2007 a fire completely
destroyed its factory and all the work in process inventory therein. However, some records were saved
which showed the following inventory balances as of June 30, 2007.
Raw materials P 60,000
Finished goods 120,000
and as of January 1, 2007 the inventories were as follows:
Raw materials 30,000
Work in Process 100,000
Finished goods 140,000
A review of the records showed that sales and gross profit fort the past five years are as follows:
Sales Gross Profit
2002 P 300,000 P 80,000
2003 320,000 100,000
2004 330,000 100,000
2005 270,000 80,000
2006 280,000 90,000
CRC-ACE/AP: Page 4
Sales for the first six months of 2007 were P300,000. Raw material purchases were P100,000. Freight on
purchase was P20,000. Direct labor for the six months was P80,000. For the past five years
manufacturing overhead was 50 percent of direct labor cost.
Required:
13. Compute the average gross profit rate for the 5 year period.
a. 25% b. 28% c. 30 % d. 32%
14. What was the value of the work in process inventory as of June 30, 2007?
a. P 80,000 b. P140,000 c. P 100,000 d. P 120,000
PROBLEM 5
As the first auditor of the Sunaga Company you discover that the following entries have been made in the
property, plant and equipment account:
Property, Plant, and Equipment
2005 2005
Plant purchased P 60,000 Depreciation P 6,310
Legal fees 700
Insurance 2,400
2006 2006
Repairs 2,000 Depreciation 6,879
Addition to Building 10,000
2007 2007
Repairs 3,000 Machine sold 500
Insurance 2,800 Depreciation 7,421
Machine purchased 7,000
You discover the following additional information:
1. The purchase of the plant included a building and machinery. When the plant was
purchased, an appraisal showed that the building was valued at P39,000 and the machinery
at P26,000.
2. Depreciation has been recorded each year at 10% of the balance in the account. The 10%
was chosen because the property is being depreciated over 10 years for tax purposes.
Subsequent investigation indicates that the expected lives at the time of acquisition were:
Building, 20 years; machinery, 8 years.
3. Each insurance payment was made on January 1 and was for a 2year policy.
4. The machine that was sold in 2007 had an original cost of P800.
5. All purchases and sales of property, plant, and equipment items occurred at the beginning
of the year indicated.
15. The costs of the building and machinery acquired in 2005 should be
Building Machinery
a. P 36,000 P 24,000
b. P 39,000 P 26,000
c. P 36,700 P 24,000
d. P 36,420 P 24,280
16. The 2005 depreciation expense was:
a. correctly stated b understated by P1,510 c. overstated by P1,454 d. overstated by
P1,510
17. The 2006 depreciation expense was:
a. correctly stated b overstated by P1,579 c. overstated by P1,523 d. overstated by P1,497
CRC-ACE/AP: Page 5
18. The gain or loss on machine disposal was:
a. P 100 loss b. P 100 gain c. P 300 loss d. P 140 loss
19. The adjusted balance of Machinery account at December 31, 2007 is:
a. P 30,200 b. P30,480 c. P 30,780 d. P 31,280
20. The carrying value of the building at December 31, 2007 is:
a. P 39,904 b. P 39,600 c. P 39,547 d. P 39,457
PROBLEM 6
The following account balances were included in the balance sheet of the Bromley Company on
December 31, 2006:
Land 100,000
Land improvements 20,000
Buildings 300,000
Machinery and equipment 500,000
During 2007 the following transactions occurred:
Land was acquired for P70,000 for a future building site. Commissions of P4,000 were paid to a real
estate agent.
II. A factory and land were acquired form the Kent Development Company by issuing 20,000 shares of
P3 par common stock. At that time the stock was selling for P10 per share on the Philippine Stock
Exchange. The independently appraised values of the land and the factory were P60,000 and
P180,000, respectively.
III. Machinery and equipment was acquired at a cost of P120,000. In addition, sales tax, freight costs,
and installation costs were P7,000, P10,000 and P16,000, respectively. During installation, the
machinery was damaged and P2,000 was spent in repairs.
IV. A new parking lot was installed at a cost of P30,000
V. A machine that had cost P20,000 on January 1, 2003 and had a book value on December 31, 2007 of
P4,000 was sold on that date for P6,000
VI. Half the land purchased in item 1 was prepared as a building site. Costs of P26,000 were incurred to
clear the land, and the timber recovered was sold for P3,000. A new building was built for P60,000
plus architect’s fees and imputed interest on equity funds used during construction of P18,000 and
P15,000, respectively. No debt is outstanding.
VII. Costs of P20,000 were incurred to improve some leased office space. The lease will terminate in
2007 and is not expected to be renewed.
VIII. A group of new machines was purchased under a royalty agreement that provides for payment of
annual royalties based on units produced. The invoice price of the machines was P30,000, freight
costs were P2,000, and royalty payments for 2007 were P12,000.
Compute the adjusted balances of the following accounts at December 31, 2007.
21. Land
a. P 210,000 b. P 213,000 c. P 220,000 d. P 216,000
22. Building
a. P 545,000 b. P 543,000 c. P 528,000 d. P 530,000
23. Machinery and equipment
a. P 665,000 b. P 663,000 c. P 677,000 d. P 675,000
PROBLEM 7
CRC-ACE/AP: Page 6
In connection with the audit of MONDAY Company’s financial statements, you obtained the following
information pertaining to its cash account.
Cash in bank
July 31 Book disbursements August
136,429 111,423
Book receipts August August 31 balance
141,230 166,236
Further examination revealed the following:
♥ The cash receipts book in August was underfooted by P10,000.
♥ Included in the book receipts in August is a note collected by the bank in July for P1,500.
♥ July NSF checks of P526 and bank service charges of P50 were recorded by the Company in
August.
♥ The bank statement in August showed total debits of P110,098, total credits of P149,951, and an
ending balance of P 180,413.
♥ Among the bank debits are:
NSF checks P 700
Bank error 900
Correction of July error 1,000
Service charges 65
♥ Among the bank credits are:
Correction of July error P 600
Note collected by bank 4,277
Bank error 3,000
♥ Deposits in transit: July 31, P5,200 ; Aug. 31, 8,330
♥ Outstanding checks as of July 31, P8,007.
Determine the following:
24. Cash Shortage
a. P 6,026 b. P 4,526 c. P 5,474 d. P 4,000
25. Outstanding checks, August 31
a. P 11,421 b. P 9,332 c. P 8,007 d. P 3,876
26. Adjusted cash Balance, August. 31
a. P 175,222 b. P 169,748 c. P 125,841 d. P 166,236
27. Adjusted cash balance, July 31
a. P 136,429 b. P 137,353 c. P 111,612 d. P 148,481
PROBLEM 8
The Allen Company is a wholesale distributor of automotive replacement parts. Initial amounts taken
from Allen’s accounting records are as follows:
Net income for the year ended December 31, 2007 P 2,172,000
Inventory at December 31, 2007 (based on Physical count of goods in Allen’s
warehouse on December 31, 2007) 1,250,000
Net purchases in 2007 3,215,000
Net sales in 2007 9,000,000
Vendor Terms Amount
B Company 2% 10 days, net 30 P 265,000
C Company Net 30 210,000
D Company Net 30 300,000
E Company Net 30 225,000
F Company
This study source was downloaded by 100000844002337 Net 30
from CourseHero.com on 03-24-2022 21:25:32 GMT -05:00
CRC-ACE/AP: Page 7
G Company Net 30
P1,000,000
Additional information is as follows:
♥ Parts held on consignment from C to Allen, the consignee, amounting to P155,000, were included
in the physical count of goods in Allen’s warehouse on December 31, 2007, and in accounts
payable at December 31, 2007.
♥ P22,000 of parts which were purchased from F and paid for in December 2007 were sold in the
last week of December 2007 for P28,000. Allen appropriately recorded the sale in December. The
parts were included in the physical count of goods in Allen’s’ warehouse on December 31, 2007,
because the parts were on the loading dock waiting to be picked up by customers.
♥ Parts in transit on December 31, 2007, to customers, shipped F.O.B. shipping point, on December
28, 2007, amounted to P34,000. The customers received the parts on January 6, 2008. Sales of
P40,000 to the customers for the parts were recorded by Allen on January 2, 2008.
♥ Retailers were holding P210,000 at cost (P250,000 at retail), of goods on consignment from Allen,
the consignor, at their stores on December 31, 2007.
♥ Goods were in transit from G to Allen on December 31, 2007. The cost of the goods was
P25,000, and they were shipped F.O.B. shipping point on December 29, 2007.
♥ A quarterly freight bill in the amount of P2,000 specifically relating to merchandise purchases in
December 2007, all of which was still in the inventory at December 31, 2007, was received on
January 3, 2008. The freight bill was not included in either the inventory or in accounts payable at
December 31, 2007.
♥ All the purchases from B occurred during the last seven days of the year. These items have been
recorded in accounts payable and accounted for in the physical inventory at cost before discount.
Allen’s policy is to pay invoices in time to take advantage of all cash discounts, adjust inventory
accordingly, and record accounts payable, net of cash discounts.
28. Adjusted inventory balance at the end of 2007.
a. P1,326,700 b. P1,306,700 c. P1,304,700 d. P1,310,000
29. Adjusted balance of accounts payable at December 31, 2007.
a. P888,700 b. P866,700 c. P1,021,700 d. P872,000
30. Adjusted net purchases in 2007.
a. P3,081,700 b. P3,087,000 c. P3,079,000 d. P3,103,000
31. Adjusted net sales in 2007.
a. P9,000,000 b. P9,040,000 c. P8,960,000 d. P9,018,000
32. Adjusted net income in 2007.
a. P2,400,000 b. P3,422,000 c. P2,425,000 d. P2,403,000
PROBLEM 9
On January 1, 2007, Andromeda, Inc., paid P700,000 for 10,000 shares of Belly Company’s voting
ordinary shares, which was a 10% interest in Belly. At that date the net assets of Belly totaled P6,000,000.
The fair values of all of Belly’s identifiable assets and liabilities were equal to their book values.
Andromeda does not have the ability to exercise significant influence over the operating and financial
policies of Belly. Andromeda received dividends of P0.90 per share from Belly on October 1, 2007.
Belly reported net income of P400,000 for the year ended December 31, 2007.
On July 1, 2008, Andromeda paid P2,300,000 for 30,000 additional shares of Belly Company’s voting
ordinary shares, which represents a 30% investment in Belly. The fair values of all of Belly’s identifiable
assets net of liabilities were equal to their book values of P6,500,000. As a result of this transaction,
Andromeda has the ability to exercise significant influence over the operating and financial policies of
Belly. Andromeda received dividends of P1.10 per share from Belly on April 1, 2008, and P1.35 per
CRC-ACE/AP: Page 8
share on October 1, 2008. Belly reported net income of P500,000 for the year ended December 31, 2008,
and P200,000 for the 6 months ended December 31, 2008. Andromeda does not amortize goodwill but
evaluates at each yearend its possible impairment. No impairment on goodwill has been observed
though.
33. Investment income in 2007
a. P 9,000 b. P 30,000 c. P 40,000 d. P 90,000
34. Carrying value of the investment on December 31, 2007
a. P 721,000 b. P730,000 c. P 691,000 d. P 700,000
35. Investment income in 2008
a. P 110,000 b. P 200,000 c. P 150,000 d. P 140,000
36. Carrying value of the investment on December 31, 2008.
a. P 3,000,000 b. P 3,076,000 c. P 3,110,000 d. P 3,150,000
PROBLEM 10
CITY FAIR Corporation purchased P100,000 8% bonds for P 92,418 on January 1, 2004. CITY FAIR
classified the bonds as available for sale. The bonds were purchased to yield 10% interest. Interest is
payable annually every January 1.
The market values of the bonds are as follows:
December 31, 2004 P 97,160
December 31, 2005 90,393
December 31, 2006 97,240
37. Interest income in 2004
a. P 9,242 b. P 8,000 c. P 10,000 d. P 9,124
38. Interest income in 2006
a. P 8,000 b. P 9,366 c. P 9,503 d. P 10,000
39. Unrealized gain or loss at the December 31, 2006.
a. gain P 711 b. loss P 711 c. gain P 3,267 d. loss P 3,267
40. Carrying value of heldtomaturity investment on December 31, 2006.
a. P 95,026 b. P 93,660 c. P 92,418 d. P 96,529
E N D
AUDITING PROBLEMS
1 A 11 C 21 A 31 B
2 C 12 D 22 C 32 A
3 C 13 C 23 A 33 A
4 B 14 D 24 B 34 D
5 A 15 D 25 A 35 A
6 B 16 C 26 A 36 B
7 A 17 D 27 B 37 A
8 C 18 A 28 C 38 C
9 B 19 B 29 B 39 A
10 B 20 A 30 A 40 D
Powered by TCPDF (www.tcpdf.org)

Auditing Problems 2

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Auditing Problems 2

Uploaded by

Copyright:

Available Formats

CRC-ACE REVIEW SCHOOL

The Professional CPA Review School

GENERAL INSTRUCTIONS: Select the correct answer for each of the following questions. Mark

In audit engagements in which interim physical inventories are observed, a frequently used auditing

Powered by TCPDF (www.tcpdf.org)

You might also like