wrwftAuditing Problems

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1. Draftwqbejk income statement of Raffles Inc. is as follows:
Sales
Cost of sales
Opening inventory
Purchases
Closing inventory
Gross profit
Expenses
Profit
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P700,000
60,000
430,000
90,000

400,000
300,000
200,000
P100,000

How much is the correct profit after the following adjustments?

(1) Closing inventory includes goods costing P20,000 which are expecthrtjhtyjtyed to realize at P19,000.
(2) A customer has taken legal action for damages of hgzzzzzzzzzzzzzzzzzzzzzzjP50,000 against Raffles.
The lawyer of Raffles has advised the customer that he has a 25% chance of succeskj.
(3) After the balance sheet date, a vehicle was damaged in an accident. The carrying amount of the vehicle
was P6,000. It was not insured.
(4) Raffles has sued one of its competitors for P60,000. The chance of Raffles winning the case is 75%.
The outcome will be known in three months.
A
.
B.
C.
D
.

P159,000
P103,000
P99,000
P49,000

Solution: C is correct
Unadjusted profit
(1) Write down of inventory to its NRV (20,000 19,000)
(2) Loss not probable no adjustment
(3) Non-adjusting event after the balance sheet date - no
adjustment
(4) Gain not virtuallycertain no adjustment
Adjusted profit

P100,000
(1,000)
P99,000

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2. Zod Company reports the following information as of December 31:

Sales revenue
Cost of goods sold
Operating expenses
Unrealized gain on available-for-sale securities

P800,000
600,000
90,000
30,000

How much should the company report as total comprehensive income?

A
.
B.
C.
D
.

P80,000
P110,000
P140,000
P200,000

Solution: C is correct
Sales revenue
Less: Cost of goods sold
Less: Operating expenses
Amount taken to P&L
Amount taken to OCI
Total comprehensive income

P800,000
600,000
90,000
P110,000
30,000
P140,000

3. You are assigned to the audit of Canon Company who spent P12,000,000 during the current year
developing its new software package. Of this amount, P4,000,000 was spent before it was at the
application development stage and the package was only to be used internally. The package was
completed during the year and is expected to have a four year useful life. Canon Company has a policy of
taking a full-year's amortization in the first year. After the development stage, P50,000 was spent on
training employees to use the program. What amount should Canon Company report as an expense for the
current year?
A
.
B.
C.
D
.

P2,012,500
P2,050,000
P6,012,500
P6,050,000

Solution: D is correct
Amount spent before the development stage
Amount spent on training employees
Amortization of the software package
(12M 4M) / 4 years
Total expense to be recognized

P4,000,000
50,000
2,000,000
P6,050,000

4. You were assigned to audit the factory accounts of Ministops Corporation for the year ended December
31, 2012. The following data were gathered: Manufacturing cost totalled P900,000. Cost of goods
manufactured was P800,000 of which factory overhead was 75% of direct labor. Overhead was 25% of
total manufacturing cost. Beginning work-in process inventory was 60% of ending work-in-process
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inventory. Manufacturing costs for the year ended December 31, 2012 submitted to you by the factory
accountant were as follows:
Raw materials used
Direct labor
Factory overhead
Total

P400,000
275,000
225,000
P900,000

Assume cost percentage relationships as stated were correct. Which of the following adjusting journal
entries is correct?
A. Raw materials used
Direct labor
B. Direct labor
Raw materials used
C. Raw materials used
Direct labor
D. Direct labor
Raw materials used

P25,000
P25,000
P25,000
P25,000
P50,000
P50,000
P50,000
P50,000

Solution: B is correct
Factory overhead (75% of direct labor)
Divided by 75%
Direct labor, per recomputation
Direct labor, unadjusted
Adjustment to direct labor

P225,000
75%
300,000
275,000
P25,000

5. On June 1, 2008, Psy Corporation purchased as a long term investment 6,000 of the P1,000 face value, 8%
bonds of Lyre Corporation. Psy Corporation has the positive intention and ability to hold these bonds to
maturity. The bonds were purchased to yield 10% interest. Interest is payable semi-annually on
December 1 and June 1. The bonds mature on June 1, 2014. On November 1, 2009, Psy Corporation sold
the bonds for a total consideration of P5,887,500. Based on the above and the result of your audit,
determine the following: (Round off present value factors to four decimal places) - the purchase price of
the bonds on June 1, 2008 is
A
.
B.
C.
D
.

P5,467,992
P5,467,992
P5,545,104
P5,436,894

Solution: A is correct
PV of the principal
(0.5568 x 6,000,000)
PV of the interest
(8.8633 x 6,000,000 x 4%)

P3,340,800

2,127,192
P5,467,992
6. The Tiger Corporation included the following in its unadjusted trial balance as of December 31, 2012:
Inventory, 12/31/11
Purchases

P19,450,000
127,850,000
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Additional information:

The inventory at December 31, 2012 was counted at a cost of P8.5 million. This includes P500,000 of
slow moving inventory that is expected to be sold for P300,000.
Sales include P8 million for goods sold in December 2012 for cash to Beer Finance Company. The cost
of these goods was P6 million. Beer Finance Company has the option to require Tiger to repurchase
these goods within one month of year-end at their original selling price plus a facilitating fee of
P250,000.
The Companys accounting policy is to present cost of writing down inventory to NRV as part of cost
of sales.

The cost of sales for the year ended December 31, 2012 is
A P138,800,000
.
B. P133,000,000
C. P132,800,000
D P139.000.000
.
Solution: B is correct
Amount in thousands:
Inventory, beginning
Add: Purchases
Less: Inventory, ending
Cost of sales, unadjusted
Add: to adjust to net realizable value the items in ending inventory
Less: Item sold under repurchase agreement
Cost of sales, adjusted

P19,450
127,850
8,500
138,800
200
6,000
P133,000

7. Inventory per count on December 31, 2012 as reported by WS Company was at P560,000. The amount
does not include the following items:
A. Merchandise costing P27,500 received on January 3, 2013, and purchase invoice recorded on
January 5, 2013. Shipment was made on December 25, 2012,terms FOB destination.
B. Merchandise costing P20,000 was physically segregated in the warehouse and was set aside for
shipmentto a customer (shipment scheduled on January 2, 2013). This will be invoiced to the
customer by then at P28,000.
C. Merchandise received on January 7, 2013, costing P17,000 was entered in the purchases journal on
January 8, 2013. Invoice shipment was made FOB shipping point on December 30, 2012.
What is the adjusted balance of inventories to be presented in the 2012 statement of financial position?
A P597,000
.
B. P580,000
C. P578,000
D P587,500
.
Solution: A is correct
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Unadjusted inventory balance

Item (a) Goods received January 2013, under FOB Destination, thus item is
correctly excluded
Item (b) Goods still in warehouse but were not included in the count
Item (c) Goods received January 2013, under FOB shipping point. Items shipped
December 30, 2012
Adjusted inventory balance

P560,000
20,000
17,000
P597,000

8. Bohol Company leased office premises to Jill Company for a 5-year term starting January 2, 2013. Under the
terms of the lease, rent for the first year is P200,000 and rent for years 2 through 5 is P300,000 annually. As
an inducement to enter the lease, Bohol Company waives the first six month payments. Jill Company likewise
paid a P70,000 security deposit of which 80% is refundable at the end of the lease term. Furthermore,
contingent rent equal to 2% of sales in excess of P12,000,000 shall be paid by Jill Company. Bohol Company
incurred initial direct cost of P40,000 while JL Company paid P30,000 in costs in relation to the lease. In
2013, Jill Company reported sales of P13,000,000.
Rental expense to be included in Jill Companys 2013 income statement is
A 288,800
.
B. 268,800
C. 302,200
D 315,000
.
Solution: A is correct
Total rental payments for five years(P200,000/2) + (P300,000 x 4)
Divided by total years
Annual rental expense (fixed)
Contingent rent [(P13M P12M) x 2%]
Direct cost incurred(30,000 / 5)
Non-refundable portion of security deposit(P70,000 x 20%) / 5
Total rental expense

P1,300,000
5 years
P260,000
20,000
6,000
2,800
P288,800

The following information applies to the next two questions:

Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client
for late December 2010 and early January 2011:
Bank Account One
Bank Account Two
Disbursing Date

Receiving Date

(Month/Day)

(Month/Day)

Per Bank

Per Books

Per Bank Per Books

1.

12/31

12/30

12/31

12/30

2.

1/2

12/30

12/31

12/31

3.

1/3

12/31

1/21/2

4.

1/3

12/31

1/212/31

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9.

Based on the schedule of interbank transfers above, which of the cash transfers indicates an error in
cash cutoff at December 31, 2010?
a.

b.

c.

d.

Answer: C

10.

Based on the schedule of interbank transfers above, which of the cash transfers would appear as a
deposit in transit on the December 31, 2010 bank reconciliation?
a.

b.

c.

d.

Answer: D
Auditing Theory
1. Which of the following are the three principal methods in sample selection are specifically identified in PSA
530?
A. Statistical sampling, attribute sampling and haphazard sampling
B. Random number selection, systematic selection and haphazard selection
C. Sequential sampling, discovery sampling and statistical sampling
D. Sequential sampling, discovery sampling and random number selection
Answer: B
(PSA 530, Audit Sampling)
2. Which of the following is an appropriate consideration in auditors selection of sample size?
A. The auditor may select a voided or cancelled document in a sample. If the document has been properly
voided, treat the item as deviation.
B. If the auditor encounters missing documents and he is unable to determine whether control has been
properly performed, replace the document with another sample item.
C. The auditor may select a voided or cancelled document in a sample. If the document has been properly
voided, replace the document with another sample item
D. If the auditor encounters missing documents and he is unable to determine whether control has been
properly performed, treat the item as deviation and replace the document with another sample item.
Answer: C
(PSA 530, Audit Sampling)
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The auditor may select a voided or cancelled document in a sample. If the document has been properly voided,
the document must be replaced with another sample item. If the auditor encounters missing documents and he is
unable to determine whether control has been properly performed, the auditor must treat the item as deviation.
3. Fraudulent financial reporting involves intentional misstatements or omissions of amount or disclosures in the
financial statements to deceive financial statement users. Which of the following acts appropriately involves
fraudulent financial statements?
I.
II.
III.
IV.
V.

Manipulations, falsification or alteration of records or documents

Lapping of accounts receivable
Recording of transactions without substance
Stealing entitys assets such as cash, marketable securities and inventory
Intentional application of accounting policies

compared to the approved price list.

A. D is incorrect. The director should have required the purchase order to be compared to the approved
price list before approving it. Otherwise, the purchase price may exceed the approved price.

A.
B.
C.
D.

4. Which of the following fraudulent entries is most likely to be made to conceal the theft of an asset?
Debit expenses, and credit the asset
Debit the asset, and credit another asset account
Debit revenue, and credit the asset
Debit another asset account, and credit the asset
eret

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