Polytechnic University of the Philippines

Sta. Mesa Manila

ACCO 30053 – Auditing and Assurance: Concepts and Application Part 1
Midterm Examination (December 16, 2022)

Name: _________________________________________ Date: ___________ Section: ________

General Instruction: Select the letter of your choice in MS Teams. For problem solving, compute for the
required for each cases presented and show your computations. For items with specific instructions, follow that
instruction. Goodluck and God Bless you all!!

Case 1: Multiple Choices – Audit Planning and Misstatements

1. Statement 1: Planning an audit involves establishing the overall audit strategy for the engagement and
developing an audit plan, in order to reduce audit risk to an acceptably low level.
Statement 2: The overall audit strategy sets the scope, timing and direction of the audit, and guides the
development of the more detailed audit plan.
a. True, True
b. True, False
c. False, False
d. False, True

2. Statement 1: The audit plan is less detailed than the overall audit strategy and involves determining the
characteristics of the engagement that define its scope.
Statement 2: The auditor should document the overall audit strategy and the audit plan, including any
significant changes made during the audit engagement.
a. True, True
b. True, False
c. False, False
d. False, True

3. As used in auditing, which of the following statements best describes "assertions"?

a. Assertions are the representations of management as to the reliability of the information system.
b. Assertions are the auditor's findings to be communicated in his audit report.
c. Assertions are the representations of management as to the fairness of presentation of the financial
statements.
d. Assertions are found only in the notes to the financial statements.

4. The purpose of the requirement in having communication between the predecessor and successor auditors
is to
a. Allow the predecessor auditor to disclose information which would otherwise be confidential.
b. Help the successor auditor to evaluate whether to accept the engagement.
c. Help the client by facilitating the change of auditors.
d. Ensure the predecessor collects all unpaid fees prior to a change in auditor.

5. Which of the following is not a category of assertions that management makes about the accounting
information in the financial statements?
a. Assertions about classes of transactions for the period under audit.
b. Assertions about account balances at period end.
c. Assertions about the quality of source documents used to prepare the financial statements.
d. Assertions about presentation and disclosure.

Case 2: Multiple Choices – Audit Planning and Misstatements

6. Statement 1: Detection risk is the risk that an auditor issues an unmodified or clean audit opinion when the
financial statements are in fact materially misstated.
Statement 2: Risk assessment procedures by themselves, however, do not provide sufficient appropriate
audit evidence on which to base the audit opinion
a. Only statement 1 is incorrect
b. Only statement 2 is incorrect
c. Both statements are incorrect
d. Both statements are correct

7. Prior period errors are omissions from and/or misstatements in the financial statements for one or more
periods arising from a failure or misuse of reliable information that
I. was not available when financial statements for those periods were authorized for issue.
II. could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements.
a. I only.
b. II only
c. Both I and II.
d. Neither I nor II.

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 8. An example of a correction of an error in previously issued financial statements is a change
a. in the tax assessment related to a prior period.
b. from the cash basis of accounting to the accrual basis of accounting.
c. from the FIFO method of inventory valuation to the average method.
d. in the service life of plant assets, based on the changes in the economic environment.

9. Where financial statements for a single year are being presented, a prior period error recognized in the
current year ordinarily would
a. affect net income of the current year.
b. be included in the statement of recognized gains and losses.
c. be shown as an adjustment of the balance of retained earnings at the start of the current year.
d. be shown as an extraordinary item on the current year’s statement of comprehensive income.

10. An auditor is doing analytical procedures for possible errors that a client has in the financial statement.
Counterbalancing errors do not include?
a. error in purchases cut-off.
b. errors that correct themselves in two years.
c. an overstatement of prepaid expenses.
d. errors that correct themselves in four years.

Case 3: Consideration of Misstatements in FS Audit (Supply the answer)

You were engaged to audit the financial statements of JBC Company for the year 2022. The following
information was discovered during your audit:

Audit Note I: The retained earnings account showed the following details:
Retained Earnings
P1,250,000 Beginning balance
Dividends P80,000 450,000 Net income
1,620,000 Balance 12/31/2020
Dividends 80,000 660,000 Net income
2,200,000 Balance 12/31/2021
Dividends 80,000 540,000 Net income
2,660,000 Balance 12/31/2022

Audit Note II:

During the investigation, you discovered that sales commission expenses were recorded when paid. Due to this,
sales commissions that should have been recorded as expense and payables in the previous year were recorded
the following year. These amounts were summarized below.
Amount Date Paid
P20,000 January 10, 2020
23,000 January 8, 2021
27,000 January 11, 2022
30,000 January 7, 2023

Other notes and observations:

i. On December 31, 2020, JBC Company has goods in transit from suppliers amounting to P78,000 that was
shipped FOB Destination. This was not recorded until the goods were received on January 10, 2021.
ii. JBC Company failed to record supplies on hand at the end of 2021 and 2022 amounting to P4,500 and
P3,800, respectively.
iii. It was discovered through comparison of company records that dividends are not recorded in the books until
they were paid.
iv. On December 31, 2020, the Company bought Land and Building for a lump sum amount of P12,500,000
when the fair value of the land was at P9,000,000 and the building was at P6,000,000. The building has an
estimated useful life of 10 years on the date of sale. The whole amount paid was debited to Land in 2020.
v. On July 1, 2021, the Company purchased a 3-year insurance policy for P300,000. The whole amount was
debited to insurance expense. No adjustments were made yet.
vi. On February 12, 2023, the Company paid dividends amounting to P86,000. The date of declaration was on
December 15, 2022. The date of record was January 15, 2023.

Determine the following as a result of your audit:

11. How much is the adjusted retained earnings as of December 31, 2020?
12. How much is the adjusted retained earnings as of December 31, 2021?
13. How much is the adjusted retained earnings as of December 31, 2022?
14. The proposed adjusting journal entries for the year ended December 31, 2022 includes a net debit
(credit) to retained earnings of?
15. The proposed adjusting journal entries for the year ended December 31, 2022 includes a net debit
(credit) to accumulated depreciation of?

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Case 4: Consideration of Misstatements in FS Audit (Supply the answer)
You were engaged to audit RCBC Co., a small engineering firm with books rigged with errors. The income
statements of RCBC Co. indicate the following net income:
2020 P1,500,000
2021 1,750,000
2022 2,000,000

An examination of the accounting records for the year ended December 31, 2022 indicates that several errors
were made. The following errors were discovered:
A. Salary accruals on December 31, were consistently omitted:
2019 P95,000
2020 110,000
2021 100,000
2022 140,000

B. The footings and extensions showed that the inventory on December 31, 2021 was overstated by P190,000

C. P150,000 worth of inventories were received on January 4, 2023. Upon investigation, you discovered that
these goods were shipped by the supplier on December 31, 2022 FOB Shipping point. Further investigation
revealed that the liability on the item were recorded when the goods were received.

D. Prepaid insurance were consistently omitted at the end of each year:

2019 P75,000
2020 100,000
2021 115,000
2022 120,000

E. Interest receivable were not recorded on December 31 of the following years:

2020 P20,000
2021 25,000
2022 30,000

F. On January 1, 2022, an equipment costing P400,000 was sold for P220,000. At the date of sale, the
equipment had accumulated depreciation of P240,000. The cash received was recorded by the company as
miscellaneous income.

G. You also discovered on July 1, 2020, the company completed the construction of the left wing of its factory
building incurring a total cost of P750,000, which it had charged to repairs and maintenance. The building
which had an original cost of P3,000,000 had an accumulated depreciation of P1,125,000 as of July 1, 2020.
The said building has been used in operations and its remaining useful life was as of July 1, 2020 was 8
years.

Determine the following as a result of your audit:

16. What is the audited net income in 2020?
17. What is the audited net income in 2021?
18. What is the audited net income in 2022?
19. How much should be the adjustment to retained earnings at December 31, 2022 audit?
20. What is the correct depreciation expense in 2022?

Case 5: Audit of Cash and Cash Equivalents (Theories)

21. In validating bank reconciliation statements of the client, the auditor should trace back
outstanding checks to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.

22. In validating the bank reconciliation statements of the client, the auditor should trace back the
unrecorded debits, like service charges to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.

23. In preparing the bank reconciliation statement of the client, a cash in bank shortage normally occurs
when:
a. The unadjusted balance per bank is lower than the unadjusted balance per books.
b. The adjusted balance per bank is higher than the unadjusted balance per books.
c. The unadjusted balance per bank is higher than the unadjusted balance per books.
d. The adjusted balance per bank is lower than the adjusted balance per books.
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24. The proof of cash statements is usually prepared by the auditor when:
a. Internal control over cash is strong and control risk is placed at the maximum.
b. Internal control over cash is weak and control risk is place at the maximum.
c. Cash balance is very significant.
d. Cash balance is very insignificant.

25. The usefulness of the standard bank confirmation request may be limited because the bank
employee who completes the form may:
a. Not believe that the bank is obligated to verify confidential information to a third parity.
b. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation.
c. Not have access to the client’s cutoff bank statement.
d. Be unaware of all the financial relationships that the bank has with the client.

Case 6: Audit of Cash and Cash Equivalents (Supply the answer)

You were engaged to audit the year-end balances of Hanguk Inc. for the year ended December 31, 2022 and
were assigned to audit the cash in bank. The following information was provided to you by your client:
a. The bank reconciliation for the month ended November 30, 2022 was shown as below:
Cash per bank statement P550,000
Additions:
Deposit in transit P54,000
Bank service charges 2,000
NSF Check 36,000
Bank error 23,000 115,000
Deductions:
Outstanding checks 28,000
Notes collected by the bank 134,000 162,000
Cash per books P503,000

b. Bank statement and company records showed the following for the month of December:
Cash balance per books P383,000
Cash per bank statement 775,000
Total credits per bank statement 1,890,000
Cash receipts per cash records 1,770,000
Bank service charges 2,500
NSF Checks 28,000
Notes collected by the bank 225,000

c. Additional information:
• A P23,000 bank debit error in November was corrected by the bank in December.
• A P56,000 check collection during December was erroneously recorded by the bank as P50,000. The error
was detected and corrected in December.
• A P89,000 customer collection during the month was recorded by the Company’s accountant as P98,000.
This was detected during December but no journal entries have been made.
• A P77,000 customer collection was received by the company during December. This was recorded in the
company’s records as a credit of P75,000.

d. There are no other information available regarding this and it was ascertained that there is no cash shortage
or overage in the prior periods.

Determine the following as a result of your audit:

26. How much is the deposit in transit for the month of December?
27. How much is the outstanding checks for the month of December?
28. How much is the adjusted balance of disbursements for December?
29. How much is the adjusted balance of receipts for December?
30. How much is the correct cash balance as of December 31, 2022?

Case 7: Audit of Cash and Cash Equivalents (Supply the answer)

You were engaged to audit the financial statement of Focus Corporation for year ended December 31, 2022.
Your audit plan included procedures designed to detect material misstatement for cash account during the
period. The assessment of inherent and control risk over cash is high. During the course of your audit, the
following information was given by your client related to its cash balance as of December 31:
Petty Cash Fund (Note 1) P15,000
Undeposited receipts (Note 2) 275,000
Cash in Bank (Note 3) 2,500,000
Cash Equivalents (Note 4) 1,025,000
Total Cash P3,815,000

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Note 1 – Petty cash fund
The imprest balance of petty cash fund was P15,000. A cash count on January 3, 2023 was made and revealed
the following to be included in the petty cashier’s cash box.
Bills and coins P3,000
Vouchers for replenishments* 7,500
Employee contribution (amount on face of envelope is P1,000) 800
*inspection revealed that un-replenished vouchers included vouchers dated Jan. 2, 2023 for P1,000 and voucher dated
December 30, 2022 representing advances made by an employee for a business trip for P5,000 in December.

The liquidation report for the advances made by the employee for business trip includes:
Airfare P2,000
Hotel accommodation 1,200
Meals 800
Total P4,000
Accommodation check issued by employee 1,000
Total advances P5,000

Note 2 – Undeposited receipts

The undeposited receipts represents cash and check collections from customers all dated December 30, 2022
recorded as follows:
O. R. Number Customer Amount Particulars
OR# 1234 Banana Corp. P10,000 cash
OR# 1235 Apple Inc. 150,000 check
OR# 1236 Orange Co. 14,000 cash
OR# 1237 Luya Company 100,000 check
Total count of bills and coins for undeposited receipts was P25,000 while check with OR# 1237 was dated January 5, 2023.

Note 3 – Cash in Bank

The client gave you a list of its bank accounts where cash are deposited. The schedule of your client is
presented below:
Name of bank/ Acct. # Amount
BDO Checking Account – 004567862 P1,000,000
Security Bank Checking account – 00000718279 1,500,000
Total P2,500,000

BDO account audit notes:

a. Check issued to a supplier in December and deducted in BDO account for P70,000. The check was recorded
in cash disbursement journal in December but delivered to payee on January 4, 2023.
b. Check collection in December for P60,000 was credited by the accountant in its BDO cash account at P6,000.
This check was deposited in BDO account in December.

Security Bank audit notes:

General ledger Bank statement
November balances P1,310,000 P1,185,000
Deposits 1,180,000 1,320,000
Disbursements (990,000) (1,065,000
Bank service charge (5,000)
Notes collected by the
bank 120,000
NSF check (15,000)
December balances P1,500,000 P1,540,000

a. Bank reconciliation in November included the following information: Bank statement balance, November,
P1,185,000; Deposit in transit, P110,000; Outstanding checks, P85,000, and balance per ledger, November,
P1,310,000.
b. Collection from a customer of P105,000 in December 27, 2022 was deposited in the bank. The bank credited
Focus Company’s account for P150,000.
c. A check for P99,000 was cleared by the bank in December, it was for payment of accounts due in December.
The company’s accountant recorded the check in the cash disbursements journal at P89,000. No correction
was made yet on this transaction in the book.

Cash equivalent audit notes:

The cash equivalent is composed of the following items:
Time deposit, 3 months P250,000
Money market placement (three months from date of acquisition) 175,000
Treasury Bills dated October 31, 2022 due in Jan. 31, 2023 310,000
Treasury Bills dated December 31, 2022 due in June 30, 2023 290,000
Total P1,025,000

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Determine the following as a result of your audit:
31. How much is the correct balance of petty cash fund as of December 31, 2022?
32. How much is the correct balance of cash in bank – BDO account as of December 31, 2022?
33. How much is the correct balance of cash in bank – Security Bank account as of December 31, 2022?
34. How much is the correct balance of cash equivalents in its December 31 financial statement?
35. How much is the correct balance of cash and cash equivalents in its December 31 financial
statement?

Case 8: Audit of Receivables and related accounts (Theories)

36. An auditor who has confirmed accounts receivable may discover that the sales journal was held open past
year end if
a. Positive confirmations sent o debtors are not returned.
b. Negative confirmations sent to debtors are not returned.
c. Most of the returned negative confirmations indicate that the debtor owes a larger balance than the
amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the
amount being confirmed.

37. Which of the following most likely would be detected by an auditor’s review of a client’s sales cutoff?
a. Shipments lacking sales invoices and shipping documents.
b. Excessive write-offs of accounts receivable.
c. Unrecorded sales at year-end.
d. Lapping of year-end accounts receivable.

38. The auditor finds situation in which one person has the ability to collect receivables, make deposits, issue
credit memos and record receipt of payments. The auditor suspects the individual may be stealing from
cash receipts. Which of the following audit procedures would be most effective in discovering fraud in this
scenario?
a. Send positive confirmations to a random selection of customers.
b. Send negative confirmations to all outstanding accounts receivable customers.
c. Perform a detailed review of debits to customer discounts, sales returns, or other debit accounts,
excluding cash posted to the cash receipts journal.
d. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash
receipts journal.

39. Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption that an
auditor will confirm accounts receivable is not overcome if
a. Based on prior’s years’ audit experience response rates will be inadequate.
b. Based on experience with similar engagements, responses are expected to be unreliable.
c. The accounts receivable are immaterial.
d. The combined assessed level of inherent and control risk is high.

40. A company has computerized sales and cash receipts journals. The computer programs for these journals
have been properly debugged. The auditor discovered that the total of the accounts receivables subsidiary
accounts differs materially from the accounts receivable control account. This discrepancy could indicate
a. Credit memoranda being improperly recorded.
b. Lapping of receivables
c. Receivables not being properly aged.
d. Statements being intercepted prior to mailing.

Case 9: Audit of Receivables and related accounts (Supply the answer)

You are assigned to audit Ignation Inc. for the year ended June 30, 2022. Prior to any adjustments, you were
able to extract the following balances from the client’s records:
Accounts receivable – control account P540,000
Allowance for bad debts – beginning 30,150

Your audit client provided you the schedule of the accounts receivable subsidiary ledger based on ageing policy:
Accounts with debit balances:
60 days old and below P230,000
61 to 120 days 270,000
Over 120 days 75,000 P575,000
Accounts with credit balances (35,000)
Accounts receivable per GL P540,000

The credit balance in the accounts receivable represents collection from a customer whose account had
been written off as uncollectible in the previous year. Upon investigation, the only entry made by the client
upon the recovery was a debit to cash and a credit to accounts receivable.

Certain Accounts Receivable balances were circularized/confirmed as of June 30, 2022 and the following
exceptions/replies have not been disposed of as at the date of your examination.
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 Customer Balances Comments from Customers Audit Findings
Alpha P4,000 This balance for the invoice Ignation Inc. received the
dated June 5, 2022 was paid on mailed check dated July 2,
June 29, 2022. 2022.
Beta 13,800 The balance for the invoice Ignation Inc. erroneously
dated June 1 was offset by our credited accounts payable for
June 10, shipment of goods that P13,800 to record the purchase
were returned. of goods.
Charlie 16,600 The above balance for the The payment was credited to
invoice dated April 20 has been customer Delta’s subsidiary
paid. records.
Delta 20,000 The records show a bigger A new confirmation was
balance, please check. mailed. All outstanding
invoices to Delta are dated
June.
Echo 11,800 We do not owe Ignation Inc. The shipment costing P8,000
anything as the goods were was made on June 29, 2022 and
received July 5, 2022, FOB the goods were included in
Destination. recording the June 30, 2022
inventory summary.
Juliet 5,000 Amount is okay. Since this is on Goods costing P4,400 were
consignment, we will remit appropriately included in
payment upon selling the goods. Ignation Inc.’s inventory. The
amount is included in the “below
60 days” receivables.
Hotel 3,200 CM No. 111 cancels this The CM dated April 30, 2022 was
balance. recorded by Ignation Inc. in July
2022. The amount is for an April
15 sales invoices.
India 23,700 No reply on the 2 sets of Upon your recommendation, the
confirmation letters sent. management agreed to write-off
this receivable. The amount is for
an invoice dated May 19, 2021.
Based on your discussions with the client, the following estimated rates are appropriate for computing the
uncollectible accounts:
60 days and below 5%
61 to 120 days 15%
More than 120 days 20%

Determine the following as a result of your audit:

41. What is the correct balance of the accounts receivable as of June 30, 2022?
42. What is the balance of the allowance for bad debts as of June 30, 2022?
43. What is the balance of bad debts expense in its income statement for year ended June 30, 2022?
44. What is the net realizable value of accounts receivable presented in its June 30, 2022 statement of
financial position?
45. Your proposed adjusting journal entry would include a net debit (credit) to accounts receivable of?

Case 10: Audit of Receivables and related accounts (Supply the answer)
You were assigned to audit the notes receivable of Seum Corp. The following are the notes receivable of the
company:

Note receivable from sale of land:

On July 1, 2021, Seum Corp. sold a tract of land costing P6,000,000 for P10,000,000 to DC Company. DC
Company made a down payment of P2,000,000 and signed a 5-year 10% note for P8,000,000. The note is
collectible in equal annual amount starting June 30, 2022 plus interest based on outstanding balance. The
prevailing rate of interest on this date was 8%.

The following journal entries were made by the company regarding this note:
Date Particulars Debit Credit
July 1, 2021 Cash 2,000,000
Notes receivable 8,000,000
Land 6,000,000
Gain on sale 4,000,000
To record the sale of land.
June 30, 2022 Cash 2,400,000
Notes receivable 1,600,000
Interest income 800,000
To record receipt of first installment on notes.
Notes receivable from sale of equipment:

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On January 1, 2022, Seum Corp. received a 12%, P5,000,000 notes from sale of equipment costing P4,500,000
with accumulated depreciation of P1,125,000. This was collectible as follows:
December 31, 2022 P2,000,000
December 31, 2023 1,500,000
December 31, 2024 1,000,000
December 31, 2025 500,000

The effective interest on January 1, 2022 is at 10% while on December 31, 2022 at 9%. The following journal
entries were made regarding this note:
Date Particulars Debit Credit
January 1, 2022 Notes receivable 5,000,000
Accumulated depreciation 1,125,000
Equipment 4,500,000
Gain on sale 1,625,000
To record the sale of equipment.

December 31, 2022 Cash 2,600,000

Notes receivable 2,000,000
Interest income 600,000
To record receipt of first installment on notes.

Determine the following as a result of your audit:

46. How much is the correct total interest income related to notes receivable reported in the 2022
Statement of Comprehensive Income?
47. How much is the net understatement (overstatement) of profit reported in the Statement of
Comprehensive Income in 2022?
48. How much is the carrying value of notes receivable reported as current as of December 31, 2022?
49. How much is the carrying value of notes receivable reported as non-current as of December 31,
2022?
50. The proposed adjusting journal entries in 2022 related to the audit of notes receivable assuming the
books are still open would include a net debit (credit) to interest income of?

*** end of Midterm Examination***

" Life is what happens when you're busy making other plans."

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