Problem no.

1
In connection with the audit of the PAKYO COMPANY for the year ended December 31 !"1" you are
called u#on to $erify the account% #ayable tran%action%. You find that the com#any doe% not ma&e u%e of a
$oucher re'i%ter but enter% all merchandi%e #urcha%e% in a Purcha%e% (ournal from which #o%tin' are
made to a %ub%idiary account% #ayable led'er. )he %ub%idiary led'er balance of P1*""""" a% of
December 31 !"1" a'ree% with the account% #ayable balance in the com#any+% 'eneral led'er. An analy%i%
of the account di%clo%ed the followin',
)rade creditor% credit balance% P 13-3"""
)rade creditor% debit balance% -3"""
Net P 13"""""
.%timated warranty on #roduct% %old 1"""""
Cu%tomer+% de#o%it% /"""
Due to officer% and %hareholder% for ad$ance% *""""
0ood% recei$ed on con%i'nment at %ellin' #rice
1off%ettin' debit made to Purcha%e%2 31"""
P 1*"""""
A further analy%i% of the 4)rade Creditor%5 debit balance% indicate%,
Date Item% Amount
Mi%cellaneou% debit balance% #rior to !""6.
No information a$ailable due to lo%%
of record% in a fire. P 3"""
"37"37"6 Manila Co. 8Merchandi%e returned for credit
but the com#any i% now out of bu%ine%% 9"""
"-71"7"/ Cebu Cor#. 8 Merchandi%e returned but Cebu
%ay% 4ne$er recei$ed5 6"""
"671"71" (olo Di%tributor% 8 Allowance 'ranted on
defecti$e merchandi%e after the in$oice
wa% #aid *"""
1"71"71" :ulacan Co 8 O$er#ayment of in$oice 1!"""
1!7"*71" Ad$ance to ;ambale% Co. )hi% com#any a'ree%
to %u##ly certain article% on a co%t 8#lu% ba%i% !3"""
1!7"*71" 0ood% returned for credit and ad<u%tment% on
#rice after the in$oice% were #aid= credit memo%
from %u##lier not yet recei$ed 3"""
-3"""
Your ne>t %te# i% to chec& the in$oice% in both the #aid and the un#aid in$oice file% a'ain%t led'er account%.
In thi% connection you di%co$er an in$oice from Atla% Co. of P3*""" dated December 1! !"1" mar&ed
4Du#licate5 which wa% entered in the Purcha%e (ournal in (anuary !"11. ?#on in@uiry you di%co$er that
the merchandi%e co$ered by thi% in$oice wa% recei$ed and %old but the ori'inal in$oice a##arently ha% not
been recei$ed.
In the ban& reconciliation wor&in' #a#er% there i% a notation that fi$e chec&% totalin' P -3""" were
#re#ared and entered in the Ca%h Di%bur%ement% (ournal of December but the%e chec&% were not i%%ued
until (anuary 1" !"11.
)he in$entory analy%i% %ummary di%clo%e% 'ood in tran%it of P -""" at December 31 !"1" not ta&en u# by
the com#any under audit durin' the year !"1". )he%e 'ood% are included in your ad<u%ted in$entory.
1. )he Account% #ayable 8 )rade balance at December 31 !"1" %hould be
A. P 1361""" :. P 1-13"""
C. P 1!13""" D. P 1366"""
!. )he net ad<u%tment to Purcha%e% %hould include a
A. Net debit of P *1"""
:. Net credit of P 31"""
C. Net debit of P 1""""
D. Net debit of P 63"""
3. )he entry to ad<u%t the Account% #ayable account for tho%e account% with debit balance% %hould include a
debit to
A. P 19""" :. P !3"""
C. P 3*""" D. P 3/"""
3. )he entry to ad<u%t the Account% #ayable account for tho%e account% with debit balance% %hould include a
debit to
A. Mi%cellaneou% lo%%e% if P !3"""
:. Ad$ance% to %u##lier% of P !3"""
C. Au##lier% to debit balance% of P 19"""
D. Purcha%e% of P !1"""
*. Auditor confirmation of account% #ayable balance% at the end of the re#ortin' #eriod may be nece%%ary
becau%e
A. )here i% li&ely to be other reliable e>ternal e$idence to %u##ort the balance%
:. Corre%#ondence with the audit client% attorney will re$eal all le'al action by $endor% for nonB#ayment
C. )hi% i% a du#lication of cutoff te%t
D. Account% #ayable at the end of re#ortin' #eriod may not be #aid before the audit i% com#leted.
Problem !
You were able to obtain the followin' from the accountant for Ma$eric% Cor#. Celated to the com#any%
liability a% of December 31 !"1".
Account% #ayable P -*""""
Note% #ayable 8 trade 1/""""
Note% #ayable 8 ban& 9"""""
Da'e% and %alarie% #ayable 1*"""
Intere%t #ayable E
Mort'a'e note% #ayable 8 1"F -"""""
Mort'a'e note% #ayable 8 1!F 1*"""""
:ond% Payable !""""""
)he followin' additional information #ertain% to the%e liabilitie%,
a. All trade note% #ayable are due within %i> month% of the balance %heet date.
b. :an& note% #ayable include two %e#arate note% #ayable Allied :an&.
112 A P3""""" 9F note i%%ued March 1 !""9 #ayable on demand. Intere%t i% #ayable e$ery
%i> month%.
1!2 A 1Byear P*""""" 11 GF note i%%ued (anuary ! !"1". On December 3" !"1" Ma$eric&%
ne'otiated a written a'reement with Allied :an& to re#lace the note with !Byear P*"""""
1"F note to be i%%6ued (anuary ! !"11. )he intere%t wa% #aid on December 31 !"1"
c. )he 1"F mort'a'e note wa% i%%ued October 1 !""6. Dith a term of 1" year%. )erm% of the note
'i$e the holder the ri'ht to demand immediate #ayment of the com#any fail% to ma&e a monthly
intere%t #ayment within 1" day% of the date the #ayment i% due. A% of December 31 !"1"
Ma$eric&% i% three month% behind in #ayin' it% re@uired intere%t #ayment.
d. )he 1!F mort'a'e note wa% i%%ued may 1 !""1 with a term of !" year%. )he current #rinci#al
amount due i% P 1*""""". Princi#al and intere%t #ayable annually on A#ril 3" A #ayment of
P!!"""" i% due A#ril 3" !"11. )he #ayment include% intere%t of P 19"""".
e. )he bond% #ayable i% 1"Byear 9F bind% i%%ued (une 3" !""1. Intere%t i% #ayable %emiBannually
e$ery (une 3" and December 31.
:a%ed on the abo$e and the re%ult of your audit an%wer the followin',
1. Intere%t #ayable a% of December 31 !"1" i%
a. P1**""" b. 133""" c. !"3""" d.
!1*"""
!. )he #ortion of the Note% #ayable 8 ban& to be re#orted under current liabilitie% a% of December
31 !"1" i%
a. P 3""""" b. *""""" c.9""""" d. "
3. )otal current liabilitie% a% of December 31 !"1" i%
a. P 3/*"""" b. 3139""" c. 3/39"""
d. 3//9"""
3. )otal noncurrent liabilitie% a% of December 31 !"1" i%
a. P16-"""" b. !*-"""" c. 3/-""""
d. 1/-""""
Problem no. 3
In con<unction with your firm+% e>amination of the financial %tatement% of PIA)ONA COMPANY a% of
December 31 !"1" you obtained from the $oucher re'i%ter the information %hown in the wor&in' #a#er
below.
Item
no.
Entry Date Voucher
Ref.
Description Amount Account Charged
1 1!.19.1" 1!B!"! Au##lie% #urcha%ed HO:
de%tination !3.!-.!"=
recei$ed 1!.16.1"
P !"""" Au##lie% on hand
! 1!.19.1" 1!B!"3 Auto in%urance 1!.1*.1"
1!.!".11
!3""" Pre#aid in%urance
3 1!.!1.1" 1!B!"- Ce#air% %er$ice%= recei$ed
1!.!".1"
!3""" Ce#air% and
maintenance
3 1!.!1.1" 1!B!13 Merchandi%e %hi##ed HO:
Ahi##in' #oint 11.!".1"=
recei$ed 1!."3.1"
16""" In$entory
* 1!.!1.1" 1!B!1/ Payroll 1!."-.1" to
1!.!".1" 11! wor&in' day%2
-/""" Aalarie% and wa'e%
- 1!.!-.1" 1!B!!1 Aub%cri#tion to )a>
Ce#ortin' Aer$ice for !"11
*""" Due% and
%ub%cri#tion
6 1!.!9.1" 1!B!3" ?tilitie% for December !"1" !/""" ?tilitie% e>#en%e
9 1!.!9.1" 1!B!33 Merchandi%e %hi##ed HO:
de%tination 1!.!3.1"=
recei$ed "1."!.11
111*"" In$entory
/ 1!.!9.1" 1!B!33 Merchandi%e %hi##ed HO:
de%tination 1!.!-.1"=
recei$ed 1!.!/.1"
93""" In$entory
1" "1."!.11 "1B""1 Ie'al %er$ice%= recei$ed
1!.!9.1"
3-""" Ie'al and
#rofe%%ional e>#en%e
11 "1."*.11 "1B""! Medical %er$ice% for
em#loyee% for December
!"1"
!*""" Medical e>#en%e
1! "1."*.11 "1B""3 Merchandi%e %hi##ed HO:
%hi##in' #oint 1!.!/.1"=
recei$ed "1."3.11
**""" In$entory
13 "1."*.11 "1B""3 Payroll 1!.!1.1" to
"1."*.11 11! wor&in' day%
in total 3 wor&in' day% in
(an. !"11
6!""" Aalarie% and wa'e%
13 "1.1".11 "1B""* Merchandi%e %hi##ed HO:
%hi##in' #oint "1."!.11=
recei$ed "1."*.11
-3""" In$entory
1* "1.1!.11 "1B""- Manufacturin' royaltie%
December !"1"
3/""" Manufacturin' co%t
1- "1.1!.11 "1B""6 Merchandi%e %hi##ed HO:
de%tination "1."3.11=
recei$ed "1.1".11
39""" In$entory
16 "1.13.11 "1B""9 Maintenance e %er$ice%=
recei$ed "1."/.11
/""" Ce#air% and
maintenance
19 "1.13.11 "1B""/ Intere%t on ban& loan 1"B
1!B1" to "!1.1".11
3"""" Intere%t .>#en%e
1/ "1.1*.11 "1B"1" Manufacturin' e@ui#ment
in%talled on 1!.!/.1"
!*3""" Machinery and
e@ui#ment
!" "1.1*.11 "1B"11 Di$idend% declared
1!.1*.1"
1-"""" Di$idend% #ayable
Accrue% liabilitie% a% December 31 !"1" were a% follow%,
Accrued #ayroll P 39"""
Accrued intere%t #ayable !---6
Di$idend% #ayable 1-""""
Accrue% royaltie% #ayable 3/"""
)he accrue% #ayroll accrued intere%t #ayable and accrued royaltie% #ayable account% were re$er%ed on
(anuary 1 !"11.
C.J?IC.D,
Pre#are ad<u%tin' entrie% a% of December 31 !"1" ba%ed on your re$iew of the data 'i$en abo$e.
PROBLEM O !
H..I NA H..I INC. ha% been #roducin' @uality reu%able adult dia#er% for more than two decade%. )he
com#any+% fi%cal year run% from A#ril 1 to March 31. )he followin' information relate% to the obli'ation% of
Heel Na Heel a% of March 31 !"1".
BOD" PA#ABLE
Heel Na Heel i%%ued P1""""""" of 1"F bond% on (uly 1 !""9. )he #re$ailin' mar&et rate of intere%t for
the%e bond% wa% 1!F on the date i%%ue. )he bond% will mature on (uly 1 !"19. Intere%t i% #aid
%emiannually on (uly 1 and (anuary 1. Heel Na Heel u%e% the effecti$e intere%t rate method to amortiKe
bond #remium or di%count
O$E" PA#ABLE
Heel Na Heel ha% %i'ned %e$eral lon'Bterm note% with financial in%titution%. )he maturitie% of the%e note%
are 'i$en in the %chedule below. )he total un#aid intere%t for all of the%e note% amount% to P-""""" on
March 31 !"1"
Due Date Amount Due
A#ril 1 !"1" P 3"""""
(uly 1 !"1" -"""""
October 1 !"1" 3"""""
A#ril 1 !"11 B March 31 !"1! 3"""""
A#ril 1 !"1! 8 March 31 !"13 1!""."""
A#ril 1 !"13 8 March 31 !"13 1""""""
A#ril 1 !"13 8 March 31 !"1* 9"""""
A#ril 1 !"1* 8 March 31 !"1- 1""""""
P 6""""""
E"$IMA$ED %ARRA$IE"
Heel Na Heel ha% a oneByear #roduct warranty on %ome %elected item% in it% #roduct line. )he e%timated
warranty liability on %ale% made durin' the !""9B!""/ fi%cal year and %till out%tandin' a% of March 31 !""/
amounted to P19"""". )he warranty co%t on %ale% made from A#ril 1 !""/ throu'h March 31!"1" are
e%timated a% P*!"""". )he actual warranty co%t incurred durin' the current !""/B!"1" fi%cal tear are a%
follow%,
Darranty claim% honored on !""9B!""/ %ale% P 19""""
Darranty claim% honored on !""/B!"1" %ale% 169"""
)otal warranty claim% honored P 3*9"""
O$&ER I'ORMA$IO
1. )CAD. PAYA:I.A
Account% #ayable for %u##lie% 'ood% and %er$ice% #urcha%ed on o#en account amount to
P63"""" a% March 31 !"1"
!. PAYCOII C.IA).D I).MA
Merchandi%e %hi##ed HO: de%tination 1!.!3.1"= recei$ed "1."!.11
Accrued Aalarie% and wa'e% P 3"""""
Dithholdin' ta>e% #ayable /3"""
Other #ayroll deduction% 1""""
3. MIAC.IIAN.O?A ACCC?AIA
Other accrual% not %e#arately cla%%ified amount to P1*"""" a% of March 31 !"1"
3. DILID.NDA
On march 1* !"1" Heel Na Heel+% board of director% declared a ca%h di$idend of
P".!" #er common %hare and a 1"F common %toc& di$idend. :oth di$idend% were to be
di%tributed on A#ril 1! !"1" to the common %toc&holder% of record at the clo%e of bu%ine%% on
march 31 !"1". Data re'ardin' Heel Na Heel common %toc& are a% follow%,
Per Lalue P
*."" #er %hare
Number of %hare% i%%ued and out%tandin' -""""""
%hare%
Mar&et Lalue% of Common Atoc&,
March 1* !"1" P !!."" #er %hare
March 31 !"1" !1.*" #er %hare
A#ril 1! !"1" !!.*" #er
%hare
1. Mow much wa% recei$ed by Heel Na Heel from the bond% i%%ued on (uly 1 !""9E
a. P99*!/-" b. 1""""""" c. 1"*""""" d.
1"-36"3"
!. On March 31 !"1" Heel Na Heel+% %tatement% of financial #o%ition would re#ort total current
liabilitie% of
a. P*!9-""" b. 339-""" c. *33-""" d.
*-3!"""
3. On March 31 !"1 Heel Na Heel+% %tatement of financial #o%ition would re#ort total
noncurrent liabilitie% of
a. P1339/.3*" b. 133*!!16 c. 1336"693 d.
13!*!/-"
PROBLEM O. (
On (anuary 1 !""/ DI;ACDA COCPOCA)ION i%%ued !""" of it% *Byear P1""" face $alue 11F bond%
date (anuary 1 at an effecti$e annual intere%t rate 1yield2 of /F. Intere%t i% #ayable each December 31.
DiKard% u%e% the effecti$e intere%t method of amortiKation. On December 31 !"1". )he !""" bond% were
e>tin'ui%hed early throu'h ac@ui%ition on the O#en Mar&et by DiKard for P1/9"""" #lu% accrued intere%t.
On (uly 1 !""/ DiKard% i%%ued *""" of it% P1""" face $alue 1"F con$ertible bond% at #at. Intere%t i%
#ayable e$ery (une 3" and December 31. On the date of i%%ue the #re$ailin' mar&et intere%t rate for
%imilar debt without the con$er%ion o#tion i% 1!F. On (uly 1 !"1" an in$e%tor in DiKard% con$ertible bond%
tendered 1*"" bond% for con$er%ion into 1*""" %hare% of DiKard% common %toc& which had a fair $alue
of P1"* and a #ar $alue of P1 at the date of con$er%ion.
:a%ed on the abo$e and the re%ult of your audit determine the followin', 1Cound off #re%ent
$alue factor% to four decimal #lace%.2
1. )he i%%ue #rice on the !""" *Byear P1""" face $alue bond% in (anuary 1 !""/ i%
a. P!1**.*"" b. P!"""""" c. 19333""
d. !1369""
!. )he carryin' $alue of the !""" *Byear P1""" face $alue bond% on December 31 !""/ i%
a. 19/93"" b. !1!/*"" c. !"""""" d.
!1!11""
3. )he 'ain on early retirement of bond% on December 31 !"1" i%
a. P!"""" b. 11!""" c. 1!1!"" D. "
3. )he carryin' $alue of the *""" - year P1""" face $alue bond% on December 31 !""/ i%
a. P3-"*9"" b. *"""""" c. 363!.96*
d. 3-1*3""
*. )he con$er%ion of the 1*"" -Byear% P1""" face $alue bond% on (uly 1 !"1" will increa%e APIC
by
a. P139*""" b. 1363""" c. 131*."*3
d. P1366-/6
PROBLEM O. )
)he followin' data were obtained from the initial audit of :I:I COMPANY,
*(+, *- year, .onds paya./e, dated 0anuary *, 1--2
De.it Credit
Ba/ance
Ca%h #roceed% from i%%ue on (anuary 1 !""/
Of 1""" P1""" bond%. )he mar&et rate of
Intere%t on the date of i%%ue wa% 1!F P 116!"33 P116!."33
Bond Interest E3pense
Ca%h #aid 17!71" P 6*""" P 6*"""
Ca%h #aid 67171" 6*""" 1*""""
Accrual 1!73171" 6*""" !!*"""
Accrued Interest on Bonds
:alance 17171" P 6*""" P 6*"""
Accrual 1!73171" 6*""" 1*""""
$reasurer .onds
Cedem#tion #rice and intere%t to date on
!"" bond% #ermanently retired on 1!73171" P !-*""" P
!-*"""
:a%ed on the #recedin' information determine the followin',
1. Carryin' $alue of bond% #ayable at December 31 !"1"
a. P93111" b. 9""""" c. 11*1*93 d.
/!1!--
!. Io%% on :ond redem#tion
a. P3-93 b. P1/-93 c. 1*""" d. 33-93
3. Accrued Intere%t on :ond% at December 31 !"1"
a. P6*""" b. 13*""" c. -"""" d. *!*""
3. :ond Intere%t .>#en%e for the year ended December 31 !"1"
a. P1*"""" b. 13/9163 c. -/63* d. 1-"9!-
PROBLEM 4
N?00.)A COCPOCA)ION manufacture% and %ell% food #roduct% and food #roce%%in' machinery. It%
re#ortin' date i% December 31. Cele$ant e>tract% from it% financial %tatement% at December 31 !""/ are a%
follow%,
Current /ia.i/ities
Pro$i%ion
Pro$i%ion for warrantie% P!6""""
oncurrent /ia.i/ities
Pro$i%ion
Pro$i%ion for warrantie% P19""""
ote 5)6Contigent Lia.i/ities
N?00.)A i% en'a'ed in the liti'ation with $ariou% #artie% in relation to aller'ic reaction t o trace% of
#eanut% alle'ed to ha$e been found in #ac&et% of fruit 'um%. N?00.)A %trenuou%ly denie% the alle'ation
and a% at the %ame date authoriKin' the financial %tatement% for i%%ue i% unable to e%timate the financial
effect if any of any co%t or dama'e% that may be N#ayable to the #laintiff%.
)he #ro$i%ion for warrantie% at December 31 !""/ wa% calculated u%in' the followin' a%%um#tion%, )here
wa% no balance carried forward from the #rior year.
.%timated co%t of re#air% 8 Product% with minor defect% P 1""""""
.%timated co%t of re#air% 8 Product% with minor defect% P -""""""
.>#ected F of #roduct% %old durin' !""9 ha$in' no defect% in !"1" 9"F
.>#ected O of #roduct% %old durin' !""9 ha$in' minor defect% in !"1" 1* F
.>#ected O of #roduct% %old durin' !""9 ha$in' Ma<or defect% in !"1" *F
Btho%e with minor defect% all in
!"1"
.>#ected timin' of %ettlement of warranty #ayment%
Btho%e with ma<or defect% 3"F
in !"1"
-"F in !"1"
Durin' the year ended December 31 !"1" the followin' occurred,
1. In a relation to the warranty #ro$i%ion of P3*"""" at December 31 !""/ P!""""" wa%
#aid out of the #ro$i%ion. Of the amount #aid P1*"""" wa% for #roduct% with minor defect%
and P*"""" wa% for #roduct% with ma<or defect% all of which related to amount% that had
been e>#ected to be #aid in !"1"7
!. In calculatin' it% warranty #ro$i%ion for December 31 !"1" N?00.)A made the followin'
ad<u%tment to the a%%um#tion% u%ed for the #rior year,
.%timated co%t of re#air%B#roduct% with minor defect% no chan'e
.%timated co%t if re#air% 8 #roduct% with ma<or defect% P *""""""
.>#ected F of #roduct% %old durin' !"/ ha$in' no defect% in !"11 9*F
.>#ected F of #roduct% %old durin' !""/ ha$in' minor defect% in !"11 13F
.>#ected F of #roduct% %old durin' !""/ ha$in' ma<or defect% in !"11 !F
Btho%e with minor defect% all in
one !"11
.>#ected timin' of %ettlement of warranty #ayment% !"F in !"11
Btho%e with ma<or defect% 9"F
in !"1!
3. N?00.)A determined that #art of it% #lant and e@ui#ment needed an o$erhaul 8 the
con$eyor belt on one of it % machine% would need to be re#laced ion about December !"11
at an e%timated co%t of P!*"""". )he carryin' amount of the con$eyor belt at December
31 !""/ wa% P13"""". It% ori'inal co%t wa% P!"""""
3. N?00.)A wa% un%ucce%%ful in it% defen%e of the #eanut aller'y ca%e and wa% ordered to
#ay P1*"""""" to the #laintiff%. A% at December 31 !"1" N?00.)A had #aid P9"""""
*. N?00.)A commenced liti'ation a'ain%t one of it% ad$i%er for ne'li'ent ad$ice 'i$en on the
ori'inal in%tallation of the con$eyor belt referred to in 132 abo$e in October !"1" the court
found in fa$or of N?00.)A. )he hearin' for dama'e% had not been %cheduled a% at the
date the financial %tatement for !"1" were authoriKed for i%%ue. N?00.)A e%timated that it
would recei$e about P3!*""".
-. N?00.)A %i'ned an a'reement with Cho&o :an& to the effect that N?00.)A would
'uarantee a loan made by Cho&o :an& to N?00.)A+ %ub%iadiary Cha#aChoc&% Itd.
Cha#aChoc%+ loan with Cho&o :an& wa% P3!""""" a% at December 31 !"1".
Cha#aChoc% wa% in a %tron' financial #o%ition at 31 December !"1"
:a%ed on the abo$e and the re%ult of your audit an%wer the followin',
1. )he warranty e>#en%e in !"1" i%
a. P1""""" b. 3""""" c. 1-"""" d.
!3""""
!. )he #ro$i%ion for warrantie% a% of December 31 !"1" i%
a. P*9"""" b. !3"""" c. 39"""" d.
31""""
3. )he #ro$i%ion for warrantie% to be re#orted a% current liability a% of December 31 !"1" i%
a. !!"""" b. 1*"""" c. 3""""" d
33""""
3. )he #ro$i%ion for warrantie% to be re#orted a% noncurrent liability a% of December 31 !"1" i%
a. P. 9"""" b. P!-"""" c. 1*"""" d.
33""""
*. )otal #ro$i%ion% to be re#orted in the %tatement of financial #o%ition a% of December 31 !"1" i%
a. P39"""" b. 31"""" c. 119"""" d.
13-""""
PROBLEM O 7
Aelect the be%t an%wer for each of the followin',
1. In Auditin' account% #ayable an auditor #rocedure% mo%t li&ely will focu% #rimarily
on mana'ement% a%%ertion of.
a. .>i%tence c.
Com#letene%%
b. Pre%entation and di%clo%ure d. Laluation and allocation
!. An auditor #erform% a te%t to determine whether all merchandi%e for which the
client wa% billed wa% recei$ed. )he #o#ulation for thi% te%t con%i%t of all
a. Merchandi%er recei$ed c. Canceled chec&%
b. Lendor+% in$oice% d. recei$in'
re#ort%
3. )he #rimary audit te%t to determine if account% #ayable are $alued #ro#erly i%
a. Confirmation of account% #ayable
b. Louchin' account% #ayable to %u##ortin' documentation
c. An analytical #rocedure
d. Lerification that account% #ayable wa% re#orted a% a current liability in
the balance %heet.
3. Dhich of the followin' #rocedure% i% lea%t li&ely to be #erformed before the
balance %heet dateE
a. Ob%er$ation of in$entory count.
b. )e%tin' of internal control o$er ca%h.
c. Aearch for unrecorded liabilitie%.
d. Confirmation of recei$able%.
*. An audit a%%i%tant found a #urcha%e order for a re'ular %u##lier in the amount P
**"" the #urcha%e order wa% date after recei#t of 'ood%. )he #urcha%in' a'ent
had for'otten to i%%ue the #urcha%e order. Al%o a di%bur%ement of P3*" for
material% did not ha$e recei$in' re#ort. )he a%%i%tant wanted to %elect additional
#urcha%e order% for in$e%ti'ation but wa% unconcerned about lac& of recei$in'
re#ort. )he audit director %hould.
a. A'ree with the a%%i%tant becau%e the amount of the #urcha%e order
e>ce#tion wa% con%iderably lar'er than the recei$in' re#ort e>ce#tion
b. A'ree with the a%%i%tant becau%e the ca%h di%bur%ement cler& had been
a%%ured by the recei$in' cler& that the failure to fill out a re#ort didn+t
ha##en $ery often.
c. Di%a'ree with the a%%i%tant becau%e two #roblem% ha$e an e@ual ri%& of
lo%% a%%ociated with them
d. Di%a'ree with the a%%i%tant becau%e the lac& of a recei$in' re#ort ha% a
'reater ri%& of lo%% a%%ociated with it.
-. Dhen u%in' confirmation to #ro$ide e$idence about com#letene%% a%%ertion for
account #ayable the a##ro#riate #o#ulation mo%t li&ely i%
a. Lendor% with whom the entity ha% #re$iou%ly done bu%ine%%
b. Amount% recorded in the account% #ayable %ub%idiary led'er
c. Payee% of chec&% drawn in the month after the year end.
d. In$oice% filed in the entity+% o#en in$oice file.
6. Dhich of the followin' i% a %ub%tanti$e te%t than an auditor i% mo%t li&ely to
#erform to $erify the e>i%tence and $aluation of recorded account% #ayableE
a. In$e%ti'atin' the o#en #urcha%e order file to a%certain that #reB
numbered #urcha%e order% are u%ed and accounted for.
b. Cecei$in' the client+% mail uno#ened for a rea%onable #eriod of time
after year end to %earch for unrecorded $endor+% in$oice%
c. Louchin' %elected entrie% in the account% #ayable %ub%idiary led'er to
#urcha%e order% and recei$in' re#ort%.
d. Confirmin' account% #ayable balance% with &now %u##lier% who ha$e
Kero balance%.
9. Only one of the followin' four %tatement% which com#are confirmation of account%
#ayable with %u##lier% and confirmation of account% recei$in' with debtor% i%
fal%e. )he fal%e %tatement% i% that
a. Confirmation of account% recei$in' with debtor% i% a more widely
acce#ted auditin' #rocedure than u% confirmation of account% #ayable
with %u##lier%
b. Atati%tical %am#lin' techni@ue% are more widely acce#ted in the
confirmation of account% #ayable than in the confirmation of account%
recei$able P
c. A% com#ared with the confirmation of account% recei$able the
confirmation of account% #ayable will tend to em#ha%iKe account% with
Kero balance% at the balance %heet date.
d. It i% le%% li&ely that the confirmation re@ue%t %ent to the %u##lier will
%how the amount owed than that re@ue%t %ent to the debtor will %how
the amount date.
/. Dhen title to merchandi%e in tran%it ha% #a%%ed to the audit client the auditor
en'a'ed in the #erformance of a #urcha%e cutBoff will encounter the 'reate%t
difficulty in 'ainin' a%%urance with re%#ect to the
a. Juantity C. Price
b. Juality d. )erm%
1". Dhich of the followin' audit #rocedure% i% lea%t li&ely to detect an unrecorded
liabilityE
a. Analy%i% and recom#utation of intere%t e>#en%e
b. Analy%i% and recom#utation of de#reciation e>#en%e.
c. Mailin' of %tandard ban& confirmation form%.
d. Ceadin' of the minute% of meetin'% of the board of director%
11. ?nrecorded liabilitie% are mo%t li&ely to be found durin' the re$iew of which of the
followin' document%E
a. ?n#aid bill% c. bill% of ladin'
b. Ahi##in' record% d. ?nmatched %ale% in$oice
1!. Dhich of the followin' audit #rocedure% i% be%t for identifyin' unrecorded trade
account% #ayableE
a. Ce$iewin' ca%h di%bur%ement recorded %ub%e@uent to the balance
%heet date to determine whether the related #ayable% a##ly to the #rior
#eriod.
b. In$e%ti'atin' #ayable% recorded <u%t #rior to and <u%t %ub%e@uent to the
balance %heet date to determine whether they are %u##orted by
recei$in' re#ort%.
c. .>aminin' unu%ual relation%hi#% between monthly account% #ayable
balance% and recorded ca%h #ayment%.
d. Ceconcilin' $endor% %tatement to the file of recei$in' re#ort% to identify
item% recei$ed <u%t #rior to the balance %heet date
13. In $erifyin' debit% to #er#etual in$entory record% of nonmanufacturin' firm the
auditor i% mo%t intere%ted in e>aminin' the #urcha%e
a. (ournal c. Order
b. Ce@ui%ition% d. In$oice%.
13. Dhich of the followin' #rocedure% relatin' to the e>amination of account% #ayable
could the auditor dele'ate entirely to the client% em#loyee%
a. )e%t footin'% in the account% #ayable led'er
b. Ceconcile un#aid in$oice% to $endor% %tatement%
c. Pre#are a %chedule of account% #ayable
d. Mail confirmation for %elected account balance%
1*. An auditor% #ur#o%e in re$iewin' the renewal of a note #ayable %hortly after the
balance %heet date mo%t li&ely i% to obtain e$idence concernin' mana'ement%
a%%ertion% about
a. .>i%tence c. Com#letene%%
b. Pre%entation and di%clo%ure d. Laluation
1-. An auditor% #ro'ram to audit lon'Bterm debt %hould include %te#% that re@uire
a. .>aminin' bond tru%t indenture%
b. In%#ectin' the account% #ayable %ub%idiary led'er
c. In$e%ti'atin' credit% to the bond intere%t income account
d. Lerifyin' the e>i%tence of the bondholder%.
16. In an audit of bond% #ayable an auditor e>#ect% the tru%t indenture to include the
a. Auditee+% debtBtoBe@uity ratio at the %ame time of i%%uance
b. .ffecti$e yield of the bond% i%%ued
c. Aub%cri#tion li%t
d. De%cri#tion on the collateral
19. In auditin' lon'Bterm bond% #ayable an auditor mo%t li&ely will
a. Perform analytical #rocedure% on the bond #remium and di%count
account%
b. .>amine documentation of a%%et% #urcha%ed with the bond #roceed% or
lien%
c. ComN#are intere%t with the bond #ayable amount for rea%onablene%%
d. Confirm the e>i%tence of indi$idual bondholder% at yearBend
1/. )he audit #rocedure% u%ed to $erify accrued liabilitie% differ from tho%e em#loyed
for the $erification of account% #ayable becau%e
a. Accrued liabilitie% u%ually #ertain to %er$ice% of a continuin' nature
while account #ayable are the re%ult of com#leted tran%action
b. Accrued liability balance% are le%% material than account #ayable
balance%.
c. .$idence %u##ortin' accrued liabilitie% i% none>i%tent while e$idence
%u##ortin' account #ayable i% readily a$ailable
d. Accrued liabilitie% at year end will become account #ayable durin' the
followin' year
!". )he auditor i% mo%t li&ely to $erify accrued commi%%ion% #ayable in con<unction
with the
a. Aale% cutoff te%t.
b. Lerification of contin'ent liabilitie%.
c. Ce$iew of #o%tBbalance %heet date di%bur%ement%.
d. .>amination of trade account% #ayable
Suggested Answers
Problem 1 Problem 8
1. D 1. C
2. C 2. B
3. A 3. C
4. B 4. C
5. A 5. D
Problem 2 6. A
1. B 7. C
2. A 8. B
3. C 9. B
4. D 10. B
Problem 3 11. A
Adust!ng entr!es 12. A
13. D
Problem 4 14. C
1. A 15. D
2. A 16. A
3. C 17. D
18. C
Problem 5 19. A
1. A 20. A
2. B
3. C
4. A
5. B
Problem 6
1. D
2. B
3. C
4. C
5. D
6. A
7. C
Problem 7
1. C
2. D
3.
4. A
5. B