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AUDITING PROBLET{S

SLT'-DEPARTM ENT OF ACCOUNTANCY C.T.ESPENILLA

AUDIT OF LIABILITIES
APOT-PROBLEM Lr

L'

An internal control questionnaire indicates that an approved receiving report is required to aqqgmpany evQry qheek requeqt for pqymqnt ef merghqnQige. Wiiqn'Sf the iqft.*in-g procedures provides the greatest assuranCe $rlt tnis control operating effectively? a' select and examine canceled checks. and ascertainisthat the ielated receiving R reports are dated no eariier than the cheeks. E Seleq and examine canceled checks, and ascertain that the related receiving repofts are dated no later than the checks. c' Select and examine receiving reports, and asceftain that the related caneeled eheeks ane dated no earlier than tFre reeeiving repo*s, d' select and examine receiving reports, and alcertain that the related canceled checks are dated no later than tl-re receiving reports,
The accounts payable department receives the purchase order to accomplish all the following except a. Comparing the invoice price to the purchase order price. b' Ensuring that the purchase had been properry authorized. g Ensuring that the goods had been received by the party requesting them. d. Comparing the quantity ordered to the quantity purchased.

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For effective internat control, which of the following Indivlduals shouid be ,esponsibie for mailing signed checks? a. Receptionist @ Treasurer payable T Accounts clerk d. Payroll check

4'

If internal contro!.is properly destgned, lhe qqjne employee should not be perrnitted to ?, 9ign qheqks qanQel guErparring

b, @ 'd.

and doslJrnenis, Receive merchandise and prepare a reeeiving report, Prepare disbursement vouchers and sign ehecks, Initiate a request to order rnerchandise and approve merchandise ordered.

5. In a properly

designed accounts payabie system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report have been ,rerinei. The next step in the system is to a. Cancel the supporting documents, b, Enter the check amount in the check reqister. A Approve the voucher for payment. (g Post the voucher amount tc the expense ledger.

6' A client erroneously recorded a large purchase

twice. vlhich of the following internal ?9gaunting aan!1ql rneasures would be mest likely ts deteet this error in a timety an? effteient manner? a. Footing the purchases journal, Reconciling vendors' monthiy statements with subsidiary payabre iedger accounts, Tracing totals from the purchases journal to the ledger accounts. d. Sending written quarterly confirmitions to al! vendo-l-s.

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responsible for mailing signed checks? a. ReceDtionist. 6c. Treasurer.payable clerk. Accounts d. Payroll clerk. The accounts payable department receives the purchase order forrn to accomplish alt the following except a. Compare invoice price to purchase order price, L Ensure the purchase had been properly authorized. (fi Etrgursllg goods had been received by tle party requesting the goods. d. Compare quantity ordered to quantity purchased.

For effective internal control purposes, which of the following individuals should

be

9.

You are auditing the December 31, 2005, accounts payable balance of one of your firm's divisisns, The dlvisiqn eantraller's sffiEe has prsvided ysu with a schedule listing Ure eredllqrs and the amount owed fo each at December 31,2005. Which oi tne fottilwing-Iu-Oii procedures would be your best choice for determining that no individual account paya-ble has been omitted from the schedule? a. Send confirmation requests to a randomly selected sample of creditors listed on the schedule. b. Send confirmation requests to creditors that are listed on the schedule but not listed on the coresponding December 31, ZAA4, schedule. c, Examine support for selected January 2006 payrnents to creditors, ascertaining that those relating to 20o6 are not on the schedule. Examine support for selec-ted January 2006 payments to creditors, @ ascertaining that those relating to 2005 are on this schedule.

10.

A company uses an automated accounts payable system to propess its disbursements, An internaf auditot' wants to reesneile the aeesunts payable balanse'listed in the firm's monthend trial balance report to the master accounts piyabte file, wfriih- is sto.eO on rig;"1i. tape. Whlch of the following application audit techniques would be most appropriate to tnis
task?

6 b. c. d.
----'l

to recomputed the file balance. Review a listing of the accounts payable program source code. Develop and use accounts payable data. PreBare an analytie audit flowehart of the automated aeeounts payable system.

Use general-purpose audit software

11. A preliminary survey of the purchasing function indicates the following:

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Department managers initiate purchase requests, which must be approved by the plant superintendent. Purchase orders are typed by the purchasing department by using the prenumbered and controlled forms. Buyers regulady update the official vendor listing as new sources of supply become known. Rush orders can be plaeed with a vendor by telephone but must be followed by Sdttgn purqhagg qrdqr befere delivery _can be aceeBted, Vendor invoice payment requests must be accompanied by a purchase order and receiving report.

One ggssible fautt of.this system is that

b.
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Purchases can be, made at prices higher than normal from a vendor Gq controlled bv a buyer.
d.

unnecessary supplies can be purchased by department managers. Payment can be rnade for supplies not received. Payment can be made for supplies reeeived but not ordered

by

the

12"

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which of the following controls could be used to detect bank deposits that are recorded

"-*!-"+?blishing

but

b'

accountanitity for receiBts at the earrier possibre time. accountabirities (l'e'. corrections to either :STfl,J:::5nJ,:

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Csnsolidating eash reeeiving Beints. Having a third party perform bank reconciliations,

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13' The treasurer makes disbursements by check and reconciles the monthly banks statement to qf

accaunting records, Which the following b,est describes the cont*t *;;; of this arangement? 6' Intennal control will be enhanced because these are duties a treasurer shoufd

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perform.

The treasurer will be abre to make unauthorized adJustments to the cash

accoLint.

The treasurer will be in position to make and concear unauthorized payments.

Controls will be enhanced because the treasurer will have two oppoftuniges to discover inappropriate d isbursements.

14' Which of the following procedures would an auditor most likely perform in searching qnreqer{q{ liabilltiesz
a, b,

for

@
a

ir"/r"sn\?\ vouch a sample of accounts payable entries recorded just before year end l&\**-/ii the unmatched receiving report file. esrnBarq a samBle pf plJrqhese erder$ issued iugt ?f!qr y9r end with the year-end accounts payable trial balance, vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices. scan the cash disbursements entries recorded just before year end for indications of unusual transactions.

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15. For effectlve internal control, the accounts payable department generalh/ should a' stamp, perforate, or othennrise cancet supporting* documentation after payment is mailed. Asqe.rtain that each requisitisn is aBproved as te p!"iee, eu?r.rtit!, and quality by an authorized employee. obliterate the quantity ordered on the receiving department copy of the purchase order. Establish the agreement of the vendor's invoice with the receiving report @ purchase and order.

b.

1'5.

In testing contrsls over cash disbursements, ari auditor most likely would determine that the person who signs checks also a. Review the monthly bank reconciliation. b, Returns the checks to aceoqnfs Bayable, c. Is denied access to the supporting documents, @ Is responsibte for *iiling in" chelks.

L7.To provide assurance that each voucher is submitted and paid only once, an auditor most fikely would examine a sarnple of paid vouchers and deierrnine whether each voucher is
Supported by a i. Stamped !'Bsi6ftt vendor,s invoice. by the eheek signer" 'W Prenurnbered and accounted for. c. d" Approved for authorized purchases"

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18' which of the following internal control activities !s nof usually performed in the vouchers payable department? a. Matching the vendor's invoice with the related receiving report. @' ngnrSving vouchers for payment by having an authorized employee sign the vouchers, c. Indicating the asset and expense accounts to be debited. d' Accounting for unused prenunnbered purchase orders and receiving reports. 19' In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher resister ts the suBparting doeunnents' whieh assertlan wsuld tnis test Ei isntrcts mqgt llkely support? A, Completeness Existence or occurrence W Valuation or allocation. c, d. Rights and obligations. 20. Under propenly designed intennal control, the same employee most likely would match vendors'invoices with receiving reports and also A Post the detailed accounts-payable records. (9 ReEompute the ealeulations on venders, lnvsiees, ledger. ,/ Cancel vendors' invoices 'd. Reconcile the accounts payablepayrient. after 21' An auditor traced a sa.mple of purchase orders and the related receiving reports to the purchases Journaf and the cash disbursernents Journal. The purpose of this substantive audit procedure most likely was to a. Identiff unusually large purehase that sheuld be investigated fufrher, b. Verifv that cash disbursements were for goods actually Feceivea.@ Deteimine that purchai*,,""r" property recorded. d. Test whether payments were foi goods actuaily ordered.

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AUDITII{G PROBLE}IS

IIABILTNES

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,-, c. :::Il overdraft at , :: i-asn l"#:Ji'F,i:i;:#'#i5:?f?'n:uoo. Farmers Bank, p1,3S0. :: >d. Accounts receivable with crelii U"ii'*i*, p2,g50. ct= e' Estimated expenses of meetint warranties on merchandise

The following information about Victorjas_c-ompany is availabfe at December 31, 2o05: income taxes wi$rnero, pe00.

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h. Dividends in.allears preference shares, p25,000. i' Deferred seriar.bondson or'psoo,oo9, is919!'atEiinc-bearing

sold, 'o'"iiur"J".v pJ'r"ffi;.[1il"-"1i".-ct,

previously

p3,200" p1,250.

interest at L*o/o, payable in serniannual installrnents of p50,00b;dJeApril 1 and october I of each onn:,:o on rniereit is -r'"-p"io I5f,i;llij?'i,l 13aio

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shares to be distributel as a resurt or a share dividend

R,equirements:

tfoT.tn" items presented above comprise the companyk current

florn the items presented above comprise the company,s non_current

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APOT.PROBLEITI 3: You are auditing the 2008 liabilities of Joio Inc. which follows the calendar year financial statements repofting' The following infolmqtiqD we.ie aGiaore with regard to irs currengy

maturing obligations:
a,

on December 31, 2009, Jojo had p1M of short-term payabfe due Februa 1ote,s ry 7, 2o09. on January 15,2009,.the iompany issued bonds wittr aiicevalue of p900,000 at 96; brokerage fees and other costs of issuance were p3,450, on January 22, zaog, the proceeds from the bond issue plus additional cash nero nv th" .orp"ny on December 31, 2008 were used to liquidate the p1M of short_term notei.
Another short-term debt in the form of n-otes payabre p500,000 were due on June 1, 2009' on.February 2, 2aa9, Joio eniered totating to an-agreernent with National Life Insurance co' whereby National will lend:oio F+oo]ogo''payable tn 5 years at !4o/o, the proceeds of which is intended to be used to partrv ren".-".i, the said ;;i"; ih" ,on"y will be available to the company on May ZO, 2009.

b.

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Another F500,000 n9!es payable is due on June 15, 2oog. At the financiat statement date Decernber 31, 2009; Jojo sig.ned to borrow up to p5o0,000 to refinance the notes payable on a-long-terrn- nasis, "".gi""*"niin" finun.ing agreement called for borrqwinss net te gxgeed 80 per- e91l qf,tne of the date of issue of the pecember sr, zooe rinintiir tfe Eef later.allpjq was prsvidins, At "-all-i statements, the vatue of the collateral was P600,000 and was not expected to fail berow *ris imouni during 2009. Assuming thatthe financial statements of Jojo were authorized to be lssued on March 31,200g: 1, l-low much liabilities above are short term as of the balance sheet date?
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How much liabifities above are long term as of the balance sheet date?

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for P100,000 each. Each one has one-year /arranty. It estimated that the I Yarranty Cl rst will be P8,000 for each computer.aMoreover, the L ompany estimates that 20olo of t he compu :ers sold will never be given back to the company fof | -"! '-' 3pairs. In 2008 Bart actually inc *:: anty cosr of p1,250,000.
F

:,onnie Company sells 500 compr rters in 20 08

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Debit: Accounts receivab le

Sales

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equirements: . AdJust the entries prepared in 2008"

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APOT.PROBLEM 5:

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JDI video and sound seils compact stereo systems with a two-year warranty. past experience indicates that 10o/o of all sets sold will need repair in the first year, and lao/owill need repairs in the second year. The average repatr cost is p50O peisystem.
The company n'as abfe to sell 5,0o0 units and 6;000 units

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in 2aa7

and 20qg, respectivety.

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Aetual repair eosts were P525,000 in 20o7 and P850,000 in 200g. All r'eBair eosts iRvolved eash expenditures and wbre all charged to warranti"s on tne y".. oii*rrin.".
No accrual for additionar warranty riabirity were made by the company at year end.
REQUIRED

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2. 3.

Prcpare adjustments in 200g.

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what is the correct warranues expense to be reported in what is the corect warranUes expense to be reported

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2aa7? ]p *.. in 200g? 1tt {}"*

4.

what is the correct Estimated warranties liabilities to be reported at the end of 2aa7? f,as :-:. what is the correct Estirnated warranties liabilities to be reported at the end of 200g? Q-/ds r,;

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redeemed.

5,000 premiums coupons that can be redeemed for prizes, with P10 can be exchanged with a premium item. The company estimates that 50o/o of the premlums will be redeemed. Melco purchase 3,000 prizes at a cost of P30 each.ln antlclpatlon of the prernlum redemptlon. Furlng the year, 1.0e0 prerniums are
Each coupon if surrendered

In 2008

UPLATE Company issued

The entries in the books.of Melco Company were: Debit to Premiums expense and credit to cash !t qm'000 (for the purehase of the premium items); Debit ts eash and credit ts other income at !' YY'! t! P10;000 (for the premium redemption),
REQUIRED:

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what is the correct promotional expense related to the coupons? .. i,-,;, what is the correct estimated liability for coupons at the end of

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APOT.PR.OBLEITI 7: To increase sales' on January 1, 2008, SIERRA AppLrANcE coRp. inaugurated a two-year sales promotional plan' The sales promotional plan entittes cusiomer to purchase

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certain amount of accumurated officiar receipts :iiil'

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Purchase

Premium item Vacuum cleaner Industrial stand fan

accumulated official receipt amount to be Dresented P15.000 12.500

purchase orice
P500

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ion

Number of premium items purchased during the period 1,000 1.500

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price of the premium items P2,250 1.500

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Total cash sales during the period amounted to P45,000,000. The company estimates that 30olo sf the tqtal receipts l'sr the year will be presented bv tnd eustomers to redeem vaeuum eleandr premium while 40olo of the total receipts will ue-preientea io reaeem inauitilai stand fan. The company's count of the premium items remaining on hand on December 31, 200g revealed -' thatthere vlere 125 vaeuum eleaners and 125 industiiit stind fan sn nano, Requirements:

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APOT-PROBLEM 8I DLlring'2009, Nokia corp. sefrs 3-year service contracts covering its product. During the first vear, p100,000 was r":ly:q ol jgltl?cts, expenses incurred for parts and labor in sonneetion with -and totated pro,goo,-'rne experience that the.paT"lgf .;pii.+=?^1r-"i-?1lffi,t"iiLql:: eomBaly e$trm;ted !.rqm past :,p"Ti for lepairs, is 25olo vear, and 4so/o inthe third year rhe sares in the

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The above transactions were booked by the accountant as: Unearned revenue 100,000 100,000 10,000
10.000.

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Inventory

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APOT.PROBLE}I 9: sAN MIG coRp. began operation on January 2,2aos wrth 250 emproyees. The company pa,d vacatlon leave ror every operating year. rhe.co.mpanyls ioricv on sick teave to "na "i'i""tiXl ffH.::i;;::TileF'J""x.?i[TJl,:;H:1,"1,ffi$*.1n" n"*t vear onrv ine,"m*,i,;r

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on December 31' 2005, records show that there are 55 ernproyees who are yet to avair leaves' while there are of any 15 emptoyees *19 n"uq r.g,n"fi"g'i we-e!1 unused vacation and sick Emplovees nta un ur"rase dailv *.g"-r"t" or p250 i:i"v weekty i"rX.T-,::Tff3i.

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reaves ; 30 employees who have accumulated 3 weeks ,nur*J employees who have accumulated 1 week unused il[ l";;"r and vacation tu"u". combined; 10 sick feives and 1 week unused vacation

on December 31, 2oa6, records show that 925 days vacatiorr and sick leaves carried over "ln the last operating period *"." from ano paia in zooi. addition, thil ;;" 30 employees who have 6 weeks accumulateo unuslJ sick "x"riisea leaves ano oacation leavei cornlinec; 25 employees who have accumulated 3 weeks unJreJ sick teaves in8 z weet, ,nrs"o ui;;;;"

ro 17 18

reaves. Emproyees had an average dairy wage rate of p275 for 2006.

1' 2'

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How much liability for compensated absences should be included as current liabilities as of December 31, 2006? i::.
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what is the net adJustment to the c?lryn:atjon expense related to the accruat of thd {iabitity for compensated absences for the year ended 2006?

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APOT.PROBLEFI 1O: You have conducted several wrap-up audit procedures for BARRY CORP"'s financial statements !\.fd!! for lhq c=glendqr yeqr endqd pqqqmbqr ?L, Zaa7. Thq fingnqia! qtatgmentq were authqrleed for issue by BARRY's board on March 30, 2008. As part of these prociduies iou gatheied corroborating evidences with regards to the company's assertions on pending fitigation cases and unasserted claims. Through the process you ascertained the following information:

a) On January 5, 2008, inventory purchased FOB shipping point from a foreign country was detained at the countryt boarder because of political unrest, ihe shipment is vilued at p1 milfion' The lawyers, in response to a letter of audit inquiry, stated that it is probable that the company will be able to obtain the shlpment. ' r. ,, i; -',.: .
.

b) On December 31, the company is a defendant in a pending lawsuit which arose from an alleged Brodust {efeet that the Qempqpy ssfd in ?006, The lawyeis, in reEBensc to s letter qf audit inquiry, stated that it is probable that the company have to pay betweeri pggOpOO to P700,000, with P400,000 as the best estimate. Moreover, it is reasonably possible that the company will have to pay the p700,000 as a result of the lawsuit. 4: ::'' c) On December 30, 2008 an explosion occurred at the company's plant totally damaging the plant and causing additional damages to adjacent neighbors.' The carrying value of the plant on the company's books was at PSM. It had a prevailing fair value of p4M prior to the explosion. ftlo claims had yet been assefted against the company as of the date of authorization of the financial statements. The rnaRagernent as coroborated by their counsel, however belleyes that it its prpbable that the esrnBany woutd be resBonsible for damages and that P5,000,000 would be a reasonable estimate of its liability. BARRY had an insurance covering this type of accident. The insurance shafl reimburse the connpany atB0o/o of the prevailing fair value of the asset prior to the fire while lt shall reimburse the company 80o/o of any payments to be made for damages caused to neighbors. d) On December 5, 2008 BARRY initiated a lawsuit against LORIE INC. seeking p2 million in darnages from patent infringement.

1. How much should be recognized as provisions for probable losses should be repofted in the 2008 income statements? 2. How much impairment loss shoirld be recognized in the 2008 financial statements? ..r 3. How much should be total contingent liability should be disclosed in the 2008 notes to

4.

financial statements? How mueh gain on reimbursements should be reeegnized separately in the 2008 ineome

statement?

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You requested for the.clie.nt's reconcitiation schedure between_th";;;abre in the seneral ledser and the subrroiirvlJogJr"illiJn.ur.

rhe .".on;1rltion is reporred

control

Reconcitiationor""Hitt"?g"t#?i!!."""*rLedserBaf
December 31, 2006 Add
ances P975,250

?ql?!9" per subsidiary tedger {D*ticr) reconciling it"ems: Valid purchases Valid payments Valid purchase allowances
.

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. -70,000

Batance per senerat

tedser
t-ransit, tnlrs oid nqt

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REQUIRED:

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Adiusting entries.

2' compute for the bafance of the accounts payabfe to be shown in the balance sheet.

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APOT.PROBLEM 12:
A

MOATS Company is going to issue five-year bonds dated March P1'000'000' These bond! have an annual coupon r"t"-or'roozo 1. 20og in the amount of payablesemi-innuatty every March 1 and september 1' The prevailing market rate or interest on the date the bonds were ig5qed was at B9o.

6 7

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Moats company as ptanned, was able to sell all of its bonds on March 1, 20og at the prevailing market rate of interest.

The entries prepared by the company were: 3/1: Debit to cash and credit to Bonds payable for the total proceeds from the issuance'of the bonds; gAbebit tv rrrlsrsJL s^psll: -' - 're'r to Interest expense and credlt to Cash at P50r000.
REQUIRED:

1.
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Adjusting entries for the current year 200g.

to
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2' How much is the interest expense to be reported for the year ended December 31, z0og. 3. Balance of the Bonds payabre to be reported at the end of 200g. 4' Assuming all the-bond? *ef: reacquir-ed on september 30, 200g for p1,05o,ooo,
g?in er lsss sn the early retiremeni of the bonis,

what is the

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APOT.PROBI.EM 13: on January L' 2aa7.,.sANTos coRP' ifl1e! p1,000 convertibte bonds at 110. Interest is to be paid.annuaffy at the itut"_o a 3-year, 8,00_0, coupon ;a#; 12v9 every December 31. Each bond is convertible' at the. holderk option, into ao, pzs pai varr" .o*rnon shares at any time maturity' on the date of issuance, up to nrevaiting .".["i intei"st rate for similar debt without conversion privifeqe was 9olo' on lne the date The transaction wls recorded TT" cash market frice of one common share was p3o. J"uit to .i*iii to bonds payabte for the total "t " at *re ""J eno;i;h; vear was appropriaterv reeorded ::ffJi:'il'i:1"!i""'illl;"t:::'"XT,:avment
as a

The present varue of The present vafue of

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p' at golo for 3 periods is pl at go/q ordinir-y ;*oiryat 0.7722 L at 2,5313

debt?

1. what is the equity cornponent of the conveftibre

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Assuming that the convertibte bonds above were retired, on Janua much is the gain or loss on the earty ry t, 2ao9at 105, how reiirement of ilre oonus to be reported statement assurning that the nonJs'we-re in the income selring rt ioz J ir,at time without option? the conversion

4'

2' What is the resurting bonds payabre carrying varue as of December 31, 2007? 3' Assuming that the convertibre bonds.qggue were conveT"g shquld be credited tq share piiriu*[ooitinnui ?n January r, zoog,how much piil_m'.Jp,,u, from rhe equiry cqnversion?

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APOT.PROBLE}I 14:

AUDTTIilGPROBTM
3:"'X?i,"Jrl;i,tlla"f"tllr""ffii?;li'"ed 1,000 or its:anua r, roor, ,"o, ,ii.*,;;,;; annuar interests u,:l_l1lta.y^r.{1;-1i'i:,.J;,ili"lj:ilirHbTj},""*1il[.!^t?.[.xT annual i"ieiiil! *ery Januarv 1 ana r,,'l|aitT:,::?,,119^0j9, Each bond, *rti.n pays semi

holder to acquire one share of oacevo-!9iert.ar"-"t-Ji"r", for every wbrrant ' option price of P55 per share' tmmediately at a specified after in" ii.irin.e the prevairing interest is at l'oqlo and then.'.rt"i'uIire market rate of of-the *"..iniJi"s.,e30. the transaction by debiting carh anJi..aiiing comiany recorded bonds;;;$t';t the totat cash consideration the p"'i"; .r'"-'gli*tJ iit".".t ;ffiifi:' "." "*p"nl",-inir" "r.,.u"r is yet to

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The present value of p1 at L}o/o for 5 periods is at 0.6209 present value of n1 fi 5"r, ioi'ro b*rinoi iJ e,613e The present value of pi at iO"z"irain"ry annuity is at 3.7908 The present value of pf at S"Zo oiain".y annuity is at . 2.7217 1. What is the equity component of the compound instrument ? 2. What is the balance of the bcnds payable as of December 31, ZOOT? 3, what is the resulting share premium, assuming that ail the warrants were exercised?
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APOT-PROBLEITI 15;

on January 1, 2008, Anglo leased a constructed warehouse from saxon corp. The following data relate to the lease transaction at the inception of the lease: Lease term, 10 years; Annual rental payable at the beginning of each lease year, p500,000; Useful life oi the warehouse, 15 years; Implicit interest rate, 10o/o, Fair market value of ine warenouse, p+,Ooo,ooo, The lease has no renewat option, and the possession of the machine reverts to saxon when the lease terminates' Anglo recorded the transaction as a capit-f lease and charge whatever the related expense aeeounts are in relation to the eapitalized lease during the 200g 6Berating y"ui.-

1' 2.

what is the net effect of the related audit adjustments, if there are any in relation to the transagtion in the 2009 ineome statement? what is the carrying value of the any lease fiability at the end of the year?

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to the warehous Ftril'"'ffH#*$*rmrfr,,!':l;,*f; at tn" J";;;;=:i::i'l?yse, The ssst qf rhe rne explicit interest ."t"-"t]ll"''l:::u market value rate-statei';; il': matt6t Ja]Ji"tl"6i'o

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varue or the anv rease riabirity at the sr r' oruhe year? ,v end ul fne year? _carvins

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