Problem no.

In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010 you are
called upon to verify the accounts payable transactions. You find that the company does not make use of a
voucher register but enters all merchandise purchases in a Purchases Journal, from which posting are
made to a subsidiary accounts payable ledger. The subsidiary ledger balance of P1,500,000 as of
December 31, 2010 agrees with the accounts payable balance in the company’s general ledger. An analysis
of the account disclosed the following:

Trade creditors, credit balances P 1,363,000

Trade creditors, debit balances 63,000
Net P 1,300,000
Estimated warranty on products sold 100,000
Customer’s deposits 9,000
Due to officers and shareholders for advances 50,000
Goods received on consignment at selling price
(offsetting debit made to Purchases) 41,000
P 1,500,000

A further analysis of the “Trade Creditors” debit balances indicates:

Date Items Amount

Miscellaneous debit balances prior to 2007.
No information available due to loss
of records in a fire. P 3,000

03/03/07 Manila Co. –Merchandise returned for credit,

but the company is now out of business 8,000

06/10/09 Cebu Corp. – Merchandise returned but Cebu

says “never received” 7,000
07/10/10 Jolo Distributors – Allowance granted on
defective merchandise after the invoice
was paid 5,000

10/10/10 Bulacan Co – Overpayment of invoice 12,000

12/05/10 Advance to Zambales Co. This company agrees

to supply certain articles on a cost –plus basis 24,000

12/05/10 Goods returned for credit and adjustments on

price after the invoices were paid; credit memos
from supplier not yet received 4,000
63,000

Your next step is to check the invoices in both the paid and the unpaid invoice files against ledger accounts.
In this connection, you discover an invoice from Atlas Co. of P45,000 dated December 12, 2010 marked
“Duplicate”, which was entered in the Purchase Journal in January 2011. Upon inquiry, you discover that
the merchandise covered by this invoice was received and sold, but the original invoice apparently has not
been received.

In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000 were
prepared and entered in the Cash Disbursements Journal of December, but these checks were not issued
until January 10, 2011.

The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not taken up by
the company under audit during the year 2010. These goods are included in your adjusted inventory.

1. The Accounts payable – Trade balance at December 31, 2010 should be

A. P 1,471,000 B. P 1,614,000
C. P 1,214,000 D. P 1,477,000

2. The net adjustment to Purchases should include a

A. Net debit of P 51,000

B. Net credit of P 41,000
C. Net debit of P 10,000
D. Net debit of P 73,000
a. happen very often.
b. Disagree with the assistant because two problems have an equal risk of
loss associated with them
c. Disagree with the assistant because the lack of a receiving report has a
greater risk of loss associated with it.
2. When using confirmation to provide evidence about completeness assertion for
account payable, the appropriate population most likely is
a. Vendors with whom the entity has previously done business
b. Amounts recorded in the accounts payable subsidiary ledger
c. Payees of checks drawn in the month after the year end.
d. Invoices filed in the entity’s open invoice file.
3. Which of the following is a substantive test than an auditor is most likely to
perform to verify the existence and valuation of recorded accounts payable?
a. Investigating the open purchase order file to ascertain that pre-
numbered purchase orders are used and accounted for.
b. Receiving the client’s mail, unopened, for a reasonable period of time
after year end to search for unrecorded vendor’s invoices
c. Vouching selected entries in the accounts payable subsidiary ledger to
purchase orders and receiving reports.
d. Confirming accounts payable balances with know suppliers who have
zero balances.
4. Only one of the following four statements which compare confirmation of accounts
payable with suppliers and confirmation of accounts receiving with debtors is
false. The false statements is that
a. Confirmation of accounts receiving with debtors is a more widely
accepted auditing procedure than us confirmation of accounts payable
with suppliers
b. Statistical sampling techniques are more widely accepted in the
confirmation of accounts payable than in the confirmation of accounts
receivable ]
c. As compared with the confirmation of accounts receivable, the
confirmation of accounts payable will tend to emphasize accounts with
zero balances at the balance sheet date.
d. It is less likely that the confirmation request sent to the supplier will
show the amount owed than that request sent to the debtor will show
the amount date.
5. When title to merchandise in transit has passed to the audit client the auditor
engaged in the performance of a purchase cut-off will encounter the greatest
difficulty in gaining assurance with respect to the
a. Quantity C. Price
b. Quality d. Terms

6. Which of the following audit procedures is least likely to detect an unrecorded

liability?
a. Analysis and recomputation of interest expense
b. Analysis and recomputation of depreciation expense.
c. Mailing of standard bank confirmation forms.
d. Reading of the minutes of meetings of the board of directors

7. Unrecorded liabilities are most likely to be found during the review of which of the
following documents?
a. Unpaid bills c. bills of lading
b. Shipping records d. Unmatched sales invoice
8. Which of the following audit procedures is best for identifying unrecorded trade
accounts payable?
 a. Reviewing cash disbursement recorded subsequent to the balance
sheet date to determine whether the related payables apply to the prior
period.
b. Investigating payables recorded just prior to and just subsequent to the
balance sheet date to determine whether they are supported by
receiving reports.
c. Examining unusual relationships between monthly accounts payable
balances and recorded cash payments.
d. Reconciling vendors statement to the file of receiving reports to identify
items received just prior to the balance sheet date,
9. In verifying debits to perpetual inventory records of nonmanufacturing firm, the
auditor is most interested in examining the purchase
a. Journal c. Order
b. Requisitions d. Invoices.
10. Which of the following procedures relating to the examination of accounts payable
could the auditor delegate entirely to the clients employees
a. Test footings in the accounts payable ledger
b. Reconcile unpaid invoices to vendors statements
c. Prepare a schedule of accounts payable
d. Mail confirmation for selected account balances
11. An auditors purpose in reviewing the renewal of a note payable shortly after the
balance sheet date most likely is to obtain evidence concerning managements
assertions about
a. Existence c. Completeness
b. Presentation and disclosure d. Valuation
12. An auditors program to audit long-term debt should include steps that require
a. Examining bond trust indentures
b. Inspecting the accounts payable subsidiary ledger
c. Investigating credits to the bond interest income account
d. Verifying the existence of the bondholders.
13. In an audit of bonds payable, an auditor expects the trust indenture to include the
a. Auditee’s debt-to-equity ratio at the same time of issuance
b. Effective yield of the bonds issued
c. Subscription list
d. Description on the collateral
14. In auditing long-term bonds payable, an auditor most likely will
a. Perform analytical procedures on the bond premium and discount
accounts
b. Examine documentation of assets purchased with the bond proceeds or
liens
c. Com[pare interest with the bond payable amount for reasonableness
d. Confirm the existence of individual bondholders at year-end
15. The audit procedures used to verify accrued liabilities differ from those employed
for the verification of accounts payable because
a. Accrued liabilities usually pertain to services of a continuing nature
while account payable are the result of completed transaction
b. Accrued liability balances are less material than account payable
balances.
c. Evidence supporting accrued liabilities is nonexistent while evidence
supporting account payable is readily available
d. Accrued liabilities at year end will become account payable during the
following year
16. The auditor is most likely to verify accrued commissions payable in conjunction
with the
a. Sales cutoff test.
b. Verification of contingent liabilities.
c. Review of post-balance sheet date disbursements.
d. Examination of trade accounts payable
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
Adjusting entries 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