Applied Auditing Quiz #1 (Diagnostic Exam)

PROBLEM NO. 1

You have been assigned to audit the financial statements of AYALA MERCHANTS
CORPORATION for the year 2017. The company is a dealer of appliances and has several
branches in Metro Manila. Its main office is located in Makati City. You were given by the
company controller the unadjusted balances of the items to be included in the company’s
statement of financial position and statement of income as of and for the year ended December
31, 2017. Audit findings are as follows:

I. AUDIT OF CASH

A cash count was conducted by your staff on January 7, 2018. The petty cash fund of
P60,000 maintained by the company on an imprest basis reflected a balance of P22,750.
Unreplenished expenses totaled P37,250 of which P9,510 pertains to January 2018.

You were furnished a copy of the company’s bank reconciliation statement with Chartered
Bank as follows:
Balance per bank P277,994
Add: Deposit in transit 248,836
Bank debit memos 712,750
Returned check 63,000
Less: Outstanding checks (174,580)
Book error (72,000)
Balance per books P1,056,000

Your review of the reconciliation statement disclosed the following:

1. Postdated checks totaling P107,400 were included as part of the deposit in transit. These
represent collections from various customers whose accounts have been outstanding for
less than three months. These checks were actually deposited on January 8, 2018.

2. Included in the deposit in transit is a check from a customer for P63,000 which was
returned by the bank on December 27, 2017 for insufficiency of funds. This account has
been outstanding for over six months. The check was replaced by the customer on
January 15, 2018.

3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes
payable including interest of P10,000 due on December 26, 2017. This was not recorded
as of year-end.

4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as
P102,900. This was in payment of accounts payable.

5. Bank service charges totaling P2,750 were not recorded.

II. AUDIT OF ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

It is the company’s policy to provide allowance for doubtful accounts as follows:

Less than 3 months P2,500,960 1%

3 to 6 months 843,200 5%
Over 6 months 274,500 10%
Total P3,618,660

An analysis of the accounts receivable schedule showed that several long outstanding
accounts for more than a year totaling P152,460 should be written-off.
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III. AUDIT OF MARKETABLE SECURITIES – TRADING

The company’s equity portfolio as of year-end showed the following:

Total Market Value
Shares Cost per Share
Bacnotan Cement 7,000 P108,500 P16.00
Fil-Estate 10,000 195,000 19.75
Ionics 2,400 49,200 24.00
La Tondena 2,000 67,000 26.00
Selecta 8,000 31,600 1.20
Union Bank 1,600 50,880 27.50
P502,180

The securities are listed in the stock exchange. The company follows the fair value
accounting.

IV. AUDIT OF NOTES RECEIVABLE

The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary.

This is covered by a promissory note with interest at 15% per annum dated November 1,
2017. No interest has been accrued on the note as of December 31, 2017.

V. AUDIT OF PREPAYMENTS

Prepaid expenses account consists of the following:

Prepaid advertising P 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Unused office supplies 361,000
P1,911,000

Ayala Merchants renewed its contract with an advertising agency for the annual promotion
as well as the regular advertisement of its products. It paid a total of P640,000, P100,000 of
which is for the Christmas promotion while the balance is for the regular promotion and
which will run for one year starting on August 1, 2017. Payment was made on July 20,
2017, and the total amount was reflected as prepaid advertising.

The company leases the main office and store in Makati City at a monthly rental of
P140,000. On November 5, 2017, a check for P420,000 was issued in payment of three-
month rental as per renewal contract which was effective on November 1, 2017. Rental
deposit remained at three months and is included under other assets.

The company’s delivery equipment is insured with Fortune Insurance Corporation for a total
coverage of P2.4 million. Total payment made on November 16, 2017 for the renewal
amounted to P490,000 which covers the period from November 1, 2017 to November 1,
2018. No adjustment has been made as of December 31, 2017.

To take advantage of volume discount ranging from 10% to 20%, the company buys office
and store supplies on a bulk basis. The staff-in-charge bought supplies worth P220,000 on
June 10, 2017 and included the same in their office supplies inventory. As at year-end,
unused office supplies amount to P102,500.
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VI. AUDIT OF INVENTORIES

A physical count of inventories was conducted simultaneously in all stores on December 29

and 20, 2017. Your review of the list submitted by the accountant disclosed the following:
1. Some deliveries made in December 2017 have not been invoiced and recorded as of
year-end. These items had a selling price of P146,940 with term of 15 days. The
corresponding cost was already deducted from the ending inventory.
2. Goods on consignment to Ayala Merchants totaling P356,000 were included in the
inventory list.
3. Some appliances worth P138,500 were recorded twice in the inventory list.
4. Goods costing P153,800 purchased and paid on December 26 was received on January
4, 2018. The goods were shipped by the supplier on December 28, FOB shipping point.

VII. AUDIT OF PROPERTY, PLANT AND EQUIPMENT

The company purchased additional equipment worth P268,000 on June 30, 2017. At the
date of purchase, it incurred the following additional costs which were charged to repairs
and maintenance account:
Freight-in P30,400
Installation cost 13,000
Total P43,400

The above equipment has an estimated useful life of ten years and estimated salvage value
of P20,000. Depreciation for the above equipment has been provided based on original cost.

The company discarded some store equipment on October 1, 2017, realizing no salvage
value. The cost of these equipment amounted to P165,520 with an accumulated
depreciation of P138,620 on December 31, 2017. Depreciation booked from October 1,
2017 to year-end was P10,480. No entry was made on the disposal of the property.

VIII. AUDIT OF ACCRUED EXPENSES

Some expenses for December 2017 were recorded when paid in January 2018 which
included the following data provided are from client’s employees:
Electric bills P73,400
Commission of sales agents 57,000
Telephone charges 42,500
Minor repair of delivery equipment 21,340
Water bills 18,760
Total P231,000

IX. AUDIT OF LIABILITIES

Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6 million at
an interest rate of 16% per annum on October 1, 2017. Accrued interest on this loan was
not taken up at year-end.
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X. OTHER AUDIT FINDINGS

A review of the minutes of meeting showed that a 10% cash dividend was declared to
shareholders of record as of December 15, 2017, payable on January 31, 2018.

Ayala Merchants Corporation

UNADJUSTED TRIAL BALANCE
December 31, 2017

Debit Credit
Petty cash fund P 60,000
Cash in bank 1,056,000
Trading securities 483,640
Accounts receivable – trade 3,618,660
Allowance for doubtful accounts P 110,360
Notes receivable 1,300,000
Inventories 7,274,900
Prepaid advertising 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Office supplies inventory 361,000
Furniture and fixtures 1,298,400
Delivery equipment 2,770,000
Accumulated depreciation 1,177,500
Other assets 548,000
Accounts payable – trade 2,356,320
Notes payable 3,300,000
Accrued expenses 169,040
Bonds payable 5,000,000
Discount on bonds payable 500,000
Ordinary share capital 5,400,000
Retained earnings 792,160
Sales 13,078,000
Cost of goods sold 8,034,000
Operating expenses 3,357,000
Other income 1,453,500
Other charges 625,280
P32,836,880 P32,836,880

Determine the adjusted balances of the following: (Ignore tax implications)

1. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260

2. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850

3. Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700

4. Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140

5. Allowance for doubtful accounts

A. P110,360 B. P152,640 C. P130,316 D. P88,217
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6. Notes and interest receivable

A. P1,331,960 B. P1,332,160 C. P1,332,500 D. P1,300,000

7. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400

8. Prepaid insurance
A. P449,167 B. P408,333 C. P490,000 D. P428,750

9. Prepaid rent
A. P140,000 B. P0 C. P420,000 D. P280,000

10. Prepaid advertising

A. P325,000 B. P640,000 C. P373,334 D. P315,000

11. Office supplies inventory

A. P258,500 B. P117,500 C. P361,000 D. P102,500

12. Total current assets

A. P14,0333,612 B. P13,523,866 C. P13,677,666 D. P13,537,666

13. Property, plant, and equipment

A. P4,068,400 B. P2,905,228 C. P3,946,280 D. P3,902,880

14. Accumulated depreciation

A. P1,038,880 B. P1,041,050 C. P1,177,500 D. P1,179,672

15. Accounts payable

A. P2,525,360 B. P2,428,320 C. P2,597,360 D. P2,356,320

16. Interest payable

A. P104,000 B. P16,178 C. P4,000 D. P27,644

17. Total current liabilities

A. P6,803,798 B. P6,103,798 C. P6,054,360 D. P5,603,798

18. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500

19. Cost of goods sold

A. P8,034,000 B. P8,236,200 C. P8,018,700 D. P8,374,700

20. Operating expenses

A. P4,296,514 B. P3,357,000 C. P4,341,514 D. P4,621,514

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 PROBLEM NO. 2

The cash account of NUNAL COMPANY shows the following activities:

Date Debit Credit Balance

Nov. 30 Balance P345,000
Dec. 2 November bank charges P 150 344,850
4 November bank credit for notes
receivable collected P 30,000 374,850
15 NSF check 3,900 370,950
20 Loan proceeds 145,500 516,450
21 December bank charges 180 516,270
31 Cash receipts book 2,121,900 2,638,170
31 Cash disbursements book 1,224,000 1,414,170

CASH BOOKS
RECEIPTS PAYMENTS
Date OR No. Amount Check No. Amount
Dec. 1 110-120 P 33,000 801 P 6,000
2 121-136 63,900 802 9,000
3 137-150 60,000 803 3,000
4 151-165 168,000 804 9,000
5 166-190 117,000 805 36,000
8 191-210 198,000 806 57,000
9 211-232 264,000 807 78,000
10 233-250 231,000 808 90,000
11 251-275 63,000 809 183,000
12 276-300 90,000 810 21,000
15 301-309 165,000 811 24,000
16 310-350 24,000 812 48,000
17 351-390 57,000 813 60,000
18 391-420 27,000 814 66,000
19 421-480 51,000 816 108,000
22 481-500 63,000 817 33,000
23 501-525 96,000 818 150,000
23 - - 819 21,000
23 - - 820 12,000
26 526-555 222,000 821 9,000
28 556-611 15,000 822 36,000
28 - - 823 39,000
29 612-630 114,000 824 87,000
29 - - 825 6,000
29 - - 826 33,000
Totals P2,121,900 P1,224,000
 BANK STATEMENT
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Date Check Charges Credits

Dec. 1 792 P 7,500 P 25,500
2 802 9,000 33,000
3 - - 63,900
4 804 9,000 60,000
5 EC 243,000 243,000
8 805 36,000 285,000
9 CM 16 - 36,000
10 799 21,150 462,000
11 DM 57 3.900 231,000
12 808 90,000 63,000
15 803 3,000 -
16 809 183,000 255,000
17 DM 61 180 24,000
18 813 60,000 57,000
19 CM 20 - 145,500
22 815 18,000 -
23 816 108,000 141,000
23 811 24,000 -
23 801 6,000 -
26 814 66,000 96,000
28 818 150,000 222,000
28 DM 112 360 -
29 821 9,000 15,000
29 CM 36 - 36,000
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29 820 12,000 -
Totals P1,059,090 P2,493,900

Additional information:
1. DMs 61 and 112 are for service charges.
2. EC is error corrected.
3. DM 57 is for an NSF check.
4. CM 20 is for loan proceeds, net of P450 interest charges for 90 days.
5. CM 16 is for the correction of an erroneous November bank charge.
6. CM 36 is for customers’ notes collected by bank in December.
7. Bank balance on December 31 is P1,776,810

Based on the preceding information, determine the following:

41. Outstanding checks at November 30

42. Outstanding checks at December 31

43. Deposit in transit at November 30

44. Deposit in transit at December 31

45. Adjusted book balance at November 30

46. Adjusted bank receipts for the month of December

47. Adjusted book disbursements for the month of December

48. Adjusted bank balance at December 31

49. Unadjusted bank balance at November 30

50. The best evidence regarding year-end bank balances is documented in the
A. Cutoff bank statements.
B. Bank reconciliations.
C. Interbank transfer schedule.
D. Bank deposit lead schedule.