Problem 1

Your audit of the December 31, 2017 financial statements of Dinoco Company reveals the following:

Current account at Prime Bank

Current account at Prudent Bank
Treasury bills (acquired 3 months before maturity
Treasury bills (maturity date is December 31, 2018
Payroll account
Foreign bank account-restricted (translated using the December 31, 2017
exchange rate)
Postage stamps
Employee's postdated check
IOU from the vice-president
Credit memo from a supplier for a purchase return
Traveler's check
Money order
Petty cash fund ($3,000 in currency and expense receipts for $12,000)

Required:
What amount would be reported as "cash and cash equivalents" on the statement of financial
position on December 31, 2017?
Current account at Prudent Bank 135,000
Treasury bills, (acquired 3 months before maturity) 300,000
Payroll account 390,000
Traveler's check 21,000
Money order 12,900
Petty cash fund 3,000
Total cash and cash equivalents 861,900

Problem 2

The data below are from the records of Alabama Company on December 31, 2017:

Accounts payable
Cash balance, ABC Bank
Cash overdraft, YXZ Bank
Customers' account with credit balances
Dividends in arrears on preference shares
Employees' income tax payable
Estimated warranty payable
Estimated premium claims outstanding
Income tax payable
Notes payable (issued 2017 maturing 20 semiannual installments beginning
April 1, 2018)
 Salaries payable

Required:
The amount to be show as total current liabilities on Alabama Company's statement of financial
position at December 31, 2017.
Cash overdraft, YXZ Bank 80,000
Notes payable in 2018 (4/20x2) 400,000
Accounts payable 680,000
Salaries payable 400,000
Employees' income tax payable 100,000
Income tax payable 400,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Customers' account with credit balances 25,000
Total Current Liabilities 2,225,000

Problem 3

The following audited balances pertain to Oliver Company:

Accounts payable:
January 1, 2017
December 31, 2017

Inventory balance:
January 1, 2017
December 31, 2017

Cost of goods sold - 2017

Required:
How much was paid by Oliver Company to its suppliers in 2017?
Cost of Goods Sold-2017 1,859,082
Add: Inventory Dec 31 2017 488,874
Goods available for sale 2,347,956
Less : Inventory Jan 1 2017 815,386
Purchases 1,532,570
Add: Account Payable Jan 1 2017 286,924
Total 1,819,494
Less : Account Payable Dec 31 2017 737,824
Amount paid to suppliers in 2017 1,081,670

Problem 4

You have been engaged to audit the financial statements of Pompei Company for year ended
December 31, 2017. Your audit reveals the following situations:

1. Depreciation of $16,000 for 2017 on equipment was not yet recorded.

2. The physical inventory count on December 31, 2016 improperly excluded merchandise costing
$5,000 that had been temporarily stored in a public warehouse. Pompei Company uses
a periodic inventory system.

3. The physical count on December 31, 2017, improperly included merchandise with a cost of
$42,500 had been recorded as a sale on December 29, 2017, and held for the customer to pick
up on January 2, 2018.

4. A collection of $28,000 on account from a customer received on December 31, 2017 was not
recorded until January 3, 2018.

5. In 2017, Pompei Company sold for $18,500 fully depreciated equipment that originally cost
$110,000. The proceeds from the sale were credited to the equipment account.

6. During December 2017, a competitor company filed a patent infringement lawsuit against
Pompei Company claiming damages of $1,000,000. The company's legal counsel has
indicated that an unfavorable outcome is probable and a reasonable estimate of the court's
award to the competitor is $600,000. The company has not reflected or disclosed this situation
in the financial statements.

7. Pompei Company has a portfolio of current marketable equity securities acquired in 2016 for
trading purposes. No valuation entry has been made. Information on cost and market value is
as follows:

December 31, 2016 $

December 31, 2017

8. At December 31, 2017, an analysis of payroll information shows accrued salaries of $61,000.
The Accrued Salaries Payable account had a balance of $80,000 at December 31, 2017, which
was unchanged from its balance at December 31, 2016.

9. A piece of equipment was acquired on January 2, 2017, for $160,000 and was charged to
Repair Expense. The equipment is expected to have a useful life of 8 years and no residual
value. Pompei Company normally uses the straight-line method to depreciate this type of
equipment.

10. A $75,000 insurance premium paid in July 1, 2016, for a policy that expires on June 30, 2019,
was charged to Insurance expense.

Required:
Prepare the necessary journal entries at December 31, 2017.
 1) Depreciation Expense 16,000
Accumulated Depreciation-Equipment
2) Cost of goods sold (beginning inventory) 5,000
Retained earnings
3) Cost of goods sold 42,500
Inventory
4) Cash 28,000
Accounts receivable
5) Accumulated depreciation-equipment 110,000
Cash 18,500
Equipment
Gain on sale of equipment
6) Estimated litigation loss 600,000
Estimated litigation payable
7) Investment in trading securities 25,000
Unrealized holding gain on trading securities
8) Accrued salaries payable 19,000
Salaries expense
9) Depreciation expense-equipment (160000/8) 20,000
Equipment 160,000
Repairs expense
Accumulated depreciation-equipment
10) Insurance expense (75,000/3) 25,000
Prepaid insurance (75,000/3 x 1.5) 37,500
Retained earnings

Problem 5

Max Field, CPA, is auditing the financial statements of Miller Mail order, Inc. (MMI) for the year ended
January 31, 2010. Field has complied a list of possible errors and irregularities that may result in the
misstatement of MMI's financial statements, and a corresponding list of internal control procedures
that, if properly designed and implemented, could assist MMI in preventing or detecting the errors
and irregularities.

Required:
For each possible error and irregularity numbered 1 through 15, select on internal control procedure
from the answer list below that, if properly implemented, most likely could assist MMI in preventing
or detecting the errors and irregularities. Each response in the list of internal control procedures may
be selected once, more than once, or not at all. Proper explanation is required.

Possible Errors and Irregularities

1 Invoices for goods sold are posted to incorrect customer accounts.

2 Goods ordered by customers are shipped, but are not billed to anyone.
3 Invoices are sent for shipped goods, but are not recorded in the sales journal.
 4 Invoices are sent for shipped and re recorded in the sales journal, but are not posted to any
customer account.
5 Credit sales are made to individuals with unsatisfactory credit ratings.
6 Goods are removed from inventory for unauthorized orders.
7 Goods shipped to customers do not agree with goods ordered by customers.
8 Invoices are sent to allies in a fraudulent scheme and sales are recorded for fictitious transactions.
9 Customers' checks are received for less than the customers' full account balances, but the
customers' full account balance are credited.
10 Customers' checks are misappropriated before being forwarded to the cashier for deposit.
11 Customers' checks are credited to incorrect customer account.
12 Different customer accounts are each credited for the same cash receipts.
13 Customers' checks are properly credited to customer accounts and are properly deposited, but
errors are made in recording receipts in the cash receipts journal.
14 Customers' check are misappropriated after being forwarded to the cashier for deposit.
15 Invalid transactions granting credit for sales returns are recorded.

Internal control procedures

A. Shipping clerks compare goods received from the warehouse with the details on the shipping
documents.
B. Approved sales orders are required for goods to be released from the warehouse.
C. Monthly statements are mailed to all customers with outstanding balances.
D. Shipping clerks compare goods received from the warehouse with approved sales orders.
E. Customer orders are compared with the inventory master file to determine whether items ordered
are in stock.
F. Daily sales summaries are compared with control totals of invoices.
G. Shipping documents are compared with sales invoices when goods are shipped.
H. Sales invoices re compared with the master price file.
I. Customer orders are compared with the approved customer list.
J. Sales orders are prepared for each customer order.
K. Control amounts posted to the accounts receivable ledger are compared with control totals of
invoices.
L. Sales invoices are compared with shipping documents and approved customer orders before
invoices are mailed.
M. Prenumbered credit memos are used for granting credit for goods returned.
N. Goods returned for credit are approved by the supervisor of the sales department.
O. Remittance advices are separated from the checks in the mailroom and forwarded to the
accounting department.
P. Total amounts posted to the accounts receivable ledger from remittance advices are compared with
the validated bank deposit slip.
Q. The cashier examines each check for proper endorsement.
R. Validated deposit slips are compared with the cashier's daily cash summaries.
S. An employee, other than the bookkeeper, periodically prepares a bank reconciliation.
T. Sales returns are approved by the same employee who issues receiving reports evidencing
actual return of goods.
1.        The answer is (C).
Mailing monthly statements to customers with outstanding accounts will detect invoices posted to the

2.        The answer is (G).

Each shipping document should have a corresponding invoice when the goods are shipped. The app

3.        The answer is (F).

Daily sales summaries are from the book of original entry--the sales journal. Comparing the summar

4.        The answer is (K).

Comparing control total amounts posted to the accounts receivable (subsidiary) ledger with the contr

5.        The answer is (I).

Credit approval should be received before sales are made. Thus, shipping to customers on an appro

6.        The answer is (B).

An approved sales order should be presented to the storekeeper before release of goods from the w

7.        The answer is (D).

Requiring shipping clerks to compare the amounts and type of goods received from the warehouse w

8.        The answer is (L).

Comparing sales invoices with shipping documents will assure that each invoice is supported by a sh

9.        The answer is (P).

The total receipts credited to customer accounts in the subsidiary ledger should equal the total receip

10.     The answer is (C).

Checks misappropriated (stolen) prior to forwarding to the cashier are not posted to customer accoun
Thus, customers will complain when their payments fail to be reflected in the balances on the month

11.     The answer is (C).

Mailing monthly statements to customers with outstanding accounts will detect receipts posted to the

12.     The answer is (P).

If more than one customer account is credited for the same cash receipt, the error will be detected w

13.     The answer is (S).

The bank reconciliation will detect errors in recording cash receipts (and disbursements). The balanc

14.     The answer is (P).

If the checks are misappropriated (stolen) prior to deposit, the total of the amounts posted to the acco

15.     The answer is (N).

Invalid sales returns are prevented by requiring approval of returns by the Sales Department supervis
reveals the following:

$ (30,000)
135,000
300,000
1,500,000
390,000

2,000,000
1,250
4,500
8,000
8,100
21,000
12,900
15,000

statement of financial

$ 680,000
1,240,000
80,000
25,000
400,000
100,000
50,000
90,000
400,000

4,000,000
 400,000

ment of financial

$ 286,924
737,824

$ 815,386
488,874

$ 1,859,082

for year ended

luded merchandise costing
mpei Company uses

rchandise with a cost of

held for the customer to pick

cember 31, 2017 was not

ment that originally cost

ent account.

ement lawsuit against

s legal counsel has
e estimate of the court's
ed or disclosed this situation

ities acquired in 2016 for

on cost and market value is

Cost Market
475,000 $ 475,000
475,000 500,000

crued salaries of $61,000.

December 31, 2017, which

00 and was charged to

f 8 years and no residual
depreciate this type of

expires on June 30, 2019,

 16,000

5,000

42,500

28,000

110,000
18,500

600,000

25,000

19,000

160,000
20,000

62,500

MMI) for the year ended

that may result in the
l control procedures
etecting the errors

nal control procedure

t MMI in preventing
ntrol procedures may
 not posted to any

for fictitious transactions.

balances, but the

shier for deposit.

roperly deposited, but

er for deposit.

tails on the shipping

ved sales orders.

e whether items ordered

with control totals of

tomer orders before

orwarded to the

advices are compared with

conciliation.
reports evidencing
 will detect invoices posted to the wrong accounts. Customers whose accounts were misposted for goods not ordered will cont

n the goods are shipped. The appropriate direction of testing is from the shipping documents to the sales invoices.

journal. Comparing the summaries with the total of invoices will detect failure to record all invoices.

(subsidiary) ledger with the control total of all invoices for the same period should detect invoices not posted.

hipping to customers on an approved list should reduce the risk of sales to customers with unsatisfactory credit.

fore release of goods from the warehouse to prevent goods from being removed for unauthorized orders.

s received from the warehouse with approved sales orders assures that goods shipped agree with those ordered by customers

each invoice is supported by a shipment. Fictitious sales, i.e., those for which no shipment was made, should be detected.

dger should equal the total receipts deposited, given that daily receipts are deposited intact.

re not posted to customer accounts (assuming that the remittance advices were stolen as well).
ed in the balances on the monthly statements.

will detect receipts posted to the wrong accounts. Customers whose accounts were misposted will contest the statements.

ceipt, the error will be detected when the total of the amounts posted to the accounts receivable ledger is compared with the tot

(and disbursements). The balance in the ledger will not reconcile with the amount in the bank statement.

of the amounts posted to the accounts receivable ledger will be greater than the validated bank deposit slip.
by the Sales Department supervisor.
or goods not ordered will contest the statements.

e sales invoices.

not posted.

factory credit.

h those ordered by customers.

ade, should be detected.

will contest the statements.

dger is compared with the total cash receipts.