APPLIED AUDITING

(Correction of Errors)
Q2 (Sept 7)

1. The first audit of the books for the D Corp. was made for the year ended December
31, 2019. In reviewing the books, the auditor discovered that certain adjustments
had been overlooked at the end of 2018 and 2019 and also that other items had
been improperly recorded. Omission and other failures for each year are
summarized below:
December 2018 2019
1.1 Accrued sales salaries 1,900 2,250
1.2 Accrued interest on investments 1,325 1,195
1.3 Prepaid insurance 950 750
1.4 Advanced from customers 2,750 2,500
(Collections from customers had been included in sales
but should have been recognized as advances since
goods were not shipped the following year)
1.5 Equipment 8,400 9,000
(Expenditures have been recognized as repairs but
should have been recognized as cost of equipment; the
depreciation rate on such equipment is 20% per year.
but depreciation in the year of the expenditure is to be
recognized at 10%).

Required: Prepare the adjusting entries as of December 31, 2019

2. State in good form, as shown below, the effect (N= not affected, U= understated, O=
overstated) of each of the following errors committed on 2018 upon the Assets,
Liabilities, Shareholders Equity, and Net Income for 2018 and 2019:

2018 Assets Liabilities Shareholders Equity Net Income

2.1
and so on

2019 Assets Liabilities Shareholders Equity Net Income

2.1
And so on

2.1 The ending inventory is understated as a result of an error in the count of goods
acquired on hand
2.2 The ending inventory is overstated as a result of the inclusion of goods acquired
and held on consignment basis
2.3 A purchase of merchandise at the end of 2018 was not recorded until payment
was made for the goods in 2019, the goods purchased were included in the
inventory at the end of 2018.
2.4 A sale of merchandise at the end of 2018 was not recorded until cash was
received for the goods in 2019. The goods sold were excluded in the inventory
at the end of 2018.
2.5 Goods shipped to consignee in 2018 were reported as sales; goods in hands of
consignees at the end of 2018 were not recognized for inventory purposes;
sales of goods in 2019 and collection on such sales were recorded as credits to
the receivable established with consignee in 2018.
Reflection Paper:

“My take (away) on the first three sessions in Applied Auditing”