MIDTERM EXAMINATION IN AUDITING AND ASSURANCE: CONCEPTS AND 1st Sem.

APPLICATIONS PART 1 SY 21-22

STUDENT NAME: SCORE RATING

SECTION:
DAY & TIME:
DATE OF EXAM:
ADVISER:

INSTRUCTIONS
• Read carefully all the questions below and write clearly.
• Final Answer should be clearly written.

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MIDTERM EXAMINATION IN AUDITING AND ASSURANCE: CONCEPTS AND 1st Sem.
APPLICATIONS PART 1 SY 21-22

TABLE OF SPECIFICATION:
MODULE TOPICS NUMBER OF
QUESTIONS
MODULE 1 AUDIT OF CASH 6
MODULE 2 AUDIT OF ACCOUNTS RECEIVABLES 4
MODULE 3 AUDIT OF INVENTORIES 10
MODULE 4 AUDIT OF PROPERTY, PLANT AND EQUIPMENT 12

PROBLEM 1
In connection with the audit of ABC Company’s land and building accounts, you obtained the following
data:
Cash paid to purchase the land with an old building P4,500,000
Payment to tenants to vacate the building 60,000
Cost to demolish the building in the above purchase 40,000
Expenses of land survey 30,000
Expenses for search of land title 6,000
Land excavation costs 150,000
Construction permit fee 10,000
Payment to construction workers for injuries sustained (no 85,000
insurance was carried)
Temporary building to house construction workers 50,000
Construction cost 9,800,000
Interest on borrowed funds used in construction 90,000
Cost of paving parking area adjoining building. 45,000

1. How much is the cost of the land?

a. 4,636,000
b. 4,461,000
c. 4,661,000
d. 4,536,000

2. How much is the cost of the building?

a. 10,135,000
b. 10,310,000
c. 10,010,000
d. 10,260,000

PROBLEM 2
You are called upon to determine the amount of cash shortage, if any, for HIPO Company. HIPO
Company is a micro-enterprise in the buy and sell of FTWs. The owner suspects that there might be
come irregularities involving cash because of poor internal control brought about by the concentration of
functions delegated to certain company staff.
NOVEMBER 30, 2020 DECEMBER 31, 2020
Cash account balance P10,000 P?
Bank statement balance ? 103,500
Cash on hand 4,000 6,000
Checks outstanding 13,000 15,000
Bank service charges for month 100 400
NSF checks 2,000 3,000
Collections by bank from HIPO Company 55,000 70,000
customers

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MIDTERM EXAMINATION IN AUDITING AND ASSURANCE: CONCEPTS AND 1st Sem.
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Monthly bank reconciliation is prepared on a regular basis. Reconciling items are recorded in the general
journal in the month following the month covered by the bank reconciliation. Examination of bank
statements and cash records disclosed the following:

Total bank credits in December amounted to P138,000

Canceled checks and debit memos per bank statement, P101,400
Cash column of cash receipts book totaled, P80,000 in December while cash credits per cash
disbursements book totaled P92,000.

Based on the above data, determine the following:

3. The adjusted cash balance as of November 30:
a. 57,900
b. 60,900
c. 65,000
d. 62,900
4. The adjusted cash balance as of December 31:
a. 117,500
b. 114,100
c. 50,900
d. 94,500
5. The cash shortage as of November 30:
a. 7,100
b. 2,900
c. 5,000
d. Nil
6. The cash shortage as of December 31:
a. Nil
b. 23,000
c. 19,600
d. 18,000
7. What is the amount of unaccounted receipts in December?
a. Nil
b. 10,000
c. 5,000
d. 45,000
8. What is the amount unsupported disbursements in December?
a. 5,900
b. 10,100
c. 8,000
d. Nil

PROBLEM 3
The American Corp. grants its customers 30 days credit. The company uses the allowance method for
its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying
2% by the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of
accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted
accordingly.

At the end of 2020 before any audit adjustments, the general ledger accounts showed balances of
accounts receivable at P1,230,000 and the allowance for bad debt of P106,000. Accounts Receivable
activity for 2020 included the following:
Credit Sales P12,800,000
Write offs 82,000

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MIDTERM EXAMINATION IN AUDITING AND ASSURANCE: CONCEPTS AND 1st Sem.
APPLICATIONS PART 1 SY 21-22

The company’s controller prepared the following aging summary of year-end accounts receivable:
Age Group Amount Percent Collectible
0-60 days P825,000 98%
61-90 days 220,000 90%
91-120 days 50,000 70%
Over 120 days 128,000 60%

It was ascertained that P40,000 from the over 120 days accounts are absolutely worthless.

Requirements:
9. How much is the unreconciled difference between the general ledger and the subsidiary ledger
balance of accounts receivable and how should it be accounted for:
a. P7,000; GL prevails over SL, with the difference being charged against sales
b. P10,000; GL prevails over SL, with the difference being charged to bad debt expense.
c. P7,000; SL prevails over GL, with the difference being charged against sales
d. P10,000; SL prevails over GL, with the difference being charged to bad debt expense

10. How much is the total bad debt expense for 2020?
a. 304,700
b. 278,700
c. 280,700
d. 294,700

11. How much is the net realizable value of accounts receivable at December 31, 2020?
a. 1,123,000
b. 1,118,300
c. 1,094,300
d. 1,223,000

12. When there are a large number of relatively small account balances, negative confirmation of
accounts receivable is feasible if the internal control is
a. Strong and the individuals receiving the information request are unlikely to give them
adequate consideration
b. Weak and the individuals receiving the confirmation requests are unlikely to give them
adequate consideration
c. Weak and the individuals receiving the confirmation requests are likely to give them
adequate control consideration
d. Strong and the individuals receiving the confirmation requests are likely to give them
adequate consideration

PROBLEM 4
Your audit of LAVAN Restaurant which was established on July 1, 2020, disclosed that the owner started
with an investment totaling P5 million, composed of P3 million in cash from his personal funds and P2
million worth of equipment. On September 1, LAVAN restaurant borrowed P5 million from Import Bank.
The loan is due in 5 equal monthly installments beginning October 1. Interest of P100,000 applicable to
this loan was deducted in advance from principal amount.

During the year, LAVAN collected P19 million from its customers. Amount still due from corporate
customers amounted to P2 million. Purchases for kitchen supplies amounted to P18.5 million, P2.3
million of which was paid in January 2021. The restaurant operations were made at 50 % above cost.
The owner purchased a new equipment on October 1, 2020. Depreciation of P80,000 was recorded for
this equipment during the year.

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MIDTERM EXAMINATION IN AUDITING AND ASSURANCE: CONCEPTS AND 1st Sem.
APPLICATIONS PART 1 SY 21-22

All operating expenses, including purchase of new equipment, were paid in cash.

Equipment is depreciated using the straight-line method over a five-year life taking into account a
residual value equal to 20% of the cost.

LAVAN Restaurant business operations ending December 31, 2020 showed a net income of P1.2
million.

Compute for the following:

13. Acquisition cost of the new equipment
a. 1 million
b. 2 million
c. 1.6 million
d. .8 million

14. Payment of operating expenses during 2020

a. 5,220,000
b. 5,420,000
c. 5,540,000
d. 5,460,000

15. Cash balance as of December 31, 2020

a. 240,000
b. 880,000
c. 1,440,000
d. 1,240,000

16. Inventory as of December 31, 2020

a. 9,520,000
b. 8,100,000
c. 2,200,000
d. 4,500,000

17. Total assets as of December 31, 2020

a. 11,500,000
b. 11,700,000
c. 10,500,000
d. 10,900,000

PROBLEM 5
LONELY Co started operations on September 1, 2015. LONELY’s accounts at December 31, 2018
included the following balances:

Machinery (at cost) P910,000

Accumulated depreciation – machinery 482,000
Vehicles (at cost, purchased November 21, 2017) 468,000
Accumulated depreciation – vehicles 196,560
Land (at cost, purchased October 25, 2015 810,000
Building (at cost, purchased October 25, 2015) 1,857,200
Accumulated depreciation – building 286,140

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MIDTERM EXAMINATION IN AUDITING AND ASSURANCE: CONCEPTS AND 1st Sem.
APPLICATIONS PART 1 SY 21-22

Details of machines owned at December 31, 2018, are as follows:

Machine Purchase Date Cost Useful Life Residual Value
1 October 7, 2015 P430,000 5 years 25,000
2 February 4, 2016 P480,000 6 years 30,000

Additional information:
LOVELY calculates depreciation to the nearest month and balances the records at month-end. Recorded
amounts are rounded to the nearest peso, and the reporting date is December 31.

LOVELY uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated
on the diminishing balance of 40% per annum.

The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which
cost P234,000

On acquiring the land and building, LOVELY estimated the building’s useful life and residual value at 20
years and P50,000, respectively

The following transactions occurred from January 1, 2019:

2019
Jan 03 Bought a new machine (Machine 3) for a cash price of P570,000. Freight charges of P4,420 and
installation costs of P17,580 were paid in cash. The useful life and residual value were estimated at five
years and P40,000, respectively.

June 22 Bought a second-hand vehicle for P152,000 cash. Repairing costs of P6,550 and four new tires
costing P3,450 were paid in cash

Aug 28 Exchanged machine 1 for the office furniture that had a fair value of P125,000 at the date of
exchange, The fair value of machine 1 at the date of exchange was P115,000. The office furniture
originally cost P360,000 and, to the date of exchange, had been depreciated by P241,000 in the previous
owner’s books. LOVELY estimated the office furniture’s useful life and residual value at eight years and
P5,400, respectively.

Dec 31 Recorded depreciation

2020
April 30 Paid for repairs and maintenance on the machinery at a cash cost of P9,280

May 25 Sold one of the vehicles bought on November 21, 2017. For P66,000 cash.

The following transactions occurred during 2019:

1. On May 5, Asset W was sold for P78,000 cash. The company’s bookkeeper recorded this
retirement in the following manner in the cash receipts journal:
Cash 78,000
Asset W 78,000

2. On December 31, it was determined that Asset A had been used 2,100 hours during 2019.

3. On December 31, before computing depreciation expense on Asset L, the management of

Lucban decided the useful life remaining from January 1, 2019, was 10 years.

4. On December 31, it was discovered that a plant asset purchased in 2018 had been expensed
completely in the year. This asset costs P132,000 and has a useful life of 10 years and no

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MIDTERM EXAMINATION IN AUDITING AND ASSURANCE: CONCEPTS AND 1st Sem.
APPLICATIONS PART 1 SY 21-22

salvage value. Management has decided to use the double declining balance method for this
asset, which can be referred to as Asset Y.

Requirements:
18. The 2019 depreciation expense on Asset W is
a. 17,400
b. 19,092
c. 20,880
d. 54,687

19. The gain to be recorded on the sale of Asset W is

a. 0
b. 24,600
c. 26,292
d. 28,080

20. The 2019 depreciation expense on Asset A is

a. 40,320
b. 42,840
c. 52,800
d. 58,320

21. The 2019 depreciation expense on Asset L is

a. 16,365
b. 36,000
c. 39,000
d. 51,429

22. The total depreciation expense in 2019 on the above-mentioned PPE items is
a. 191,640
b. 196,920
c. 199,920
d. 200,400

PROBLEM 6
A flood recently destroyed many of the financial records of BALLS MANUFACTURING COMPANY.
Management has hired you to re-create as much financial information as possible for a month of July.
You are able to find out the company uses an average cost inventory valuation system. You also learn
that BALLS makes a physical count at the end of each month in order to determine monthly ending
inventory values. By examining various documents, you are able to gather the following information:

Ending inventory at July 31 50,000 units

Total cost of unit available for sale in July P118,800
Cost of goods sold during July P99,000
Cost of the beginning inventory, July 1 P0.35 per unit
Gross profit on sales for July P101,000

July purchases
DATE UNITS UNIT COST
July 5 60,000 P0.40
July 11 50,000 0.41
July 15 40,000 0.42
July 16 50,000 0.45

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MIDTERM EXAMINATION IN AUDITING AND ASSURANCE: CONCEPTS AND 1st Sem.
APPLICATIONS PART 1 SY 21-22

QUESTIONS:

23. Number of units on hand, July 1

a. 35,000
b. 41,580
c. 12,250
d. 100,000

24. Units sold during July

a. 185,000
b. 162,250
c. 250,000
d. 191,580

25. Unit cost of inventory at July 31

a. 0.506
b. 0.396
c. 0.560
d. 0.492

26. Value of inventory at July 31

a. 25,300
b. 19,800
c. 28,000
d. 24,600

27. In obtaining evidence to establish the existence of inventories, which one of the following is
unlikely to be used by the auditor?
a. Reconciliation
b. Inspection
c. Observation
d. Confirmation

PROBLEM 7
As part of your audit of receivables of JAS Corp. you performed a cut off test of sales. Results of the cut
off test revealed the following:

Recorded as Sales in December 2020

INVOICE SELLING COST TERMS SHIPMENT RECEIVED
NUMBER PRICE DATE BY
CUSTOMERS
123 18,000 16,500 FOB Shipping 12/26/2020 12/29/2020
point
124 12,500 10,200 FOB 12/26/2020 12/29/2020
destination
125 8,680 7,240 FOB 12/28/2020 01/02/2021
destination
126 14,200 12,500 Shipped to 12/29/2020 01/02/2021
consignee
127 9,000 7,500 FOB Shipping 12/30/2020 01/02/2021
point
128 10,000 7,750 FOB 12/31/2020 01/03/2021
Destination

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MIDTERM EXAMINATION IN AUDITING AND ASSURANCE: CONCEPTS AND 1st Sem.
APPLICATIONS PART 1 SY 21-22

129 7,800 7,800 FOB Shipping 12/31/2020 01/02/2021

point
130 14,000 12,000 Shipped to 12/31/2020 01/02/2021
consignee

Recorded Sales in January 2021

INVOICE SELLING COST TERMS SHIPMENT RECEIVED
NUMBER PRICE DATE BY
CUSTOMERS
131 21,000 18,200 FOB Shipping 12/31/2020 01/03/2021
point
132 10,500 8,800 FOB 12/30/2020 01/03/2021
destination
133 4,500 3,200 FOB 01/02/2021 01/03/2021
destination
134 6,500 5,000 FOB Shipping 01/02/2021 01/05/2021
point

A count of all inventories within the premises was made in the afternoon of December 30, 2020 (after
deliveries were made for the day). The total cost of the count was recorded as inventories as of
December 31, 2020. The goods shipped to consignees are still unsold at December 31.

The unadjusted ledger shows the following:

Accounts Receivables P276,500
Inventories 425,000
Sales 1,320,000
Cost of Sales 842,000

Determine the adjusted balances of the following:

28. Accounts Receivable
a. 229,620
b. 250,620
c. 261,120
d. 289,320

29. Inventories
a. 406,800
b. 420,440
c. 429,240
d. 449,500

30. Sales
a. 1,294,120
b. 1,304,620
c. 1,322,320
d. 1,351,500

31. Cost of sales

a. 817,500
b. 828,360
c. 846,560
d. 837,760

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MIDTERM EXAMINATION IN AUDITING AND ASSURANCE: CONCEPTS AND 1st Sem.
APPLICATIONS PART 1 SY 21-22

32. Effect of errors to net income

a. 21,640 over
b. 21,640 under
c. 4,240 under
d. 25,880 over

Prepared by: Noted by: Approved by:

DANIEL CALAOR Prof. Rowell C. Marasigan Dr. Leonila C. Crisostomo

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