No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

iCARE Accountancy Review

AUDITING PROBLEMS
PREWEEK MATERIALS

1. Auditors try to identify predictable relationships when using analytical procedures.

Relationships involving transactions from which of the following accounts most likely
would yield the highest level of evidence?
a. Accounts receivable.
b. Interest expense.
c. Accounts payable.
d. Travel and entertainment expense.

2. An auditor is obligated to communicate an uncorrected audit adjustment to an entity's

audit committee (or those charged with governance) only if the adjustment
a. Is individually material.
b. Is not believed to be trivial.
c. Is a recurring matter that was proposed to management the prior yea.
d. Results from the correction of a prior period's departure from GAAP.

3. Miller Retailing, Inc. maintains a staff of three full-time internal auditors who report
directly to the controller. In planning to use the internal auditors to provide assistance
in performing the audit, the independent auditor will most likely
A. Place limited reliance on the work performed by the internal auditors.
B. Decrease the extent of the tests of controls needed to support the assessed level
of detection risk.
C. Increase the extent of the procedures needed to reduce control risk to an
acceptable level.
D. Avoid using the work performed by the internal auditors.

4. Proper authorization of write-offs of uncollectible accounts should be approved in

which of the following departments?
A. Accounts receivable.
B. Credit.
C. Accounts payable.
D. Treasurer.

5. Which of the following statements would an auditor most likely add to the negative
form of confirmations of accounts receivable to encourage timely consideration by the
recipients?
a. “This is not a request for payment; remittances should not be sent to our auditors
in the enclosed envelope.”
b. “Report any differences on the enclosed statements directly to our auditors; no
reply is necessary if this amount agrees with your records.”
c. “If you do not report any differences within fifteen days, it will be assumed that
this statement is correct.”
 d. “The following invoices have been selected for confirmation and represent
amounts that are overdue.”

6. Sound internal control procedures dictate that defective merchandise returned by

customers should be presented initially to the
A. Accounts receivable supervisor.
B. Receiving clerk.
C. Shipping department supervisor.
D. Sales clerk.

7. Tracing bills of lading to sales invoices provides evidence that

A. Shipments to customers were invoiced.
B. Shipments to customers were recorded as sales.
C. Recorded sales were shipped.
D. Invoiced sales were shipped.

8. Immediately upon receipt of cash, a responsible employee should

A. Record the amount in the cash receipts journal.
B. Prepare a remittance listing.
C. Update the subsidiary accounts receivable records.
D. Prepare a deposit slip in triplicate.

9. An auditor would be most likely to limit substantive audit tests of sales transactions
when control risk is assessed as low for the existence or occurrence assertion
concerning sales transactions and the auditor has already gathered evidence
supporting
A. Opening and closing inventory balances.
B. Cash receipts and accounts receivable.
C. Shipping and receiving activities.
D. Cutoffs of sales and purchases.

10. An auditor would consider a cashier's job description to contain compatible duties if
the cashier receives remittances from the mailroom and also prepares the
A. Prelist of individual checks.
B. Monthly bank reconciliation.
C. Daily deposit slip.
D. Remittance advices.

11. Mailing disbursement checks and remittance advices should be controlled by the
employee who
A. Approves the vouchers for payment.
B. Matches the receiving reports, purchase orders, and vendors' invoices.
C. Maintains possession of the mechanical check-signing device.
D. Signs the checks last.

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12. An auditor tests an entity's policy of obtaining credit approval before shipping goods
to customers in support of management's financial statement assertion of
A. Valuation or allocation.
B. Completeness.
C. Existence or occurrence.
D. Rights and obligations.

13. An auditor would most likely review an entity's periodic accounting for the numerical
sequence of shipping documents and invoices to support management's financial
statement assertion of
A. Existence or occurrence.
B. Rights and obligations.
C. Valuation or allocation.
D. Completeness.

14. In assessing control risk for purchases, an auditor vouches a sample of entries in the
voucher register to the supporting documents. Which assertion would this test of
controls most likely support?
A. Completeness.
B. Existence or occurrence.
C. Valuation or allocation.
D. Rights and obligations.

15. Before applying principal substantive tests to an entity's accounts receivable at an

interim date, an auditor should:
A. Consider the likelihood of assessing the risk of incorrect rejection too low.
B. Project sampling risk at the maximum for tests covering the remaining period.
C. Ascertain that accounts receivable are immaterial to the financial statements.
D. Assess the difficulty in controlling the incremental audit risk.

16. Under which of the following circumstances would the use of the blank form of
confirmations of accounts receivable most likely be preferable to positive
confirmations?
A. The recipients are likely to sign the confirmations without devoting proper attention
to them.
B. Subsequent cash receipts are unusually difficult to verify.
C. Analytical procedures indicate that few exceptions are expected.
D. The combined assessed level of inherent risk and control risk is low.

17. Which cycle is not directly linked to the production cycle?

A. acquisition and expenditure cycle
B. payroll cycle
C. revenue and collection cycle
D. finance and investment cycle

18. Which of the following is internal control weakness for a company whose

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 inventory of supplies consists of a large number of individual items?
A. supplies of relatively little value are expensed when purchased
B. the cycle basis is used for physical counts
C. the warehouse manager is responsible for maintenance of
perpetual inventory records
D. perpetual inventory records are maintained only for items of significant
value
19. Which of the following procedures would best prevent or detect the theft of
valuable items from an inventory that consists of hundreds of different items
selling for P1 to P10 and a few items selling for hundreds of pesos?
A. maintain a perpetual inventory of only the more valuable items with
frequent periodic verification of the accuracy of the perpetual
inventory record.
B. have an independent accounting firm prepare an internal control
report on the effectiveness of the controls over inventory.
C. have separate warehouse space for the more valuable items with
frequent periodic physical counts and comparison to perpetual
inventory records.
D. require a manager's signature for the removal of any inventory item
with a value of more than P50.
20. A retailer's physical count of inventory was higher than that shown by the
perpetual records. Which of the following would explain the difference?
A. inventory items had been counted but the tags placed on the items had
not been take off and added to the inventory accumulation sheets.
B. credit memos for several items returned by customers had not been recorded.
C. no journal entry had been made on the retailer's books for several
items returned to its suppliers.
D. an item purchased FOB shipping point had not arrived at the date of
the inventory count and had not been reflected in the perpetual
records.

21. The accuracy of perpetual inventory records may be established in part by comparing
perpetual inventory records with
a. Purchase requisitions. c. Receiving reports.
b. Purchase orders. d. Vendor payments.

22. Which of the following is not one of the independent auditor’s objectives regarding
the audit of inventories?
a. Verifying that inventory counted is owned by the client.
b. Verifying that the client has used proper inventory pricing.
c. Ascertaining the physical quantities of inventories on hand.
d. Verifying that all inventory owned by the client is on hand at the time of the
count.

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23. Periodic cycle counts of selected inventory items are made at various times during the
year rather than a single inventory count at year-end. Which of the following is
necessary if the auditor plans to observe inventories at interim dates?
a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are maintained.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.

24. In a manufacturing company, which one of the following audit procedures would give
the least assurance of the valuation of inventory at the audit date?
a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.

25. After counting for a sequence of inventory tags, an auditor traces a sample of tags to
the physical inventory listings to obtain evidence that all items
a. Included in the listing have been counted.
b. Represented by inventory tags are included in the listing.
c. Included in the listing are represented by inventory tags.
d. Represented by inventory tags are bona fide.

26. Which of the following is not one of the auditor’s primary objectives in an audit of
trading securities?
a. To determine whether securities are authentic.
b. To determine whether securities are the property of the client.
c. To determine whether securities actually exist.
d. To determine whether securities are properly classified on the balance sheet
date.

27. The auditee has acquired another company by purchase. Which of the following
would be the best audit procedure to test the appropriateness of the allocation of cost
to tangible assets?
a. Evaluate procedures used to estimate and record fair market values for
purchased assets.
b. Determine whether assets have been recorded at their book value at the date of
purchase.
c. Evaluate the reasonableness of recorded values by discussion with operating
personnel.
d. Evaluate the reasonableness of recorded values by use of replacement cost data.

28. The most effective means for the auditor to determine whether a recorded intangible
asset possesses the characteristics of an asset is
a. Vouch the purchase by reference to underlying documentation.
b. Inquire as to the status of patent application.
c. Evaluate the future revenue-producing capacity of the intangible asset.

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 d. Analyze the research and development expenditures to determine that only
those expenditures possessing future economic benefit have been capitalized.

29. In auditing Intangible assets, an auditor most likely would review or recompute
amortization and determine whether the amortization period is reasonable in
support of management’s financial assertion of
a. Valuation C. Completeness
b. Existence D. Rights and obligations

30. Assuming ABC, Corp has capitalized all research and development costs associated
with patent. The auditor who is examining this account will probably
a. Confer with management regarding transfer of the amount from the balance
sheet to the income statement
b. Confirm that the patent is registered and on file with the intellectual property
office.
c. Confer with management regarding a change in the title of the account to
“Goodwill”
d. Confer with management regarding ownership of the patent.

31. Which of the following comparisons would be the most appropriate audit test for
the amount of recorded goodwill?
a. The purchase price and the assigned book value of net tangible and
identifiable assets purchased.
b. The purchase price and the assigned fair value of net identifiable assets
purchased.
c. The purchase price and the assigned fair value of net tangible and identifiable
assets purchased.
d. Earnings in excess of 5% of net assets for the past five years.

32. Which is the best audit procedure to obtain evidence to support the legal ownership
of real property?
a. Examination of corporate minutes and board resolutions with regard to
approvals to acquire real property.
b. Examination of closing documents, deeds and ownership documents registered
and on file at the register of deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a specific
piece of property.
d. Confirmation with the title company that handled the escrow account and
disbursement of proceeds for the closing of the property.

33. An auditor is verifying the existence of newly acquired fixed assets recorded in the
accounting records. Which of the following is the best evidence to help achieve this
objective?
a. Oral evidence obtained by discussions with operating management.
b. Documentary support obtained by vouching entries to subsidiary records and
invoices.
c. Documentary support obtained by reviewing titles and tax returns.

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 d. Physical examination of a sample of newly recorded fixed assets.

34. If an auditor tours a production facility, which of the misstatements or questionable

practices is most likely to be detected by the audit procedure specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.

35. An auditor performs a test to determine whether all merchandise for which the
client was billed was received. The population for this test consists of all
a. Merchandise received c. Canceled checks
b. Vendors’ invoices d. Receiving reports

36. The primary audit test to determine if accounts payable are valued properly is:
a. Confirmation of accounts payable
b. Vouching accounts payable to supporting documentation
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the
balance sheet

37. Which of the following procedures is least likely to be performed before the balance
sheet date?
a. Observation of inventory count
b. Testing of internal control over cash
c. Search for unrecorded liabilities
d. Confirmation of receivables

38. An audit assistant found a purchase order for a regular supplier in the amount of
P5,500. The purchase order was dated after receipt of goods. The purchasing agent
had forgotten to issue the purchase order. Also, a disbursement of P450 for materials
did not have a receiving report. The assistant wanted to select additional purchase
orders for investigation but was unconcerned about lack of receiving report. The
audit manager should?
a. Agree with the assistant because the amount of the purchase order exception
was considerably larger than the receiving report exception.
b. Agree with the assistant because the cash disbursement clerk had been
assured by the receiving clerk that the failure to fill out a report didn’t happen
very often.
c. Disagree with the assistant because two problems have an equal risk of loss
associated with them.
d. Disagree with the assistant because the lack of a receiving report has a
greater risk of loss associated with it.

39. An audit program for the audit of the retained earnings account should include a
step that requires verification of

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 a. Market value used to charge retained earnings to account for a 2-for-1 stock
split.
b. Approval of the adjustment to the beginning balance as a result of a write-
down of an account receivable.
c. Authorization for both cash and stock dividends.
d. Gain or loss resulting from disposition of treasury shares.

40. In an examination of shareholders’ equity, an auditor is most concerned that

A. Capital stock transactions are properly authorized.
B. Stock splits are capitalized at par or stated value on the dividend declaration
date.
C. Dividends during the year under audit were approved by the shareholders.
D. Changes in the accounts are verified by a bank serving as a registrar and stock
transfer agent.

PROBLEM 1:
In connection with your audit of Two Joints Company’s financial statements for
the year 2021, you noted the following transactions affecting the property and
equipment items of the company:

January 1 Purchased real property for P5,026,000, which included a charge of

P146,000 representing property tax for 2021 that had been prepaid
by the vendor; 20% of the purchase price is deemed applicable to
land and the balance to buildings. A mortgage of P3,000,000 was
assumed by Two Joints on the purchase. Cash was paid for the
balance.
January 15 Previous owners had failed to take care of normal maintenance and
repair requirements on the buildings, necessitating current
reconditioning at a cost
of P236,800.
February 15 Demolished garages in the rear of the building, P36,000 being
recovered on the lumber salvage. The company proceeded to
construct a warehouse. The cost of such warehouse was P540,800,
which was P90,000 less than the average bids made on the
construction by independent contractors. Upon completion of
construction, city inspectors ordered extensive modifications to the
building as a result of failure on the part of the company to comply
with building safety code. Such modifications, which could have
been avoided, cost P76,800.
March 1 The company exchanged its own shares with a fair value of
P320,000 (par P24,000) for a patent and a new equipment. The
equipment has a fair value
of P200,000.
April 1 The new machinery for the new building arrived. In addition, a new
franchise was acquired from the manufacturer of the machinery.
Payment was made by issuing bonds with a face value of P400,000
and by paying cash of P144,000. The value of the franchise is set at

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 P160,000, while the
machine’s fair value is P360,000.

May 1 The company contracted for parking lots and waiting sheds at a
cost P360,000 and P76,800, respectively. The work was completed
and paid for
on June 1.
December The business was closed to permit taking the year-end inventory.
31 During this time, required redecorating and repairs were completed
at a cost of
P60,000.

Based on your audit, provide the correct balances of the following:

41. Land
a. 940,000 c. 1,005,200
b. 976,000 d. 1,052,800

42. Buildings
a. 4,645,000 c. 5,005,600
b. 4,762,000 d. 4,681,600

43. Machinery and Equipment

a. 360,000 c. 560,000
b. 576,615 d. 659,692

44. Land Improvements

a. 360,000 c. 76,800
b. 436,800 d. 0

45. Total PPE

a. 6,764,000 c. 6,731,200
b. 6,718,092 d. 6,618,400

PROBLEM 2:

On January 1, 2021, Pac Corp acquired 50,000 ordinary shares of Man, Inc.at P325 per
share. Man’s books contained the following selected information as of the last reporting
date, December 31, 2020:
Ordinary shares, P100 par value, 200,000 shares P 20,000,000
issued and outstanding
10% Preference shares, P50 par value, 100,000 5,000,000
shares issued and outstanding
Share premium on ordinary shares 15,000,000
Retained earnings, 12/31/2018 20,000,000
Net income for the year 2018 5,000,000

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Dividends were declared and paid on preference shares on December 31, 2020.
Man’s building which had a remaining life of 5 years was understated by P4,000,000 on
the acquisition date. Any remaining excess over the book value, is attributed to
unidentified asset.

On December 31, 2021, Man reported a total net income of P2,500,000.

Based on the information provided, answer the following:

46. What is the share in the net income of the associate assuming that the preference
shares are cumulative?
a. P300.000 c. P625,000
b. P500,000 d. P425,000

47. What is the balance of the associate assuming that the preference shares are
cumulative?
a. P16,875,000 c. P16,550,000
b. P16,750,000 d. P16,675,000

48. What is the share in the net income of the associate assuming that the preference
shares are non-cumulative?
a. P625,000 c. P300,000
b. P500,000 d. P425,000

49. What is the balance of the associate assuming that the preference shares are non-
cumulative?
a. P16,875,000 c. P16,550,000
b. P16,750,000 d. P16,675,000

PROBLEM 3:
The MACHO AKO Company is on a calendar year basis. The following data were
found during your audit:
a. Goods in transit shipped FOB destination by a supplier, in the amount of
P100,000, had been excluded from the inventory, and further testing revealed
that the purchase had been recorded.

b. Goods costing P50,000 had been received, included in inventory, and recorded
as a purchase. However, upon your inspection the goods were found to be
defective and would be immediately returned.

c. Materials costing P250,000 and billed on December 30 at a selling price of

P320,000, had been segregated in the warehouse for shipment to a customer.
The materials had been excluded from inventory as a signed purchase order had
been received from the customer. Terms, FOB destination.

d. Goods costing P70,000 was out on consignment with POGI AKO Company. Since

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 the monthly statement from POGI AKO Company listed those materials as on
hand, the items had been excluded from the final inventory and invoiced on
December 31 at P80,000.

e. The sale of P150,000 worth of materials and costing P120,000 had been shipped
FOB point of shipment on December 31. However, this inventory was found to
be included in the final inventory. The sale was properly recorded in 2018.

f. Goods costing P100,000 and selling for P140,000 had been segregated, but not
shipped at December 31, and were not included in the inventory. A review of the
customer’s purchase order set forth terms as FOB destination. The sale had not
been recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the
goods had not arrived as yet. However, these materials costing P170,000 had
been included in the inventory count, but no entry had been made for their
purchase.

h. Merchandise costing P200,000 had been recorded as a purchase but not

included as inventory. Terms of sale are FOB shipping point according to the
supplier’s invoice which had arrived at December 31.

Further inspection of the client’s records revealed the following December 31, 2019
balances: Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable,
P690,000; Net sales, P5,050,000; Net purchases, P2,300,000; Net income, P510,000.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances
of following as of December 31, 2019:
50. Inventory
a. P1,230,000 c. P1,550,000
b. P1,650,000 d. P1,480,000

51. Accounts payable

a. P710,000 c. P810,000
b. P540,000 d. P760,000

52. Net sales

a. P4,550,000 c. P4,730,000
b. P4,650,000 d. P4,970,000

53. Net purchases

a. P2,370,000 c. P2,150,000
b. P2,420,000 d. P2,320,000

54. Net income

a. P220,000 c. P540,000

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 b. P290,000 d. P550,000

PROBLEM 4:

You have been asked by the owner of BAYANIHAN HA1 Inc. to verify the accountability
of the cashier-bookkeeper, who was allowed to take a vacation leave a few days ago.

A. The bank reconciliation statements prepared by the cashier-bookkeeper are

presented below:
November 30, 2019
Balance per bank statement P21,500
Cash on hand 500
Total 22,000
Outstanding checks: (Nos. 2520-2522, P2,000, 1,400 and 1,900 (3,300)
respectively.)
Erroneous bank charge 2,000
Erroneous bank credit (500)
Book balance P20,000

December 31, 2019

Balance per bank statement P135,000
Cash on hand 6,300
Total 141,300
Outstanding checks: (Nos. 2674-2676, P31,000, 10,300 and 5,000 (41,300)
respectively.)
Erroneous bank charge 3,000
Erroneous bank credit (600)
Book balance P20,000

B. The Cash in Bank Account in the general ledger shows the following:

Cash in Bank
1 Dec. - Balance 1 Dec. – Checks issued P
P20,200 2,000
2 Dec. – Collection 4,500 5 Dec. – Checks issued 5,200
7 Dec. – Collection 5,000 14 Dec. – Checks issued
31,000
12 Dec. – Collection 24 Dec. – Checks issued
20,000 46,000
17 Dec. – Collection 30,000 28 Dec. – Checks issued 7,600
23 Dec. – Collection 9,000

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27 Dec. – Collection
70,000
31 Dec. – Collection 31 Dec. – Balance 102,400
48,500
Totals P198,200
P198,200

C. The following transactions are summarized which were taken from the December
2019 bank statement.
a. December 1 balance, P16,500
b. Total deposits, P173,700 which includes the following:
i. Collection of notes, P5,000
ii. Correction of November erroneous bank charge, P2,000
iii. December 10 erroneous credit to BAYANIHAN, P600
c. Total checks, P65,200 including:
i. Correction of November erroneous bank credit, P500
ii. December erroneous bank debit, P3,000.
d. Cash on hand per count in the morning of January 2, 2020 amounted to
P6,300

Questions:
1. What is the adjusted cash balance on November 30, 2019?
2. The amount of unaccounted receipts in December is?
3. The amount of unrecorded/unsupported disbursement in December is?
4. What is the total cash shortage as of December 31, 2019?
5. What is the adjusted cash balance on December 31, 2019?

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