AUDITING & ASSURANCE: CONCEPTS & APPLICATIONS SCORE

QUIZ # 1
TOPIC(s) COVERED: AP 01 – ACCOUNTING CHANGES & ERROR CORRECTION

NAME:__________________________ YEAR & SECTION:__________ DATE:____________

INSTRUCTIONS: FROM THE FOLLOWING MULTIPLE CHOICE QUESTIONS BELOW, CHOOSE THE LETTER OF
THE BEST ANSWER BY SHADING IT TO A SEPARATE ANSWER SHEET PROVIDED.

PROBLEM 1
You have been asked by a client to audit the financial statements of HALF-HEARTED
COMPANY for the first time. In examining the books, you found out that certain
adjustments had been overlooked at the end of 2015 and 2016. You also discovered that
other items had been improperly recorded. These omissions and other failures for each
year are summarized below:
2015 2016
Merchandise inventory, end P 10,000 8,000
Overstated understated
Advances to supplier were recorded
as purchases but the merchandise was received
in the following year 20,000 40,000
Advances from customers recorded
as sales but the goods were delivered in the
following year: 20,000 70,000
Improvements on building had been charged to expense
on January 1, 2015. Improvements have a life of 5 years.100,000 -
On January 1, 2015, an equipment costing P 40,000 was
sold P 20,000. At the date of sale, the equipment had an
accumulated depreciation of P 15,000. The cash received
was recorded as other income in 2015.
REQUIREMENTS:
1. What is the total effect of the errors on the 2015 net income?
A. Understated by 45,000 C. Overstated by 115,000
B. Understated by 25,000 D. Understated by 5,000

2. What is the total effect of the errors on the 2016 net income?
A. Overstated by 32,000 C. Overstated by 68,000
B. Overstated by 8,000 D. Overstated by 38,000

3. What is the total effect of the errors on the company's working capital at
December 31, 2016?
A. Overstated by 22,000 C. Overstated by 70,000
B. Understated by 48,000 D. Overstated by 30,000
SOLUTION:
Effects of error in
Net income Working
2015 2016 Capital
1) MI over, NI over 10,000 (10,000)
MI under, NI under (8,000) (8,000)
2) Purchases over, NI under (20,000) 20,000
(40,000) (40,000)
3) Sales over, NI over 20,000 (20,000)
70,000 70,000
4) Expenses over, NI under (80,000)
Depreciation exp under, NI over 20,000
5) Other income over 20,000
*Loss under, NI over 5,000
Adjustment (45,000) 32,000 22,000

Computation of loss:
Selling Price P20,000
Less: Book value
Cost 40,000
Less: Accumulated depreciation 15,000 25,000
Loss on sale (P5,000)
4. What is the total effect of the errors on the balance of the company's retained
earnings at December 31, 2016?
A. Understated by 13,000 C. Overstated by 183,000
B. Understated by 17,000 D. Overstated by 33,000

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 SOLUTION:
Effect of errors to Retained Earnings in 2016
Understatement to 2015 net income P45,000
Overstatement to 2016 net income 32,000
Net understatement to 2016 retained earnings P13,000

5. Necessary adjusting journal entries at December 31, 2016 would require a net
A. Debit to R/E 45,000 C. Credit to Purchases 20,000
B. Credit to Sales 50,000 D. Debit to Equipment 40,000
SOLUTION:
1) Retained earnings, beg 10,000
Merchandise inventory, beg 10,000
Merchandise inventory, end 8,000
Cost of Sales 8,000
2) Purchases 20,000
Retained earnings 20,000
Advances supplier 40,000
Purchases 40,000
3) Retained earnings, beg 20,000
Sales 20,000
Sales 70,000
Advances customers 70,000
4) Depreciation expense 20,000
Improvements 100,000
Accumulated depreciation 40,000
Retained earnings 80,000
5) Accumulated depreciation 15,000
Retained earnings, beg 25,000
Equipment 40,000

PROBLEM 2
You are auditing the financial statements of CASSIE CORP. as of and for the period
ended December 31, 2018. This is the first time CASSIE CORP.’s financial statements
are being audited since it started operations in 2016. The following summarizes your
audit findings:

a) The following is an analysis of the company’s accumulated profits account:

Date Particulars Debit Credit Balance
1/3/16 Beginning balance 2,000,000 P 2,000,000
12/31/16 2016 Net loss 1,200,000 800,000
12/31/17 2017 Net Income 1,600,000 2,400,000
1/31/18 Payment of dividends 350,000 2,050,000
12/1/18 Loss on inventory due 250,000 1,800,000
to a fire
12/31/18 2018 Net Income 1,750,000 3,550,000
b) No dividends were declared in 2016. Dividends declared in December 2017 and 2018
were paid on January of the following years. The 2018 dividends were paid at P
550,000.
c) The following items were omitted at each year end:
2016 2017 2018
Accrued utilities P 155,000 P 121,000 P 92,000
Unused supplies 30,000 20,000 -
Prepaid rent expense 120,000 - 140,000
Accrued royalty income 45,000 65,000
d) A three-year fire insurance amounting to P 360,000 was paid and recognized as
expense on September 30, 2016. The insurance however covers the period October 1,
2016 to September 30, 2019.
e) An equipment with a cost of P 1,200,000 was fully expensed in June 30, 2016. Based
on your discussions with the management, the cost should have been capitalized and
depreciated using straight-line method over its ten-year useful life.

REQUIREMENTS:
6. What is the adjusted net income in 2016?
A. 265,000 C. 280,000
B. 345,000 D. 235,000

7. What is the adjusted net income in 2018?

A. 1,679,000 C. 1,429,000
B. 1,549,000 D. 1,225,000

8. What is the net adjustment in the beginning balance of retained earnings of 2018?
A. 1,174,000 C. 1,224,000
B. 1,176,000 D. 2,103,000

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9. What is the effect of the errors in 2018 working capital?
A. 203,000 C. 485,000
B. 635,000 D. 347,000

10. What is the effect of the errors in 2018 total assets?

A. 553,000 C. 1,095,000
B. 635,000 D. 1,195,000
SOLUTION:
2018 2018 Total
2016 2017 2018Working Capital Assets
Unadjusted net income (loss) (P1,200,000) P1,600,000 P1,750,000
a) Loss on inventory due to fire (250,000) - -
c) Accrued liabilities (155,000) 155,000
(121,000) 121,000
(92,000) (92,000)
Unused supplies 30,000 (30,000)
20,000 (20,000)
Prepaid rent 120,000 (120,000) 140,000 140,000 140,000
Accrued income 45,000 (45,000)
65,000 65,000 65,000
d) Prepaid insurance 360,000
(30,000) (120,000) (120,000) 90,000 90,000
e) Equipment 1,200,000
(60,000) (120,000) (120,000) - 900,000
Total P265,000 P1,309,000 P1,429,000 P203,000 P1,195,000
Net adjustment in RE Beginning P1,174,000

PROBLEM 3
The following are two (3) unrelated situations. Answer the questions at the end of
each situation.
1) The December 31 year-end financial statement of SAMOA COMPANY contained the
following errors:
Dec. 31, 2018 Dec. 31, 2019
Ending inventory P 46,000 understated P 40,500 overstated
Depreciation expense P 11,500 understated
2) An insurance premium of P 330,000 was prepaid in 2018 covering the years 2018,
2019, and 2020. The entire amount was charges to expense in 2018. In addition, on
December 31, 2019, a fully depreciated machinery was sold for P 75,000 cash, Ink
the sale was not recorded until 2020. There were no other errors during 2018 and
2019, and no corrections have been made for any of the errors. Ignore income tax
effects.
3) On January 1, 2020, the entity acquired an office equipment for P400,000. On
acquisition date, the equipment has an estimated 10-year life and P40,000 residual
value. At the beginning of 2022, the entity revised its useful life and determined
that the remaining useful life is now 4 years. In addition, the entity estimated
an increase in residual value by P8,000 and changed the depreciation method from
straight-line method to SYD method.

REQUIREMENTS:
11. What is the total effect of the errors on Samoa’s net income
A. P 123,500 overstatement C. P 192,500 understatement
B. P 27,500 overstatement D. P 177,500 understatement
SOLUTION:
Over (Under-) statement
Understatement of 2018 ending inventory P 48,000
Overstatement of 2019 ending inventory 40,500
Prepaid insurance charged to expense in 2018 (P 330,000÷3) 110,000
Unrecorded sale of fully depreciated machinery in 2019 (75,000)
Total effect of errors on net income P 123,500

12. What is the total effect of the errors on the amount of Samoa’s working capital at
December 31, 2019?
A. P 75,500 overstatement C. P 225,500 understatement
B. P 40,500 overstatement D. P 144,500 understatement
SOLUTION:
Over (Under-) statement
Overstatement of 2019 ending inventory P 40,500
Prepaid insurance charged to expense in 2018 (110,000)
Unrecorded sale of fully depreciated machinery in 2019 (75,000)
Total effect of errors on net income (P 144,500)

13. What is the total effect of the errors on the balance of Samoa’s retained earnings
at December 31, 2019?

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 A. P 156,000 understatement C. P 133,000 understatement
B. P 87,000 overstatement D. P 85,000 understatement
SOLUTION:
Over (Under-) statement
Overstatement of 2019 ending inventory P 40,500
Understatement of depreciation expense in 2018 11,500
Prepaid insurance charged to expense in 2018 (110,000)
Unrecorded sale of fully depreciated machinery in 2019 (75,000)
Total effect on retained earnings P 133,000

14. What is the depreciation expense of the office equipment in 2022?

A. P108,800 C. P128,000
B. P131,200 D. P112,000
SOLUTION:
Original cost P400,000
Accumulated depreciation [(P400,000 – P40,000) ÷ 10 years x 2] (72,000)
Carrying amount 12/31/2021 P328,000

Depreciation expense – 2022 [(P328,000 – P48,000) x 4/10] P112,000

15. What is the carrying amount of the office equipment on December 31, 2023?
A. P216,000 C. P 98,400
B. P132,000 D. P196,800
SOLUTION:
As if new cost = carrying amount 12/31/2021 P328,000
Accumulated depreciation:
Depreciation expense – 2022 (112,000)
Depreciation expense – 2023 [(P328,000 – P48,000) x 3/10] (84,000)
Carrying amount 12/31/2023 P

PROBLEM 4
You were assigned to audit the financial statements of Charlie Corp, as of and for the
period ended December 31, 2014. This is the first time Charlie Corp’s financial
statements are being audited since it started operations in 2012. The following
summarizes your audit findings:

a) The following is an analysis of the company’s accumulated profits account:

Date Particulars Debit Credit Balance
12/31/12 2012 Net loss 200,000 (200,000)
12/31/13 2013 Net Income 600,000 400,000
1/31/14 Payment of dividends 300,000 100,000
12/31/14 2014 Net income 900,000 1,000,000
b) No dividends were declared in 2012. Dividends declared in December 2013 and 2014
were paid on January of the following years. The 2014 dividends were at P500,000.
c) The following items were omitted at each year end:
2012 2013 2014
Accrued salaries P50,000 P90,000 P120,000
Unused supplies 30,000 25,000
Unearned rent income 20,000 40,000
d) A three-year fire insurance amounting to P180,000 was paid and recognized as
expense on June 30, 2012. The insurance however covers the period July 1, 2012 to
June 30, 2015.
e) An equipment with a cost of P400,000 was fully expensed in September 30, 2012.
Based on your discussions with the management, the cost should have been
capitalized and depreciated using straight-line method over its eight-year useful
life.

REQUIREMENTS:
16. What is the adjusted net income in 2012?
A. 317,500 C. 280,000
B. 167,500 D. 457,500

17. What is the adjusted net income in 2014?

A. 825,000 C. 765,000
B. 805,000 D. 725,000

18. What is the retroactive adjustment to the retained earnings beginning 2014?
A. 417,500 C. 17,500
B. 317,500 D. 92,500

19. What is the adjusted retained earnings on December 31 2014?

A. 482,500 C. 1,152,500
B. 652,500 D. 1,182,500

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20. What is the effect of the errors in 2014 working capital?
A. 105,000 C. 485,000
B. 635,000 D. 605,000
SOLUTION:
2014 2014 R.E.
2012 2013 2014Working Capital Beginning
Unadjusted net income (loss) (P200,000) P600,000 P900,000 - -
c) Accrued salaries (50,000) 50,000
(90,000) 90,000 - (90,000)
(120,000) (120,000)
Unused supplies 30,000 (30,000) 25,000 25,000
Unearned rent income (20,000) 20,000 -
(20,000)
(40,000) (40,000)
d) Prepaid insurance 180,000
Insurance expense (30,000) (60,000) (60,000) 30,000 90,000
e) Equipment 400,000
Depreciation expense (12,500) (50,000) (50,000) - 287,500
Total P317,500 P400,000 P765,000 P105,000 P317,500

Retained earnings 12/31/2014 - unadjusted P1,000,000

Net adjustments 182,500
Adjusted retained earnings 12/31/2014 P1,182,500

- END OF EXAMINATION -

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