AUDITING answer key

Instructions: Choose the best answer for each of the following. Strictly no erasures allowed.

Problem 1: Presented below is a list of items that may or may not be reported as inventory in a
company’s December 31, balance sheet:

1
Cost of goods out on consignment at another company’s store 2 400 000
2
Goods sold on installment basis 300 000
3
Goods in transit purchased FOB shipping point 360 000
4
Goods in transit purchased FOB destination 600 000
5
Cost of goods sold to another company, for which the company has 900 000
signed an agreement to repurchase at a set price that covers all
costs related to the inventory
6 Cost of goods sold where large returns are predictable 840 000
7 Cost of goods in transit sold FOB shipping point 360 000
8 Freight charges on goods purchased 240 000
9 Factory labor costs incurred on goods still unsold 150 000
10 Interest cost incurred for inventories that are routinely 120 000
manufactured
11 Costs incurred to advertise goods held for resale 60 000
12 Materials on hand not yet placed into production 1 050 000
13 Office supplies 30 000
14 Raw materials on which the company has started production, but which 840 000
are not completely processed
15 Factory supplies 60 000
16 Cost of goods held on consignment from another company 1 350 000
17 Costs identified with units completed but not yet sold 780 000
18 Cost of goods in transit sold FOB destination 120 000
19 Temp. investment in stocks and bonds that will be resold in the near 1 500 000
future
1. How much of these items would typically be reported as inventory in the financial statements?
a. 6 900 000 c. 6 780 000
b. 6 000 000 d. 6 660 000
Problem 2: You are making an audit of the Malaguku Co for the year ended December 31, 2018. You have
observed the taking of physical inventory and have noted that all merchandise actually received up
to the close of business, December 28, 2018 were included on the inventory sheets. The total of the
physical inventory, at invoice cost, is P175 000, while the purchase accounts shows a balance of P 1
750 000.00 as of December 31, 2018. You noted also the ff purchases invoices have been recorded in
the voucher register as follows:

RR No. Dec 2018 Voucher Register Invoice Date Terms Merchandise Received
631 2 000 Dec 26 Shipping point Dec 29
632 4 000 Dec 26 Destination Jan 5
633 9 000 Jan 2 Destination Dec 30
634 8 000 Dec 31 Shipping point Jan 4
635 1 000 Jan 7 Shipping point Dec 28
636 6 000 Jan 3 Shipping point Jan 6
Jan 2019 Voucher Register
637 8 500 Dec 20 Destination Jan 8
638 7 200 Jan 2 Shipping point Dec 27
639 11 700 Dec 28 Destination Jan 7
640 6 900 Dec 30 Destination Jan 6
641 4 100 Jan 2 Destination Dec 25

2. What is the adjusted balance of Purchases for the period ended Dec 31, 2018?
a. 1 751 300 c. 1 753 200
b. 1 743 800 d. 1 751 200

3. What is the adjusted balance of Inventory as of Dec 31, 2018?

a. 175 000 c. 194 000
b. 186 000 d. 198 100
Problem 3: In relation to your audit of Inuyasha Inc.’s accounts receivable, you ascertained the ff
info:

a. The general ledger balances of the client’s receivable and related accounts were:

Accounts receivables 3 225 300

Allow for bad debts (169 000)
Amortized cost 3 056 300

b. Inuyasha Inc estimates its bad debt losses by aging its accounts receivable, the aging
schedule of accounts receivable at Dec 31 2018 is presented below:
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 AUDITING answer key

Ages of accounts Amount

Current 1 686 400
1 to 30 days past due 922 000
31 to 60 days past due 384 800
61 to 90 days past due 153 300
Over 90 days past due 78 800

c. The company normally sells n/30.

d. Furthermore, the company’s uncollectible accounts experience for the past 5 years are
summarized in the schedule that follows:
Year Current 1-30 days PD 31-60 days PD 61-90 days PD More than 90
days PD
2017 1% 6% 9% 23% 55%
2016 2% 8% 10% 18% 60%
2015 1% 4% 11% 16% 45%
2014 3% 5% 12% 22% 45%
2013 3% 2% 8% 21% 45%

Requirements:

4. What are the corresponding percentages to be used per age category in computing for the
client’s require allowance for bad debts?
Current 1-30 31-60 61-90 >90
a. 1% 3% 10% 20% 45%
b. 1.5% 5% 10% 25% 50%
c. 2% 5% 10% 20% 50%
d. 2% 3% 10% 25% 45%
5. The required allowance for bad debt expense is:
a. 173 653 c. 188 368
b. 185 415 d. 220 842
6. The net realizable value of the company’s accounts receivable on Dec 31 2018, should be:
a. 3 036 932 c. 2 986 345
b. 3 004 458 d. 2 976 540
Problem 4: The cash count in the ledger of Ilang-ilang Company had a balance of P 105 600 at Dec 31,
2018. An examination of the account, however, disclosed the ff:

1. The sales book was left open up to Jan 5 2019 and cash sales totaling P 15 000 were
considered as sales in December.
2. Checks of P9 300 in payment of liabilities were prepared before Dec 31 2018, recorded in
the books, but not mailed or delivered to payees.
3. Post-dated customer collection checks totaling P7 800 are being held by the cashier as
part of cash. The company’s experience shows that post-dated checks are eventually
realized.
4. Customer’s check for P1 500 deposited with but returned by bank, “NSF”, on Dec 27 2018.
Return was not recorded in the books.
5. The cash account included P40 000 earmarked for the purchase of a mini-computer which will
soon be delivered.

7. The cash balance to be shown on the balance sheet on Dec 31 2018 should be:
a. 105 600 c. 58 400
b. 50 600 d. 60 500
Problem 5: In connection with your audit of Recca Corp for the year ended Dec 31 2018, you gathered
the ff info:

Current account at BPI 6 000 000

Current account at Equitable PCI Bank (300 000)
Payroll account 1 500 000
Foreign bank account- restricted (in USD)** 60 000
Postage stamps 3 000
Employee’s post dated checks 12 000
IOU from a key officer 30 000
Credit memo from a vendor for a purchase return 60 000
Traveler’s check 150 000
Customer’s not-sufficient-funds check 45 000
Money orders 90 000
Petty cash fund (P12 000 in currency and expense 30 000
vouchers for P18 000)
Treasury bills, due 3-31-19 purchased 12-31-2018 600 000
Treasury bills, due 1-31-19 purchased 1-1-2018 900 000
Change funds 10 000
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 AUDITING answer key

Bond sinking fund 1 000 000

**current exchange rate as of Dec 31 2018 is at P50 for every USD1

8. What is the total cash and cash equivalent to be reported by the company in its Dec 31 2018
balance sheet?
a. 9 262 000 c. 8 362 000
b. 8 380 000 d. 8 122 000
9. How much from the list above should be presented as part of Noncurrent assets?
a. 1 000 000
b. 4 000 000
c. 4 900 000
d. 5 500 000

Problem 6: SCR Company provided the ff information on Dec 31 2018:

Current Assets 6 200 000

Other Assets 11 800 000
Total Assets 18 000 000

Current Liabilities 2 000 000

Long term Liabilities 2 000 000
Capital 14 000 000
Total Liabilities and Capital 18 000 000

Audit notes:

a. Current assets include the ff:

Cash(including P400 000 invested in money market 2 000 000
instrument and restricted foreign deposit of P600 000)
Land held for undetermined use, at acquisition cost (fair 1 000 000
value, is at P 1 200 000; the company opted to use the
cost model to account for such property)
Accounts receivable net of an allowance of P100 000 1 400 000
Inventories at cost (NRV is P1 000 000) 1 200 000
SCR Company share capital at cost 600 000
Total 6 200 000

b. Other assets include the ff:

Store supplies 100 000
Building less accumulated depreciation of P1 000 000 6 000 000
Equipment less accumulated depreciation of P500 000 1 500 000
Financial assets at amortized cost – held to maturity 1 200 000
Financial assets at fair value – through profit or loss 800 000
Trademark 600 000
Advances to officers-indefinite repayment 300 000
Patent 500 000
Land 800 000
Total 11 800 000

c. Current liabilities include:

Accounts payable 1 000 000
Notes payable, due Dec 31 2019 200 000
Income tax payable 300 000
Share premium 500 000
Total 2 000 000

d. Long term liabilities include:

Unearned leasehold income (five years starting 2015) 700 000
Stock dividends payable 300 000
Serial bonds payable (P 100 000 maturing annually) 1 000 000
Total 2 000 000

e. Capital includes:
Retained earnings 3 000 000
Share capital, P100 par 10 000 000
Retained earnings appropriated for plant expansion 1 000 000
Total 14 000 000

Requirements:
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 AUDITING answer key

10. What is the total current assets to be reported in the 2018 statement of financial position?
a. 4 700 000 c. 5 400 000
b. 4 900 000 d. 5 500 000
11. What is the total non-current assets to be reported in the 2018 statement of financial
position?
a. 11 900 000 c. 12 600 000
b. 12 500 000 d. 12 700 000
12. What is the total current liabilities to be reported in the 2018 statement of financial
position?
a. 1 600 000 c. 1 740 000
b. 1 700 000 d. 2 040 000
13. What is the total non-current liabilities to be reported in the 2018 statement of financial
position?
a. 1 600 000 c. 1 460 000
b. 1 700 000 d. 1 400 000
Problem 7: Information concerning Ruth Corporation intangible asset is as follows:

a. On January 1, 2018, Ruth signed an agreement to operate as a franchisee of Rapid Copy

Service, Inc., for an initial franchise fee of P85 000. Of this amount, P25 000 was paid when
the agreement was signed and the balance is payable in four annual payments of P15 000 each
beginning January 1, 2019. The agreement provides that the down payment is not refundable and
no future services are required of the franchisor. The present value at January 1, 2018, of
the four annual payments discounted at 14% (the implicit rate for a loan of this type is P43
700). The agreement also provides that 5% of the revenue from the franchise must be paid to
the franchisor annually. Ruth’s revenue from the franchise for 2018 was P900 000. Ruth
estimates the useful life of the franchise to be ten years.
b. Ruth incurred prior to 2018, P78 000 of experimental and development costs in its laboratory
to develop a patent which was granted on Jan 2, 2018. Legal fees and other costs associated
with the registration of the patent totaled P16 400. Management estimates that the useful
life of the patent will be eight years.
c. A trademark was purchased from Sampson Company for P40 000 on July 1, 2015. Expenditures for
successful litigation in defense of the trademark totaling P10 000 were paid on July 1, 2018.
Management estimates that the useful life of the trademark will be 20 years from the date of
acquisition.

Required: Determine the correct balances as of Dec 31 2018 of the ff:

A B C D
14. Franchise 85 000 68 700 61 830 43 700
15. Patent 94 400 82 600 16 400 14 350
16. Trademark 50 000 41 250 40 000 33 000
17. Total intangibles 109 180 118 230 125 100 150 000
18. Total expense in 72 038 62 038 55 920 53 970
2018

19. Which of the ff functions is not common to the expenditure/disbursement cycle?

a. Obligations to vendors are paid
b. Resources are held, used or transformed
c. Resources are acquired from vendors in exchange for obligations to pay
d. Resources are acquired from employees in exchange for obligations to pay
20. A request by an authorized employee for goods or services is made on the:
a. Debit memo
b. Purchase order
c. Purchase requisition
d. Acquisition transaction file
21. Which of the ff is a primary function of the purchasing department?
a. Ensuring the acquisition of goods of a specified quality
b. Authorizing the acquisition of goods
c. Verifying the propriety of goods of a specified quality
d. Reducing the expenditures for goods acquired
22. The authority to accept incoming goods in receiving should be based on a (n)
a. Vendor’s invoice
b. Material requisitions
c. Bill of lading
d. Approved purchase order
23. When goods are received, the receiving clerk should match the goods with the
a. Purchase order and requisition
b. Vendor’s invoice and the receiving report
c. Vendor’s shipping document and the purchase order
d. Receiving report and the vendor’s shipping documents
24. In assessing control risk for purchases, an auditor vouches sample of entries in the voucher
register to the supporting documents. Which assertion would this test of controls most likely
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 AUDITING answer key

a. Completeness c. Existence/Occurrence
b. Valuation d. Rights and Obligations
25. Defective merchandise returned by customers should be presented to
a. Inventory control personnel c. Purchasing personnel
b. Sales personnel d. Receiving personnel
26. Proper authorization of write-offs of uncollectible accounts should be approved in which of the
ff departments?
a. Accounts receivable c. Accounts payable
b. Credit d. Treasurer
27. Sending accounts receivable confirmation letters to the client’s customers is consistent with
the auditor’s objective of validating client’s receivable assertion on:
a. Existence and rights c. Completeness and rights
b. Completeness and valuation d. Existence and valuation
28. The auditor’s analysis of the clients aged accounts receivable schedule is consistent with the
auditor’s objective of validating client’s receivable assertion on:
a. Existence c. Rights and obligation
b. Completeness d. Valuation
29. Which of the ff is not a universal rule for achieving control over cash?
a. Separate the cash-handling and record-keeping functions
b. Deposit each day’s cash receipts by the end of the day
c. Have bank reconciliation’s performed by employees who do not handle cash
d. Decentralize the receiving of cash as much as possible
30. The least crucial element of control over cash is
a. Separation of cash record keeping from custody of cash
b. Preparation of the monthly bank reconciliation
c. Separation of cash receipts from cash disbursements
d. Batch processing of checks
31. For the most effective internal control, monthly bank statements should be received directly
from the banks and reviewed by the
a. Controller c. Cash disbursement accountant
b. Cash receipts accountant d. Internal auditor
32. Which of the ff is ordinarily a test of internal control procedures?
a. Examination of signatures on checks
b. Count and list cash on hand
c. Sending confirmation letters to banks
d. Obtain or prepare reconciliation statements of bank accounts as of the balance sheet date
33. When controls leave no documentary evidence or trail:
a. It is impossible for the auditor to verify them so he/she will have to rely on substantive
tests
b. The only thing available as verification of their effectiveness is inquiry of management
c. The auditor generally observes them being applied
d. It is impossible to audit that area of the client’s system
34. Tests to determine whether the accounting transactions have been properly authorized, correctly
recorded and summarized in the journals, and correctly posted to subsidiary ledgers and the
general ledger are:
a. Tests of controls c. Substantive tests of balances
b. Substantive tests of transactions d. Analytical procedures
35. The primary emphasis in most tests of details of balances is on the:
a. Balance sheet accounts c. Cash flow statement accounts
b. Income statement accounts d. All of these
36. Ultimately, what is sufficient appropriate audit evidence depends on:
a. The users of the financial statements under audit
b. The professional judgement of the client’s management and those charged with governance
c. The professional judgement of the auditor
d. A combination of the professional judgements of the auditor and the client’s management
37. Which of the ff audit procedures is used extensively throughout the audit but does not, by
itself, provide sufficient appropriate audit evidence?
a. Inspection of records or documents c. Inquiry
b. Observation d. Inspection of tangible assets
38. Which of the ff balance-related audit assertions/objectives typically is assessed as having
high inherent risk for cash?
a. Existence c. Detail tie-in
b. Cutoff d. Presentation and disclosure
39. Which of the ff refers to the process of transferring money from one bank account to another
and improperly recording the transaction?
a. Kiting c. Window dressing]
b. Lapping d. Theft
40. Which of the ff is not a source of evidence for the balance per bank during the audit of cash?
a. General ledger c. Cutoff bank statement
b. Bank confirmation d. Year-end bank statement
41. Which of the ff assertions/objectives are violated if acquisition of goods and the resulting
accounts payable are not recorded?
a. Existence c. Detail tie-in
b. Completeness d. Presentation and disclosure
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42. Which of the ff is the main focus of an auditor in verifying liability balances?
a. Understated liabilities c. Understated or omitted liabilities
b. Overstated liabilities d. Overstated or extraneous liabilities
43. The relationship between sample size and the allowance for risk of incorrect acceptance is
a. Direct c. Inverse
b. Variable d. Indeterminate
44. The deviation rate the auditor will permit in the population and still be willing to reduce the
assessed level of control risk is called the
a. Tolerable deviation rate c. Acceptable risk of over-reliance
b. Estimated population rate d. Sample deviation rate
45. In testing controls, it is best to remember this statement: “The basic components of business
operations and the primary subject matter of internal accounting control are:
a. Assets c. Transactions
b. Control methods and behavior d. Employees
46. The auditors who become aware of an internal control reportable condition are required to
communicate this to the:
a. Audit committee and client’s legal counsel
b. Board of directors and internal auditors
c. Audit committee
d. Internal auditors
47. Significant deficiencies in internal control are to be communicated:
a. Orally, but may also be in writing c. Orally or in writing
b. In writing d. Under no circumstances
48. It is most appropriate that tests of controls be applied to transactions and controls:
a. At the balance sheet date
b. At each quarterly interim period
c. For the entire period under audit
d. At the beginning of the fiscal period
49. A control that reduces the risk that an existing or potential control weaknesses will result in
a failure to meet a control objective is referred to as a ________________ control.
a. Conditional c. Compensating
b. Limited d. Offset
50. S1: The most important control for petty cash is that two individuals maintain joint custody of
the asset.
S2: The most important control for petty cash is the use of an imprest fund.
a. True, True c. True, False
b. False, False d. False, True

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