CPA REVIEW SCHOOL OF THE PHILIPPINES AP 94 PW

Manila

AUDITING PROBLEMS CPA Review

SITUATIONAL

SITUATION 1

Your audit of the December 31, 2023, financial statements of DIONISIO CORP. reveals the
following:
Current account at Prime Bank P(30,000)
Current account at Prudent Bank 135,000
Treasury bills (acquired 3 months before maturity) 300,000
Treasury bills (maturity date is Dec. 31, 2024) 1,500,000
Payroll account 390,000
Foreign bank account – restricted (translated
using the December 31, 2023, exchange rate) 2,000,000
Postage stamps 1,250
Employee’s postdated check 4,500
IOU from the vice-president 8,000
Credit memo from a supplier for a purchase return 8,100
Traveler’s check 21,000
Money order 12,900
Petty cash fund (P3,000 in currency and expense
receipts for P12,000) 15,000

What amount would be reported as cash and cash equivalents in the statement of financial
position on December 31, 2023?
A. P840,050 B. P873,900 C. P849,400 D. P861,900

SITUATION 2

The auditor for SAMANTHA, INC. examined the petty cash fund immediately after the close of
business, July 31, 2023, the end of the company’s natural business year. The petty cash custodian
presented the following during the count:
Currency P1,650
Petty cash vouchers:
Postage 420
Office supplies expense 900
Transportation expense 340
Computer repairs 800
Advances to office staff 1,500
A check drawn by Samantha, Inc., payable to the petty cash custodian 7,200
Postage stamps 300
An employee’s check, returned by bank, marked NSF 1,000
An envelope containing currency of P1,890 for a gift for a retiring employee 1,890
P16,000

The general ledger shows an imprest petty cash fund balance of P16,000.

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1. How much is the petty cash shortage or overage?

A. P2,190 overage B. P2,190 shortage C. P1,890 shortage D. P1,890 overage

2. What is the adjusted balance of the petty cash fund at July 31, 2023?
A. P10,740 B. P3,450 C. P7,200 D. P8,850

SITUATION 3

You are auditing general cash for the DION COMPANY for the fiscal year ended July 31, 2023.
The client has not prepared the July 31 bank reconciliation. After a brief discussion with the
owner you agree to prepare the reconciliation, with assistance from one of Dion Company’s
clerks. You obtain the following information:

General Bank
Ledger Statement
Beginning balance P 46,110 P 57,530
Deposits 250,560
Cash receipts journal 254,560
Checks cleared (236,150)
Cash disbursements journal (218,110)
July bank service charge (870)
Note paid directly (61,000)
NSF check (3,110)
Ending balance P82,560 P6,960

June 30 Bank Reconciliation

Information in General Ledger and Bank Statement

Balance per bank P57,530

Deposits in transit 6,000
Outstanding checks 17,420
Balance per books 46,110

Additional information obtained is:

1. Checks clearing that were outstanding on June 30 totaled P16,920.

2. Checks clearing that were recorded in the July disbursements journal totaled P204,670.

3. A check for P10,600 cleared the bank, but had not been recorded in the cash disbursements
journal. It was for an acquisition of inventory. Dion uses the periodic inventory method.

4. A check for P3,960 was charged to Dion Company but had been written on a different
company’s bank account.

5. Deposits included P6,000 from June and P244,560 for July.

6. The bank charged Dion Company’s account for a not-sufficient-fund check totaling P3,110.
The credit manager concluded that the customer intentionally closed its account and the
owner left the city. The check was turned over to a collection agency.

7. A note for P58,000, plus interest, was paid directly to the bank under an agreement signed
four months ago. The note payable was recorded at P58,000 on Dion Company’s books.

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Based on facts given, answer the following:

1. The checks outstanding on June 30 amount to

A. P9,980 B. P10,830 C. P13,940 D. P3,340

2. The deposits on June 30 amount to

A. P6,890 B. P10,000 C. P6,000 D. P9,110

3. The adjusted cash balance on July 31 is

A. P6,980 B. P10,940 C. P3,870 D. P3,020

SITUATION 4

LAGUNDI COMPANY applies the allowance method to value its accounts receivable. The company
estimates its uncollectible accounts based on past experience, which indicates that 1.5% of net
credit sales will be uncollectible. Its total sales for the year ended December 31, 2023, amounted
to P4,000,000 including cash sales of P400,000. After a thorough evaluation of the accounts
receivable from Nolog Company amounting to P20,000, Lagundi has decided to write off this
account before year-end adjustments are made.

Shown below are Lagundi’s account balances at December 31, 2023, before any adjustments and
the P20,000 write off.
Sales P4,000,000
Accounts receivable 1,500,000
Sales discounts 250,000
Allowance for doubtful accounts 33,000
Sales returns and allowances 350,000
Doubtful accounts expense 0

Lagundi has decided to value its accounts receivable using the statement of financial position
approach as suggested by its external auditors. Presented below is the aging of the accounts
receivable subsidiary ledger accounts at December 31, 2023.
Less than 61-90 91-120 Over
Account Balance 60 days days days 120 days
Antiporda P100,000 P100,000
Balbakwa 256,000 180,000 P 76,000
Curdapia 654,000 500,000 154,000
Dagul 50,000 P50,000
Empoy 420,000 P420,000
Total P1,480,000 P780,000 P230,000 P420,000 P50,000
% collectible 99% 95% 85% 60%

1. The entry to write off Lagundi’s accounts receivable from Nolog of P20,000 will
A. Decrease total assets and net income for 2023
B. Increase total assets and decrease net income for 2023
C. Have no effect on total assets and net income for 2023
D. Have no effect on total assets and increase net income for 2023

2. Lagundi’s doubtful accounts expense for 2023 based on net credit sales is
A. P60,000 C. P45,000
B. P12,000 D. P56,250

3. The final entry to adjust the allowance for doubtful accounts is

A. Doubtful accounts expense 44,300
Allowance for doubtful accounts 44,300

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B. Doubtful accounts expense 45,000

Allowance for doubtful accounts 45,000
C. Doubtful accounts expense 24,300
Allowance for doubtful accounts 24,300
D. Allowance for doubtful accounts 24,300
Doubtful accounts expense 24,300

4. What is the net realizable value of Lagundi’s accounts receivable on December 31, 2023?
A. P1,435,700 C. P1,397,700
B. P1,435,000 D. P1,377,700

5. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertions of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents.
B. Comparing receivable turnover ratios with industry statistics for reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for doubtful accounts for reasonableness.

SITUATION 5

The management of PIG, INC. has engaged you to assist in the preparation of year-end
(December 31) financial statements. You are told that on November 30, the correct inventory
level was 145,730 units. During the month of December, sales totaled 138,630 units including
40,000 units shipped on consignment to AA Corp. A letter received from AA indicates that as of
December 31, it has sold 15,200 units and was still trying to sell the remainder.

A review of the December purchase orders to various suppliers shows the following:

Purchase Order Invoice Quantity Date Date

Date Date in Units Shipped Received Terms
12/31/23 01/02/24 4,200 01/02/24 01/05/24 FOB Destination
12/05/23 01/02/24 3,600 12/17/23 12/22/23 FOB Destination
12/06/23 01/03/24 7,900 01/05/24 01/07/24 FOB Shipping point
12/18/23 12/20/23 8,000 12/29/23 01/02/24 FOB Shipping point
12/22/23 01/05/24 4,600 01/04/24 01/06/24 FOB Destination
12/27/23 01/07/24 3,500 01/05/24 01/07/24 FOB Destination

Pig, Inc. uses the “passing of legal title” for inventory recognition.

1. Goods purchased during December totaled

A. 11,600 units C. 19,500 units
B. 15,800 units D. 8,000 units

2. How many units were sold during December?

A. 138,630 units C. 98,630 units
B. 113,830 units D. 153,830 units

3. How many units should be included in Pig, Inc.’s inventory at December 31, 2023?
A. 18,700 units C. 43,500 units
B. 39,900 units D. 47,700 units

4. Purchase cutoff procedures should be designed to test whether all inventory

A. Purchased and received before year-end was paid for.
B. Ordered before year-end was received.
C. Purchased and received before year-end was recorded.
D. Owned by the company is in the possession of the company at year-end.

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5. The audit of year-end physical inventories should include steps to verify that the client’s
purchases and sales cutoffs were adequate. The audit steps should be designed to detect
whether merchandise included in the physical count at year-end was not recorded as a
A. Sale in the subsequent period.
B. Purchase in the current period.
C. Sale in the current period.
D. Purchase return in the subsequent period.

SITUATION 6

As the recently appointed auditor for SUPERPOWER COMPANY, you have been asked to examine
selected accounts. Your audit client, organized in 2022, has setup a single account for all
intangible assets. The following summary shows the debit entries that have been recorded during
2023.

Jan. 2 Purchased patent (8-year life) P870,000

April 5 Goodwill 720,000
June 30 Payment of 12 months’ rent on property leased by Superpower 182,000
July 1 Purchased franchise with 10-year life; expiration date, July 1, 2033 900,000
Aug. 3 Payment for copyright (5-year life) 312,000
Sept. 1 Research and development costs related
to patent (incurred prior to achieving economic viability) 320,000
P3,304,000

What is the total carrying value of Superpower’s intangible assets as of December 31, 2023?
A. P2,928,917 B. P2,622,250 C. P2,927,705 D. P2,713,250

SITUATION 7

Included in DADANG Company’s unadjusted trial balance on December 31, 2023, are Accounts
payable and Accrued expenses of P523,100 and P63,100, respectively. Upon verification, you
discovered the following information:

1. On December 28, 2023, the company issued checks to creditors totaling P115,000. These
checks were released on January 5, 2024.

2. A check dated December 12, 2023, in payment of accounts payable was recorded as P12,000.
Upon examination of the checks returned by the bank, the actual amount was P21,000.

3. On December 26, 2023, the company purchased on account goods worth P215,000, but no
entry was made in the books. The goods were already included in the year-end physical
count.

4. The following items were erroneously included in accounts payable:

• Accrued expenses totaling P37,450
• A cash advance from the President of Dadang Company amounting to P350,000 to be
used as working capital. This will be repaid within 6 months without interest.
• A debit balance of P87,250 representing advance payment for goods ordered to be
shipped by the supplier on January 12, 2024.

5. Your review of subsequent payments from January 2–15, 2024, revealed that no accrual was
made on December 31, 2023, for the following:
Light and water for Nov. and Dec. 2023 P 21,200
Telephone bills for Dec. 2023 18,150

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Representation expenses for Dec. 2023 11,990

Minor repair of a delivery car on Dec. 26, 2023 3,180
Transportation expenses for 2024 2,560
Total P 57,080

1. The adjusted balance of Accounts payable at December 31, 2023, is

A. P437,900 C. P395,900
B. P543,900 D. P738,900

2. The adjusted balance of Accrued expenses on December 31, 2023, is

A. P157,630 C. P155,070
B. P54,520 D. P57,080

SITUATION 8

DOMINICA CORPORATION reported the following amounts of net income for the years ended
December 31, 2021, 2022, and 2023:
2021 P127,000
2022 150,000
2023 128,500

You are performing the audit for the year ended December 31, 2023. During your examination,
you discover the following errors:

a) As a result of errors in the physical count, ending inventories were misstated as follows:
December 31, 2022 P14,000 understated
December 31, 2023 P23,000 overstated

b) On December 29, 2023, Dominica recorded as a purchase, merchandise in transit which cost
P15,000. The merchandise was shipped FOB Destination and had not arrived by December
31. The merchandise was not included in the ending inventory.

c) Dominica records sales on the accrual basis but failed to record sales on account made near
the end of each year as follows:
2021 P4,000
2022 5,000
2023 3,500

d) The company failed to record accrued office salaries as follows:

December 31, 2021 P10,000
December 31, 2022 14,000

e) On March 1, 2022, a 10% stock dividend was declared and distributed. The par value of the
shares amounted to P10,000 and market value was P13,000. The stock dividend was
recorded as follows:
Miscellaneous expense 13,000
Ordinary share capital 10,000
Retained earnings 3,000

f) On July 1, 2022, Dominica acquired a three-year insurance policy. The three-year premium
of P6,000 was paid on that date, and the entire premium was recorded as insurance expense.

g) On January 1, 2023, Dominica retired bonds with a book value of P120,000 for P106,000.
The gain was incorrectly deferred and is being amortized over 10 years as a reduction of
interest expense on other outstanding obligations.

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1. What is the adjusted net income for the year ended December 31, 2021?
A. P133,000 C. P121,000
B. P117,000 D. P113,000

2. What is the adjusted net income for the year ended December 31, 2022?
A. P159,000 C. P178,000
B. P187,000 D. P179,000

3. What is the adjusted net income for the year ended December 31, 2023?
A. P129,600 C. P104,400
B. P131,000 D. P139,600

4. What adjusting entry should be made on December 31, 2023, to correct the error described
in item B?
A. Accounts payable 15,000
Purchases 15,000
B. Purchases 15,000
Accounts payable 15,000
C. Accounts payable 15,000
Cash 15,000
D. No adjusting journal entry is necessary.

5. The adjusting entry on December 31, 2022, to correct the error described in item E should
include a debit to
A. Ordinary share capital of P10,000
B. Retained earnings of P16,000
C. Share premium of P3,000
D. Miscellaneous expenses of P3,000

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