POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

College of Accountancy and Finance

ACCO 30053: Auditing and Assurance – Concepts and Applications 1
Midterm Examination
November 28, 2023 | 8:00 am – 11:00 am

Name: _________________________________________ Branch/Campus and Section: _______________

Instruction: Read each question carefully and choose the best answer.

Theory (1 Point)

1. Which of the following auditing procedures probably would provide the most reliable evidence concerning the
entity’s assertion of rights and obligations related to inventories:
A. Trace the test counts noted during the entity’s physical count to the entity’s summarization of quantities.
B. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.
C. Select the last few shipping documents used before the physical count and determine whether the shipments
were recorded as sales.
D. Inspect the open purchase order file for significant commitments that should be considered for disclosure.

2. From the auditor’s point of view, inventory counts are more acceptable prior to the year-end when
A. Internal control is weak. B. Accurate perpetual inventory records are maintained.
C. Inventory is slow moving. D. Significant amounts of inventory are held on a consignment basis

3. An auditor will usually trace the details of the test counts made during the observation of physical inventory
counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items
physically present and observed by the auditor at the time of the physical inventory count are
A. Owned by the client.
B. Not obsolete.
C. Physically present at the time of the preparation of the final inventory schedule.
D. Included in the final inventory schedule.

4. The best evidence regarding year-end bank balances is documented in the

A. Cutoff bank statements. B. Bank reconciliations.
C. Interbank transfer schedule. D. Bank deposit lead schedule.

5. 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. Batch processing of checks. d. Separation of cash receipts from cash disbursements

6. The negative form of accounts receivable confirmation request is particularly useful except when
a. Control procedures surrounding accounts receivable are considered to be effective.
b. A large number of small balances are involved.
c. The auditor has reason to believe the persons receiving the requests are likely to give them consideration.
d. Individual account balances are relatively large.

7. Which of the following is not a primary objective of the auditor in tests of accounts receivable?
a. Determine the approximate realizable value.
b. Determine the adequacy of internal controls.
c. Establish the validity of the receivables.
d. Determine the approximate time of collectibility of the receivables.
8. Which of the following is not a common activity of the revenue/receipt cycle?
a. Order entry. b. Inventory control. c. Receiving. d. Cash collection.

9. Which of the following control procedures will likely prevent the concealment of a cash shortage
that was perpetrated by improperly writing off a trade account receivable?
a. Write-offs must be approved by a responsible officer after reviewing Credit Department recommendations and
supporting evidence.
b. Write-offs must be supported by an aging schedule showing that only receivables months overdue have been
written off.
c. Write-offs must be approved by the cashier.
d. Write-offs must be authorized by field sales representatives.

10. Defective merchandise returned by customers should be presented to

a. Inventory control personnel. b. Sales personnel.
c. Purchasing personnel. d. Receiving personnel

11. A sales cutoff test of billings complements tests of

a. Sales returns. b. Cash.
c. Accounts receivable. d. Sales allowances

12. Which of the following would most likely be detected by an auditor's review of a client's sales cutoff?
a. Unrecorded sales for the year. b. Lapping of year-end accounts receivable.
c. Excessive sales discounts. d. Unauthorized goods returned for credit.

13. To gather evidence about the balance per bank in a bank reconciliation, an auditor would examine
all of the following except the
a. Cutoff bank statement. b. Year-end bank statement.
c. Bank confirmation. d. General ledger.

14. Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-term bank loan by a
debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type
of error?
a. Analyze the notes payable journal. b. Analyze bank confirmation information.
c. Prepare year-end bank reconciliation. d. Prepare a year-end bank transfer schedule.

15. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor
when the
a. Check register for the last month is reviewed. b. Cutoff bank statement is reconciled.
c. Bank confirmation is reviewed. d. Search for unrecorded liabilities is performed

16. Cash is the most inherently risky among assets in the perspective of the auditor. This is mostly associated to the
fact that cash has the highest risk of misappropriation either from within or outside the entity. Which of the
following controls most likely would reduce the risk of diversion of customer receipts by an entity’s employees?
a. Daily deposit of cash receipts. b. Monthly bank reconciliations.
c. Prenumbered remittance advice d. A bank lockbox system

17. As payments are received, one mailroom employee is assigned the responsibility of prelisting check receipts and
preparing the deposit slip prior to forwarding the check receipts, the deposit slip, and the remittance advices to
accounts receivable for posting. Accounts receivable personnel refoot the deposit slip, stamp a restrictive
endorsement on the back of each check, and then forward the receipts and the deposit slip to the treasury
department. Which of the following is a reasonable assessment of internal control on this process?
a. Internal control is adequate.
b. Internal control is inadequate because mailroom employees should not have access to cash.
c. Internal control is inadequate because treasury employees should prepare the deposit slip.
d. Internal control is inadequate because of a lack of segregation of duties.

18. Which of the following is correct regarding cash counts?

a. Where the accountability is petty cash fund, accommodated checks are considered not valid support if NSF,
post-dated or stale as of the count date.
b. Where the accountability is undeposited collections, customer collection checks are considered valid
support even if they are NSF, post-dated or stale as of the count date.
c. Where the accountability is petty cash fund, any evidence to claim that cash was used to pay certain
disbursements (e.g. postage stamps) shall be considered valid support.
d. Where the accountability is undeposited collections, any evidence to claim that collection was used to
pay certain disbursements (e.g. postage stamps) shall be considered valid support.

19. Which of the following assertions does the auditor most likely would like to validate in deciding to render cash
counts?
a. Completeness b. Valuation c. Existence d. Rights and obligation

20. Which of the following characteristics most likely would be indicative of check kiting?
a. High turnover of employees who have access to cash.
b. Many large checks that are recorded on Mondays.
c. Frequent cash withdrawals from checking accounts.
d. Low average balance compared to high level deposits.

21. The usefulness of the standard bank confirmation request may be limited because the bank employee who
completes the form may:
a. Not believe that the bank is obligated to verify confidential information to a third parity.
b. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation.
c. Not have access to the client’s cutoff bank statement.
d. Be unaware of all the financial relationships that the bank has with the client

22. __________ shipping documents and delivery notes to accounting records corroborates the __________ of
receivables and the __________ of sales transactions.
A. Vouching; completeness; propriety of cutoff B. Vouching; existence; occurrence
C. Tracing; existence; occurrence D. Tracing; completeness

23. Testing subsequent collections to corroborate existence of receivables is an alternative to which of the following
primary substantive procedure?
A. Review of allowance for bad debts
B. External confirmation of receivables
C. Subsidiary ledger-general ledger reconciliation
D. Review of unusual transactions

24. The auditor may use negative confirmation template for receivables if
A. The controls over receivables are operating effectively and there is no reason to believe that the recipients of the
letters will not give due attention to the request.
B. The controls over receivables are not operating effectively and there is no reason to believe that the recipients of
the letters will not give due attention to the request.
C. The controls over receivables are operating effectively and there is reason to believe that the recipients of the
letters will not give due attention to the request.
D. The controls over receivables are not operating effectively and there is reason to believe that the recipients of the
letters will not give due attention to the request.
25. In obtaining an understanding of a manufacturing entity’s internal control over inventory balances, an auditor
most likely would
A. Analyze the liquidity and turnover rations of the inventory.
B. Perform analytical procedures designed to identify cost variances.
C. Review the entity’s descriptions of inventory policies.
D. Perform test counts of inventory during the entity’s physical count.

26. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk
is high, an auditor would probably
A. Insist that the client perform physical counts of inventory items several times during the year.
B. Apply gross profit tests to ascertain the reasonableness of the physical counts.
C. Increase the extent of tests of controls of the inventory cycle.
D. Request the client to schedule the physical inventory count at the end of the year.

27. Your client is primarily engaged in the development and sale of residential properties. Which of the following
should not form part of your client’s “inventories”?
A. Construction in progress
B. Land held for future development
C. Consigned construction materials from contractors
D. All of these

28. Which of the following most likely would be an internal control procedure designed to detect errors and
irregularities concerning the custody of inventories?
a. Periodic reconciliation of work-in-process with job cost sheets.
b. Segregation of functions between general accounting and cost accounting.
c. Independent comparisons of finished goods records with counts of goods on hand.
d. Approval of inventory journal entries by bookkeeper

29. Which of the following is not a relevant process in the auditor’s perspective in his understanding and review of
a client’s production/conversion cycle?
a. Production planning.
b. Materials, labor and OH requisition.
c. Cost accounting.
d. Order processing

30. Which of the following is incorrect regarding the physical count of inventories of the client in the context of the
independent audit of financial statements?
a. The best timing for observing physical count of inventories from the auditor’s perspective is at year-end.
b. The primary responsibility of the independent auditor with regard inventory physical count is to observe the
conduct of the physical count of inventories done by the client personnel.
c. The auditor may decide to perform test-count on inventories as part of his substantive test procedure for
inventories.
d. The auditor traces test-counts noted during his count observation to the client’s inventory summary and
records in support of the existence assertion on inventories.

Problems (2 points each)

Problem 1. Audit of Cash
You are conducting an audit of the Cagayan Company for the year ended December 31, 2022. The internal control
procedures surrounding cash transactions were not adequate. The bookkeeper-cashier handles cash receipts,
maintains accounting records, and prepares the monthly bank reconciliations.
The bookkeeper-cashier prepared the following reconciliation at the end of the year:
Balance per bank statement P350,000
Add: Deposit in transit P175,250
Note collected by bank 15,000 190,250
Total 540,250
Less outstanding checks 246,750
Balance per general ledger P293,500

In the process of your audit, you gathered the following:

• At December 31, 2022, the bank statement and general ledger showed balances of P350,000 and P293,500,
respectively.
• The cut-off bank statement showed a bank charge on January 2, 2023 for P30,000 representing correction
of an erroneous bank credit.
• Included in the list of outstanding checks were the following:
a. A check payable to a supplier, dated December 29, 2012, in the amount of P14,750, released on
January 5, 2023.
b. A check representing advance payment to a supplier in the amount of P37,210, the date of which is
January 4, 2023, and released in December, 2022.
c. On December 31, 2022, the company received and recorded customer’s postdated check
amounting to P50,000.
Based on the above and the result of your audit, answer the following:
31. The adjusted deposit in transit as at December 31, 2022 is
a. P175,250 b. P125,250 c. P225,250 d. P125,000
32. The adjusted outstanding checks as at December 31, 2022 is
a. P298,710 b. P232,000 c. P209,540 d. P194,790
33. The adjusted cash to be presented in the statement of financial position at December 31, 2022 is
a. P235,460 b. P250,460 c. P265,460 d. P310,460
34. The net adjustment to the cash account as of December 31, 2022 is
a. P43,040 b. P60,000 c. P58,040 d. P45,000

Outstanding Checks Unadjusted 293,500

Per Reconciliation 246,750 Less: Note Collected - 15,000
Adjustment - 14,750 Unreleased Reversal of O/C 51,960
- 37,210 PDC Check Reversal of AR - 50,000
Adjusted O/C 194,790 Bank Charges - 30,000
Net Adjustment - 43,040
Deposit in Transit Adjusted Balance 250,460
Per Reconciliation 175,250
Adjustment - 50,000
PDC
Adjusted D/T 125,250

Problem 2. Audit of Cash

The bank statement for the current account of PINK Corporation showed a December 31, 2021 balance of
P585,284. Information that might be useful in preparing a bank reconciliation are as follows:
A. Outstanding checks were P52,810.
B. The December 31, 2021 cash receipts of P23,000 were not deposited in the bank until January 2, 2022.
C. One check written in payment of rent P8,940 was correctly recorded by the bank but was recorded by PINK as
P9,840.
D. In accordance with prior authorization, the bank withdrew P18,000 directly from the current account as payment
on a mortgage note payable. The interest portion of that payment was P14,000. PINK has made no entry to record
the automatic payment.
E. Bank service charges of P740 were listed on the bank statement.
F. A deposit of P35,000 was recorded by the bank on December 12, but it did not belong to PINK.
 G. The bank statement included a charge of P3,400 for an NSF check. The company will seek payment
from the customer.
H. PINK maintains an P8,000 petty cash fund that was appropriately reimbursed at the end of December.
I. According to instructions from PINK on December 30, the bank withdrew P400,000 from the account and
purchased treasury bills for PINK. The company recorded the transaction in the books on December 31 when it
received the notice from the bank. Half of the treasury bills mature in three months, while the other half will mature
in six months.
Requirements:
35. What is the cash in bank balance per books on December 31, 2021?
a. P549,714 b. P543,514 c. P534,914 d. P541,714
36. What is the adjusted cash in bank balance on December 31, 2021?
a. P520,474 b. P527,274 c. P518,674 d. P520,154
37. What amount would Kapitan Corporation report as cash and cash equivalents as of December 31, 2021?
a. P928,474 b. P728,474 c. P720,474 d. P735,274

Problem 3. Audit of Cash

The accountant for the Bulacan Company assembled the following data:

June 30 July 31
Cash account balance P 15,822 P39,745
Bank Statement Balance 107,082 137,817
Deposit in Transit 8,201 12,880
Bank Service Charge 27,718 30,112
Customer check deposited July 10,
Returned by bank on July 16 marked NSF,
And redeposited immediately; no entry made
On books for return or redeposit 8,250
Collection by bank of company’s
Notes receivable 71,815 80,900

The bank statements and the company’s cash records show these totals:

Disbursements in July per Bank Statement P218,373

Cash receipts in July per Bulacan’s books 236,452
Determine the ff;
38. How much is the adjusted cash balance as of June 30?
a. 3,695 b. 15,822 c. 87,565 d. 107,082
39. How much is the adjusted bank receipts for July?
a. 214,802 b. 232,881 c. 245, 537 d. 253,787
40. How much is the adjusted book disbursements for July?
a. 181,782 b. 206,673 c. 212,517 d. 220,767
41. How much is the adjusted cash balance as of July 31?
a. 22,513 b. 112,335 c. 120,585 d. 137,817
42. How much is the cash shortage as of July 31?
a. 0 b. 8,250 c. 71,815 d. 196,114
 Problem 4. Audit of Receivables
To substantiate the existence of the accounts receivable balances as at December 31, 2022 of PVL COMPANY, you
have decided to send confirmation requests to customers. Below is a summary of the confirmation replies together
with the exceptions and audit findings. Gross profit on sales is 20%. The company is under the perpetual inventory
method.

Name of Balance Comments

Customer Per Books From Customers Audit Findings
Concordia P150,000 P90,000 was returned on December 30, Returned goods were received
2022. Correct balance as is P60,000. December 31, 2022.
Falcon P30,000 Your CM representing price adjustment The CM was taken up by PVL
dated December 28, 2022 cancels this. Company in 2023.
Lazaro P144,000 You have overpriced us by P150. Correct The complaint is valid.
price should be P300.
Silang P112,500 We received the goods only on January 6, Term is shipping
2023. point. Shipped in 2022.
Yakal P135,000 Balance was offset by our December PVL Company credited
shipment of your raw materials. accounts payable for
P135,000 to record
purchases. Yakal is a
supplier.

43. If the necessary adjusting journal entry is made regarding the case of Concordia, the net income will
A. Decrease by P18,000. C. Increase by P18,000.
B. Decrease by P90,000. D. Increase by P90,000.

44. The effect on 2022 net income of Lukas Company of its failure to record the CM involving transaction with
Falcon:
A. P30,000 over. B. P30,000 under C. P6,000 over. D. P6,000 under.
45. The overstatement of receivable from Lazaro is
A. P96,000 B. P24,000 C. P72,000 D. P48,000
46. The accounts receivable from Silang is
A. Correctly stated. B. P112,500 over. C. P112,500 under. D. P225,000 under.

47. The adjusting entry to correct the receivable from Yakal is

A. Purchases 135,000
Accounts receivable 135,000
B. Accounts payable 135,000
Purchases 135,000
C. Accounts receivable 135,000
Accounts payable 135,000
D. Accounts payable 135,000
Accounts receivable 135,000
Solution:
a. Returned Sales - 108,000
Inventory 90,000 COGS 90,000
COGS 90,000 GPR - 18,000 Decrease in Income

Sales 108,000
AR 108,000

b. Unrecorded CM overstate the Sales for the period for P30,000

Per book 144,000
c. unit sold 320 Correct AR 96,000
Correct AR 96,000 Overstatement 48,000

Problem 5. Audit of Accounts Receivable

During 2020, QUARTS Company wrote-off P184,000 in receivables and recovered P48,000 that had been written-
off in prior years. The company recorded an interim provision of bad debts expense of 2% of Net Credit sales.
QUARTS’s December 31, 2019 allowance for doubtful accounts was P120,000.
The trial balance as of December 31, 2020 showed the following:
Dr Cr
Accounts receivable P2,680,000
Allowance for doubtful accounts, 12/31/20 P144,000
Sales (on account) ?
Sales returns (all on credit) 100,000

The adjusted balance at December 31, 20019 of the accounts receivable was P2,000,000.
Using the aging method, QUARTS’s trade accounts receivable revealed the following:
Days outstanding Estimated amount % Uncollectible
0-60 P960,000 2%
61-120 720,000 4%
Over 120 1,000,000 6%
48. The adjusted allowance for doubtful accounts at December 31, 2020 should be:
A. P108,000 B. P120,000 C. P124,000 D. P144,000
49. The correct provision for doubtful accounts for year 2020 is:
A. P108,000 B. P120,000 C. P124,000 D. P144,000
50. During 2020, doubtful accounts expense already recorded amounted to:
A. P208,000 B. P160,000 C. P120,000 D. P108,000
51. The Gross Sales for year 20020 is:
A. P8,000,000 B. P8,100,000 C. P8,200,000 D. P8,300,000
52. The total collection from customers during the year 2020 is:
A. P7,320,000 B. P7,136,000 C. P7,184,000 D. P7,232,000
Before change.
ABD
EB 144,000 120,000 BB
Write off 184,000
48,000 Recovery
328,000 168,000
160,000 Bad Debts Expense

AR
BB 2,000,000 2,680,000 EB
Sales 8,100,000 100,000 Saels Returns
AR Recovery 48,000 184,000 write off
10,148,000 2,964,000
7,184,000

Problem 6. Comprehensive Problem (Audit of Inventory and Receivables)

VIOLET, Inc., your audit client, is in the business of selling canned goods. The goods are shipped in boxes to
customers, with each box containing 100 units. Terms of shipment are FOB shipping point; 2/10, n/30; with a 10%
volume discount if a customer purchased 300 boxes or more.

During 2021, each canned good cost the entity P20 (each box contains canned goods with a total cost of P2,000),
and each can is sold for P30.
The following information are extracted from your client’s records:
Inventory, January 1 (50,000 cans @ P18 per can) 900,000
Purchases 18,000,000
Accounts receivable 2,438,000
Allowance for doubtful accounts 152,560

An inventory count was conducted by your client last December 31, 2021, from 8:00am to 4:30pm. You were able
to observe this count, and the following information were obtained:
At 4:30pm, 600 boxes of canned goods, plus 83 cans, remain in the warehouse.
100 boxes of canned goods ordered last December 28, 2021, arrived at 5:10pm on the day of the count. The
purchase was recorded last December 30, 2021, when the invoice arrived.
Your client is using the FIFO method.

In your audit of your client’s accounts receivable, you were able to obtain their subsidiary ledger. The breakdown
and age of the accounts receivable are as follows:
Current 31-60 days 61-120 days Over 120
ACTION Enterprise 990,000 990,000
BREATH, Inc. 153,000 153,000
CARPET Corporation 210,000 210,000
DRAWER Corporation - 30,000 - 30,000
EASTERN, Inc. 125,000 125,000
FLAPPY Ltd. 600,000 350,000 250,000
GARGLE Co. 390,000 390,000
Total 2,438,000 1,560,000 503,000 250,000 125,000

To confirm the December 31, 2021 balances of your client’s receivables from its customers, you required your
client to send out confirmation requests to its customers. The customers are required to return the letters directly to
you. A summary of replies is presented below:
Amount per reply
ACTION Enterprise 891,000
BREATH, Inc. 153,000
CARPET Corporation 210,000
DRAWER Corporation 0
EASTERN, Inc. no reply
FLAPPY Ltd. 600,000
GARGLE Co. 390,000

Audit notes related to the investigation of variances between the amount per subsidiary ledger and amount per
reply:
• The entity was not able to include the volume discount that should be extended to ACTION Enterprise for
purchasing 330 boxes last December 24, 2021.
• The negative balance in DRAWER Corporation’s account is due to a return they made after they have fully
paid their balance.
• EASTERN, Inc.’s account has been outstanding for more than a year already. The company’s policy is to
write-off accounts that exceed one year.

Additional information and transactions that transpired affecting your client’s accounts receivable valuation:
• Based from your client’s policy, the estimated percentage of collectability for current accounts is 100%;
88% for 31-60 days; 75% for 61-120 days; and 25% for over 120 days.
• A P50,000 provision for doubtful accounts expense was recognized last September 30, 2021 for their
interim report.
• CARPET Corporation paid all of its account in January 5, 2021, which is within the discount period.

53. How much is the company's cost of goods sold for 2021?
a. P17,898,340 b. P17,698,340 c. P17,498,340 d. P17,298,340
54. What is the adjusted balance of your client's accounts receivable as of December 31, 2021?
a. P2,214,000 b. P2,244,000 c. P2,369,000 d. P2,343,000
55. What is the adjusted balance of your client's allowance for doubtful accounts as of December 31, 2021?
a. P122,860 b. P216,610 c. P120,860 d. P241,220
56. How much additional doubtful accounts expense shall be recognized by the end of 2021?
a. P95,300 b. P50,000 c. P45,300 d. P139,050
57. What is the carrying value of your client's accounts receivable as of December 31, 2021?
a. P2,116,940 b. P2,121,140 c. P2,023,190 d. P2,027,390

Problem 7. Audit of Inventories

Marvelous 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 Hermie Company. Since the monthly statement from
Hermie 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 2022.
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.
i. Further inspection of the client’s records revealed the following December 31, 2022 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

Based on the above and the result of your audit, determine the adjusted balances of following accounts as of
December 31, 2022:
58. Inventory
a. P1,230,000 b. P1,650,000 c. P1,550,000 d. P1,480,000
59. Accounts payable
a. P710,000 b. P540,000 c. P810,000 d. P760,000
60. Net sales
a. P4,550,000 b. P4,650,000 c. P4,730,000 d. P4,970,000
61. Net purchases
a. P2,370,000 b. P2,420,000 c. P2,150,000 d. P2,320,000
62. Net income
a. P220,000 b. P290,000 c. P540,000 d. P550,000

Problem 8. Audit of Inventories

The MALABON COMPANY is an importer and wholesaler. Its merchandise is purchased from a number of
suppliers and is warehoused until sold to consumers.
In conducting his audit for the year ended December 31, 2023, the company’s CPA determined that the system of
internal control was good. Accordingly, he observed the physical inventory at an interim date, November 30, 2023,
instead of at year end.
The following information was obtained from the general ledger:
Inventory, January 1, 2023 P 270,000
Inventory, November 30, 2023 675,000
Sales for eleven months ended November 30, 2023 2,400,000
Sales for year ended December 31, 2023 2,850,000
Purchases for eleven months ended November 30, 2023 (before audit adjustments) 2,160,000
Purchases for year ended December 31, 2023 (before audit adjustments) 2,430,000

Additional information is as follows:

a. Goods received on November 28 but recorded as purchases in December 30,000
b. Deposits made in October 2023 for purchases to be made in 2024 but charged
to Purchases 42,000
c. Defective merchandise returned to suppliers:
Total at November 30, 2023 15,000
Total at December 31, 2023, excluding November items 21,000
The returns have not been recorded pending receipt of credit memos from the suppliers. The defective goods were
not included in the inventory.

d. Goods shipped in November under FOB destination and received in December were recorded as purchases in
November 55,500

e. Through the carelessness of the client’s warehouseman, certain goods

were damaged in December and sold in the same month at its cost. 60,000
f. Audit of the client’s November inventory summary revealed the following:
Items duplicated 9,000
Purchases in transit:
Under FOB shipping point 36,000
Under FOB destination 55,500
Items counted but not included in the inventory summary 21,000
Errors in extension that overvalued the items 12,000

63. What is the correct amount of net purchases for the month of December 2023?
A. P249,000 B. P274,500 C. P247,500 D. P304,500
64. The correct inventory on November 30, 2023 is
A. P619,500 B. P643,500 C. P711,000 D. P655,500
65. What is the gross profit for eleven months ended November 30, 2023?
A. P702,000 B. P651,000 C. P672,000 D. P712,500
66. What is the cost of sales ratio for eleven months ended November 30, 2023?
A. 73% B. 70% C. 28% D. 72%
67. What is the estimated inventory on December 31, 2023?
A. P549,300 B. P527,700 C. P553,200 D. P570,000
Problem 9. Audit of receivables
You were assigned to audit the loans receivable account of Nara Corp. for the period ended December 31, 2022.
Details regarding a loan transaction with Yokohama Inc. were as follows:

The three-year, P5M loan was dated January 1, 2021 and pays interest at 10% every December 31. Yokohama had
good financial standings and management estimates revealed that the 12-months ECL is very insignificant. The
proceeds of the loan were consistent with the yield rate on this date which was 12%.

By the end of 2021, interest was collected. Management’s assessment on Yokohama’s credit standing did not
change.

By the end of 2022, however, while Yokohama was able to pay the interest due, management concluded that there
is a significant increase in Yokohama’s credit risk. As a result, the management estimated that the present value of
the life-time expected credit loss is P400,000 with a 25% probability of default.

By the end of 2023, Yokohama defaulted on the loan and interest payment. As a result, certain concessions were
entered with the company. These concessions included:

• Interest due in 2023 is forgiven

• While there will be no more interest to be collected on the loan, the maturity value of is increased to P6M
and is due on December 31, 2025.

Market rate of interest prevailing at the end of 2023 was 11%.

68. What is the carrying value of the loans receivable as of December 31, 2021?
a. 4,759,817 b. 4,910,714 c. 4,830,995 d. 5,000,000

69. What is the carrying value of the loans receivable as of December 31, 2022?
a. 4,659,817 b. 4,810,714 c. 4,730,995 d. 4,900,000
 70. What is the impairment loss/bad debt expense in 2023?
a. 716,837 b. 616,837 c. 216,837 d. 604,837