BM1909

I. During your risk assessment and test of internal control of Legacy Commercial, Inc. (Company), you documented
the following. Given the data, indicate whether you will test in full, perform scoping, or waive substantive tests.
Write your answers in the Test of Details column. (10 items x 2 points)
Test in full – Test all transactions involved in the account.
Scoping – Select specific transactions to test.
Waive – The auditor will not perform the test of details.
Account Value Material Assertion/ Risk Reason for Risk Controls **SAR Tests of
Balance (Y or N) s Assessment Assessment (Y/N) (Y/N) Details
*C, E, A (High or
and V Low)
Cash P=3,078,898 Y C, E, A and High Cash is highly Y N
V susceptible to Test in
misappropriation
and any material
Full
misstatement may
pervasively affect
the fairness of
presentation of the
financial statements.

Trade and other 33,135,488 Y C, E, A and High The Company’s Y Y

receivables V receivable stems
from receivable Scoping
from its customers
and employees.
Transactions
involving receivable
are voluminous in
nature.

Due from 5,803,000 Y C, E, A and High Transactions with N Y

related V related are
parties considered high-
risk due to the risk Test in
that affiliated Full
entities may
manipulate their
books by colluding
to post fictitious
transactions,
especially involving
income and expense
accounts.

Merchandise 15,625,492 Y C, E, A and High The Company’s Y Y

and supplies V inventories in Scoping
inventory nature can be
susceptible to
expiration. The
movement of the
Company’s
inventory per day is
voluminous.

Other 1,849,564 N N/A N/A The Company’s N N

current other current Waive
assets assets include
CWTs withheld y

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 BM1909

Account Value Material Assertion/ Risk Reason for Risk Controls **SAR Tests of
Balance (Y or N) s Assessment Assessment (Y/N) (Y/N) Details
*C, E, A (High or
and V Low)
customers which,
due to the
Company’s tax
exemption can’t be
applied against
future tax liability.
Property and 103,869,504 Y C, E, A and Low Additions during Y N
equipment V the year are Scoping
minimal.
Other 708,090 N N/A N/A There are no N N
noncurrent transactions Waive
assets involving this
account during the
year. This pertains
to a long-term
deposit of the
Company.
Trade and 55,630,860 Y C, E, A and Low There are no Y N
other payables V significant Scoping
fluctuations in the
balance of this
account as
compared with prior
years.
Moreover, the
Company’s
purchasing and
disbursing
process are found to
be effective.
Due to 148,871,000 Y C, E, A and High Transactions with N N
related V related are Scoping
parties considered high-
risk due to the risk
that affiliated
entities may
manipulate their
books by colluding
to post fictitious
transactions,
especially involving
income and expense
accounts.

Retirement 11,831,547 Y C, E, A and High Valuation of N N

liability V retirement liability Test in
and retirement costs Full
requires significant
judgment in
evaluating the
assumption and
estimates used by
the actuary.

*Completeness, Existence, Accuracy and Valuation

**Substantive Analytical Review

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 BM1909

II. During your team planning, you were assigned to audit the following accounts and faced with the following
problems. Document your audit procedure for each item. (6 items x 5 points)

Cash and cash equivalents

Legacy Commercial Inc. (Company) has several bank accounts. Bookkeeper James Red prepared a check named
after him for his personal expenses amounting to P500,000 from Bank Account A of the Company. No journal entry
was made.
Fearing that the auditors would detect this fraud, he prepared a check worth P500,000 from Bank Account B and
deposited it to Bank Account A (still, no journal entries were made). The deposit was credited and cleared to Bank
Account A since it was deposited within the day. However, the check was not yet cleared from Bank Account B
since it will still undergo the clearing process. It will appear that Bank A has no shortage, and at the same time, Bank
Account B will be at its correct balance until the check clears.

Questions:
1. What audit procedure/s will you perform to detect that the Company’s recorded cash is short of
P500,000 or that there is fraud?
 I will request a list of bank accounts and its transactions and I will obtain confirmations from the
banks that the transactions really occur on that period. I will also check who made the transactions
and where the money goes, whether for the company or was used for personal interest.

2. What pieces of audit evidence will you need?

 Accounting records such as the financial statement, ledgers, bank statements, checks, etc.

Trade and other receivables

During your audit of the following Legacy’s receivables account, you noted that the following customers are aging
90 days as of December 31, 201A reporting period.

Receivables Schedule:
 Kutitap Toothpaste – P5,670,724
 Camila Bridal Salon – P10,876,382
 Tala Studio – P6,991,482

You also noted that the Company’s practice of valuing doubtful accounts receivables is when the receivables are
over 360 days old.

Questions:
1) What audit procedures will you do to test the existence of the above receivables?
 Evaluate the adequacy of the allowance for doubtful accounts. Test aging of receivables by testing
the samples taken for confirmation. This includes examination of supporting invoices to ensure
that the client’s aged debt listing is consistent with the supporting documentation.

2) What will be your audit finding/s as to the Company’s valuation of receivables or assessment of doubtful
accounts?
 Companies must estimate collectability and reduce their balance by an allowance for
doubtful accounts. The auditor must establish whether the company's estimate is
appropriate and audit the underlying data utilized to produce the estimate.

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 BM1909

Merchandise and Supplies Inventory

In your audit of the Company’s inventory, you noted that a physical inventory count on December 31, 201A, showed
merchandise costing P15,625,492 was on hand at that date. Your examination reveals the following items are all
excluded from the inventory per count:

1. Merchandise costing P110,150 shipped by a seller FOB destination on December 29, 201A and received by the
Company on January 2, 201B. (The merchandise was purchased under FOB destination term and was not
received until January 2.)
2. Merchandise costing P255,000 was held on consignment. (The Company does not possess legal title because the
merchandise was received on a consignment basis.)
3. Goods costing P159,200 were shipped FOB destination on December 31, 201A. These goods were delivered to
the customer on January 3, 201B. (The merchandise should be added back to the company's inventory since it
was only delivered to the customer on January 3.)
4. Goods costing P193,544 were shipped by a vendor FOB seller on December 31, 201A, and received by the
Company on January 5, 201B. (Same as FOB shipping point)
5. Goods costing P29,100 were shipped FOB shipping point to a customer on December 28, 201A. The customer
received these goods on January 2, 201B. (The Company recorded the sale at the time of shipment; thus, no
necessary adjustment is needed.)

What adjusting entries would you propose given the facts presented?

a.
Merchandise Inventory 159,200
Cost of Goods Sold 159,200

b.
Merchandise Inventory 193,544
Accounts Payable 193,544

Rubric for short answer:

Criteria Performance Indicators Points
Content Provided pieces of evidence, supporting details, 3
and factual scenarios
Organization of Expressed the points in a clear and logical 2
ideas arrangement of ideas in the paragraph
TOTAL 5

Rubric for adjusting journal entries:

Performance Indicators Points
Correct accounts and amounts used 3
Computed final amounts are correct/balanced 2
Total 5

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