SUBSTANTIVE TEST OF CASH AND CASH EQUIVALENTS
1) Which of the following is not a "cash equivalent"?
A) Time deposits
B) Certificates of deposit
C) Money market funds
D) Marketable securities
D
2) An imprest petty cash fund would least likely be used to pay for which of the
following items?
A) Minor office supplies
B) Monthly interest expense
C) Stamps for small mailings
D) Small contributions to a local charity
B
3) An imprest petty cash fund:
A) is a bank account.
B) is used for large, unusual purchases.
C) is usually reimbursed at least once a week for good internal control.
D) is being replaced by pre-approved purchase cards in many companies.
D
5) Companies may purchase marketable securities as a way to temporarily invest
excess cash.
A) True
B) False
A
6) Examples of cash equivalents include time deposits, certificates of deposit, and
marketable securities.
A) True
B) False
B
1) Which of the following misstatements is most likely to be uncovered during an
audit of a client's bank reconciliation?
A) Duplicate payment of a vendor's invoice
B) Billing a customer at a lower price than indicated by company policy
C) Failure to record a collection of a note receivable by the bank on the client's
behalf
D) Payment to an employee for more than the hours actually worked
C
2) Which of the following is likely to be detected as part of the audit of the bank
reconciliation?
A) Failure to bill a customer
B) Duplicate payment of a vendor invoice
C) Cash received by the client after year end, but included in cash receipts in the
current year
D) An embezzlement of cash by intercepting cash receipts from customers before
they are recorded
C
3) Which of the following would normally be discovered as part of the audit of the
bank reconciliation?
A) Failure to bill a customer
B) Failure to include a deposit in transit on the bank reconciliation
C) Duplicate payment of a vendor's invoice
D) Payment to an employee for more hours than she worked
B
4) The general cash account is considered a significant account in almost all audits:
A) where the ending balance is material.
B) even when the ending balance is immaterial.
C) except those of not-for-profit organizations.
D) where either the beginning or ending balance is material.
B
5) All of the following would not be uncovered by a bank reconciliation except for:
A) duplicate payment of a vendor's invoice.
B) improper payments of officers' personal expenditures.
C) payments on notes payable debited directly to the the bank account by the bank
but not recorded on the books.
D) payment to an employee for more hours than he worked.
C
6) Which of the following cycles does not affect cash in bank?
A) Capital acquisitions cycle
B) Inventory and warehousing
C) Payroll and personnel cycle
D) Acquisitions and disbursements
B
List below at least THREE misstatements that are designed to be detected by bank
reconciliation.
Failure to include a check that has not cleared the bank on the outstanding
checklist, even though it has been recorded on the cash disbursement journal
Cash received by the client subsequent to the balance sheet date, but recorded as
cash receipts in the current year
Deposits recorded as cash receipts near the end of the year, deposited in the bank
in the same month, and included in the bank reconciliation as a deposit in transit
Payments on notes payables debited directly to the bank balance by the bank but
not entered in the client's records
1) The test of details of balances procedure that requires the auditor to foot the
outstanding check list and deposits in transit is an attempt to satisfy which audit
objective?
A) Cutoff
B) Presentation and disclosure
C) Detail tie-in
D) Completeness
C
2) The audit objective of determining that cash in bank, as stated on the
reconciliation, foots correctly and agrees with the general ledger can be tested by
which of the following procedures?
A) Performing tests for kiting
B) Receiving and testing a cutoff bank statement
C) Footing the outstanding checks list and the list of deposits in transit
D) Examining the minutes of the board of directors for restrictions on the use of
cash
C
3) The test of details of balances procedure that requires the auditor to trace the
book balance on the reconciliation to the general ledger is an attempt to satisfy
the audit objective of:
A) detail tie-in.
B) existence.
C) completeness.
D) accuracy.
A
4) Which of the following statements is correct?
A) Auditors must obtain bank confirmations for audits of non-public entities.
B) Auditors are required to obtain bank confirmations under international auditing
standards.
C) Auditing standards do not address specific requirements regarding bank
confirmations.
D) Auditing standards do not require bank confirmations.
D
5) A partial-period bank statement and the related canceled checks, duplicate
deposit slips, and other documents included in bank statements, mailed by the
bank directly to the CPA firm's office, is called:
A) a four-column proof of cash.
B) a year-end bank statement.
C) a cutoff bank statement.
D) a short-period bank statement.
C
6) Which of the following statements is correct?
A) Bank personnel are responsible for providing reasonable assurance that a
response to a bank confirmation is accurate.
B) Bank personnel are responsible for providing complete assurance that a bank
confirmation is complete.
C) Bank personnel are not responsible for searching their records for bank balances
or loans beyond those included on the bank confirmation.
D) Bank personnel are not responsible for providing information related to interest
on the bank confirmation.
C
7) In addition to confirming bank balances of your audit client, a bank confirmation
would normally contain:
A) the client's bank loans with due date, interest rate, and collateral requested.
B) the client's credit history as regards to paying back loans.
C) the client's managements bank account information.
D) the client's business prospects.
A
8) Which of the following balance-related audit objectives typically is assessed as
having high inherent risk for cash?
A) Existence
B) Cutoff
C) Detail tie-in
D) Presentation and disclosure
A
9) Because cash is the most desirable asset for people to steal, it has a higher:
A) control risk.
B) inherent risk.
C) detection risk.
D) liquidity risk.
B
10) The starting point for the verification of the balance in the general bank
account is to obtain:
A) a bank reconciliation from the client.
B) the client's cash account from the general ledger.
C) a cutoff bank statement directly from the bank.
D) the client's year-end bank statement.
A
11) In an effort to satisfy the completeness objective, the auditor could perform
which of the following test of details of balance procedures?
A) Trace the book balance on the reconciliation to the general ledger.
B) Trace outstanding checks to subsequent period bank statements.
C) Perform a four-column proof of cash.
D) Review financial statements to make sure that material savings accounts and
certificates of deposit are disclosed separately.
C
12) The audit procedure which requires the auditor to record the last check
number used on the last day of the year and subsequently trace to the outstanding
checks and the cash disbursements records is performed to satisfy the audit
objective of:
A) detail tie-in.
B) existence.
C) completeness.
D) cutoff.
D
13) The direct receipt of a confirmation from every bank with which the client does
business is:
A) required by auditing standards for every audit.
B) not necessary unless material fraud is suspected.
C) recommended but not required by auditing standards.
D) necessary for every audit except when there are an unusually large number of
active accounts.
C
14) The reason for testing the client's bank reconciliation is to verify whether the
client's recorded bank balance is the same amount as the actual cash in bank,
except for deposits in transit, checks outstanding, and other reconciling items. The
information needed to complete the tests of the reconciliation are provided by
the:
A) client's records and ledgers for the year under audit.
B) cutoff bank statement.
C) client's records and ledgers for the subsequent year.
D) canceled checks for the year under audit.
B
15) Which of the following items would not normally appear on bank
reconciliations?
A) Balance per bank
B) List of deposits in transit
C) Outstanding deposits
D) Outstanding checks
C
16) If a bank does not respond to a bank confirmation request, the auditor would
most likely:
A)
Perform alternative procedures Send a second
request Ask the client to communicate with the bank to ask them to complete and
return the confirmation
No Yes Yes
B)
Perform alternative procedures Send a second
request Ask the client to communicate with the bank to ask them to complete and
return the confirmation
No No Yes
C)
Perform alternative procedures Send a second
request Ask the client to communicate with the bank to ask them to complete and
return the confirmation
Yes No Yes
D)
Perform alternative procedures Send a second
request Ask the client to communicate with the bank to ask them to complete and
return the confirmation
Yes Yes No
A
17) The most important balance-related audit objectives in the audit of cash
include all but which of the following?
A) Existence
B) Accuracy
C) Completeness
D) Occurrence
D
18) The bank reconciliation:
A) must be done on a daily basis if the client uses electronic banking.
B) should be performed by someone independent of the handling or recording of
cash receipts.
C) should be performed by someone who handles cash disbursements.
D) ensures that no cash has been embezzled.
B
19) ________ is an automated fraud detection tool offered by most banks.
A) Positive pay
B) A bank confirmation
C) Fraud buster
D) Check matching
A
20) Which of the following balance-related objectives applies to auditing the
general cash account?
A)
Rights Classification Realizable value
Yes No Yes
B)
Rights Classification Realizable value
No Yes No
C)
Rights Classification Realizable value
Yes Yes Yes
D)
Rights Classification Realizable value
No No No
D
21) The standard bank confirmation form has been agreed upon by the:
A) SEC and FASB.
B) AICPA and the SEC.
C) SEC and the American Bankers' Association.
D) AICPA and the American Bankers' Association.
D
22) The auditors test the client's monthly bank reconciliation to verify whether the
client's recorded bank balance is the same amount as the actual cash in the bank.
Which of the following would not explain a difference between the company's cash
balance and the bank's balance for the client?
A) Deposits in transit
B) Checks are written by the client in the same month the checks clear the bank.
C) Other reconciling items
D) Outstanding checks
B
23) If an auditor waits until the subsequent period bank statement is available to
verify reconciling items, it is primarily a test for:
A) errors.
B) omissions.
C) kiting.
D) intentional misstatements.
D
24) Which of the following verifications would generally not be performed by the
auditor in the month subsequent to the balance sheet date?
A) Foot the lists of all canceled checks, debit memos, deposits, and credit memos.
B) Verify the bank statement balances when the footed totals are used.
C) Verify the book statement balances tie to the cash receipts and disbursements
journals for the year under audit.
D) Review the items included in the footings to make sure that they were cancelled
by the bank
C
29) The bank reconciliation control is enhanced when a qualified employee reviews
the monthly reconciliation as soon as possible after its completion.
A) True
B) False
A
30) Many of the auditor's audit procedures in the audit of cash center around the
client's bank confirmations.
A) True
B) False
B
31) Tracing outstanding checks to subsequent period bank statements tests the
cutoff audit objective.
A) True
B) False
A
32) When auditing the year-end cash balance, one of the areas of focus is on the
accuracy objective.
A) True
B) False
A
33) The three most important audit objectives for cash are accuracy, existence,
and classification.
A) True
B) False
B
34) The starting point for the verification of the balance in the general bank
account is to obtain a bank cut-off statement.
A) True
B) False
B
35) When auditing the general cash account, receipt of a standard bank
confirmation is the starting point for verifying the company's general cash account
balance.
A) True
B) False
B
36) To test the client's list of outstanding checks on the bank reconciliation for
completeness, the auditor should trace from the list to the checks included with
the cutoff bank statement.
A) True
B) False
B
37) The client may mail the bank confirmation requests if the auditor believes
doing so will increase the likelihood that the confirmation will be returned
promptly.
A) True
B) False
B
38) Auditors usually design bank confirmations that address the client's specific
circumstances.
A) True
B) False
B
39) Ordinarily, all deposits-in-transit listed on the year-end bank reconciliation
should appear as deposits on the cutoff bank statement.
A) True
B) False
A
40) Auditors are not always required to obtain bank confirmations.
A) True
B) False
A
41) The auditor is generally concerned about the realizable value and the rights to
cash.
A) True
B) False
B
1) Auditors are likely to prepare a proof of cash when the client has:
A) material control weaknesses in cash receipts and cash disbursements.
B) material control weaknesses in accounts receivable and revenue.
C) material control weaknesses in accounts payable and inventory.
D) material control weaknesses in payroll.
A
2) The auditor uses a proof of cash to determine whether:
A)
All recorded cash disbursements were paid by the bank. All amounts that were
paid by the bank were recorded.
Yes Yes
B)
All recorded cash disbursements were paid by the bank. All amounts that were
paid by the bank were recorded.
No No
C)
All recorded cash disbursements were paid by the bank. All amounts that were
paid by the bank were recorded.
Yes No
D)
All recorded cash disbursements were paid by the bank. All amounts that were
paid by the bank were recorded.
No Yes
A
3) A proof of cash represents:
A) a test of controls and substantive test of transactions.
B) a substantive test of transactions.
C) a substantive test of transactions and test of details of balances.
D) a test of details of balances.
C
4) A major consideration in the audit of the general cash balance is the possibility
of fraud. The auditor must extend his or her procedures in the audit of year-end
cash to determine the possibility of a material fraud when there are:
A) large cash balances at the end of the year.
B) large cash receipts and disbursements during the year.
C) no imprest accounts used for payroll.
D) inadequate internal controls.
D
) The audit and accounting concern addressed in a monthly proof of cash is with:
A) adjusting account balances.
B) reconciling the amounts recorded in the books with the amounts included in the
bank statement.
C) determining the month-end balance.
D) identifying cash transfers.
B
6) A proof of cash is effective at identifying which of the following misstatements?
A) Checks written for incorrect amounts
B) Checks issued to invalid vendors
C) Fraudulent checks
D) Checks recorded in the books for an amount different from that on the check
D
7) The process of transferring money from one bank account to another and
improperly recording the transaction is referred to as:
A) kiting.
B) lapping.
C) scamming.
D) embezzling.
A
8) Which of the following is a correct statement?
A) A proof of cash receipts is a test of the balance in the cash account at a point in
time.
B) The proof of cash disbursements is effective for discovering a check written for
the incorrect amount for which the dollar amount in cash disbursements is also
incorrect.
C) It is extremely difficult for an auditor to detect thefts of cash, especially omitted
transactions and account balances.
D) Segregation of duties is not an important control procedure for cash in a small
business.
C
12) A proof of cash is not an effective procedure for identifying which of the
following types of misstatements?
A) All recorded disbursements were paid by the bank.
B) All recorded cash receipts were deposited.
C) All amounts that were paid by the bank were recorded.
D) Some checks were written for incorrect amounts.
D
13) Listing all bank transfers made a few days before and after the balance sheet
date and tracing each to the accounting records for proper recording is a useful
approach to test for:
A) kiting.
B) lapping.
C) income smoothing.
D) channel stuffing.
A
14) On the last day of the fiscal year, the cash disbursements clerk drew a
company check on bank A and deposited the check in the company account in
bank B to cover a previous theft of cash. The disbursement has not been recorded.
The auditor will best detect this form of kiting by:
A) examining the composition of deposits in both bank A and bank B subsequent to
year-end.
B) examining paid checks returned with the bank statement of the next account
period after year-end.
C) preparing, from the cash disbursements records, a summary of bank transfers
for one week prior to and subsequent to year-end.
D) comparing the detail of cash receipts as shown by the client's cash receipts
records with the detail on the confirmed duplicate deposit tickets for three days
prior to and subsequent to year-end.
B
15) When the auditor believes the year-end bank reconciliation may be
intentionally misstated, it is appropriate to perform extended tests of the year-end
bank reconciliation. Assuming the client has a October 31 year-end, these
extended tests would not include:
A) comparing all September 30 reconciling items with canceled checks and other
documents in the October bank statement.
B) comparing all canceled checks and deposit slips in the October bank statement
with the October cash disbursements and receipts records.
C) carrying out all proper procedures subsequent to the end of the year with the
use of the bank cutoff statement.
D) determining that all outstanding checks had cleared by the date of the bank
cutoff statement.
D
21) Match six of the terms (a-k) with the descriptions/definitions provided below
(1-6):
a. Bank reconciliation
b. Branch cash account
c. Cash equivalents
d. Cutoff bank statement
e. General cash account
f. Imprest payroll account
g. Imprest petty cash fund
h. Kiting
i. Proof of cash
j. Standard bank confirmation form
k. Lapping
________ 1. A fund of cash maintained within the company for small cash
acquisitions, expenses, or to cash employees' checks.
________ 2. A form approved by the AICPA and American Bankers' Association
through which the bank responds to the auditor about bank balance and loan
information.
________ 3. Excess cash invested in short-term, highly liquid investments such as
time deposits, certificates of deposit, and money market funds.
________ 4. The primary bank account for most organizations.
________ 5. The transfer of money from one bank account to another and
improperly recording the transfer so that the amount is recorded as an asset in
both accounts.
________ 6. The document usually prepared by client personnel of the differences
between the cash balance recorded in the general ledger and the amount in the
bank account.
1. g
2. j
3. c
4. e
5. h
6. a
22) A proof of cash involves a combination of substantive tests of transactions and
tests of details of balances.
A) True
B) False
A
23) A proof of cash includes a reconciliation of cash receipts deposited in the bank
with the cash disbursements records for a given period.
A) True
B) False
B
24) The transfer of money from one bank account to another and improperly
recording the transfer so that the amount is recorded as an asset in both banks is
referred to as kiting.
A) True
B) False
A
25) Tests for kiting are performed using only a schedule of intrabank transfers.
A) True
B) False
B
26) A proof of cash helps the auditor determine whether all recorded cash receipts
were deposited in the bank and whether all recorded cash disbursements were
paid by the bank.
A) True
B) False
A
27) A proof of cash receipts is not useful for uncovering the theft of cash receipts
or the recording and deposit of an improper amount of cash.
A) True
B) False
A
28) A proof of cash disbursements is not effective for discovering checks written
for an improper amount, fraudulent checks, or misstatements in which the dollar
amount appearing in the cash disbursements records is incorrect.
A) True
B) False
A
29) The auditor must extend the audit procedures in the audit of year-end cash
when there are inadequate internal controls.
A) True
B) False
A
4) The majority of financial instruments are valued using:
A) cost.
B) fair value estimates.
C) lower of cost or market.
D) realizable value.
B
5) When an audit client uses a service organization to manage their investment
activity:
A) the auditor can always rely on the internal controls of the service organization.
B) the auditor must state in their audit opinion that the client uses a service
organization.
C) the auditor can rely on the internal controls of the service organization if the
service organization's auditor issues a report on their internal control.
D) the auditor must rely on the service organization to determine the fair level 1, 2,
and 3 estimates.
C
6) As part of their internal control procedures, management needs to have
procedures in place to properly classify financial instruments as trading, availablefor-sale, or held-to-maturity, based on:
A) cost.
B) intent.
C) maturity.
D) probable future gain or loss.
B
7) Prices in an active market for identical assets is a level ________fair value
estimate.
A) 1
B) 2
C) 3
D) 4
A
8) When auditing financial instruments:
A) the auditor usually performs more extensive substantive testing to reduce
reliance on controls.
B) analytical procedures are critical in assessing the year-end balances for financial
instruments.
C) the auditor relies on statements and broker's advices from investment
managers to test purchases and sales as long as controls were deemed effective.
D) tests of transactions are generally not performed.
C
9) When auditing financial instruments, analytical procedures can be used to:
A) test the reasonableness of interest and dividend income.
B) test the year-end balance.
C) determine if the financial instruments were properly valued.
D) determine if the gain or loss on the sales were properly computed.
A
10) Which is not an important objective for financial instruments?
A) existence
B) cutoff
C) accuracy
D) realizable value
B
11) Level ________ estimates use observable inputs other than quoted prices.
A) 1
B) 2
C) 3
D) 4
B
12) A schedule of investment activity will include all but:
A) the purchases and sales.
B) ending balances.
C) the gains and losses.
D) the opinion of management as to the suitability of the investment to the
company.
D
13) When auditing financial instruments , a confirmation is sent to the brokerdealer:
A) only if the client has poor internal controls.
B) to confirm interest and dividends.
C) to provide assurance on realizable value.
D) to confirm year-end holdings.
D
14) The auditor is testing for the balance-related audit objective of detail tie-in
when they:
A) prove the schedule of investment activity as to additions and subtractions.
B) perform a physical inspection of the security.
C) verify the quoted market prices.
D) test management's assumptions related to valuation.
A
15) When the auditor sends a confirmation to the broker-dealer, they are testing
the balance-related audit objective of:
A) detail tie-in.
B) existence.
C) cutoff.
D) rights.
B
16) When dealing with financial instruments, the most difficult balance-related
audit objective to test is:
A) existence.
B) accuracy.
C) rights.
D) realizable value.
D
17) An auditor is reviewing the minutes of board meetings to determine whether
any securities are pledged as collateral. This test of the detail of balances relates to
the audit objective of:
A) rights.
B) cutoff.
C) realizable value.
D) classification.
A
18) Determining if the financial instruments included in the schedule of investment
activity at year end are stated at appropriate amounts in accordance with
accounting standards is the balance-related audit objective of:
A) materiality.
B) realizable value.
C) consistency.
D) classification.
B
20) The majority of financial instruments are valued at the lower of cost or market.
A) True
B) False
B
21) Business risks associated with financial instruments are the same for all
companies.
A) True
B) False
B
22) The starting point for testing the ending balance of financial instruments
accounts is to obtain a gain or loss schedule for the year.
A) True
B) False
B
23) The auditor needs to have an understanding of the client's internal controls
over determining fair value estimates.
A) True
B) False
A
24) A factor that increases inherent risk for financial instruments is the complexity
of the relevant accounting standards.
A) True
B) False
A
25) Level 1 estimates require more management judgment than level 2 or level 3
estimates.
A) True
B) False
B
26) There is significant potential for misstatements and misclassification of
financial instruments.
A) True
B) False
A
27) Assessing internal controls related to financial instruments may be necessary in
order to reduce audit risk to an acceptable level.
A) True
B) False
A
28) When auditing financial instruments, interest income and dividends can be
recomputed and compared to a public source.
A) True
B) False
A
29) Analytical procedures may be used to assess the year-end balances for
financial instruments.
A) True
B) False
B
30) Completeness is an important objective for derivative financial instruments.
A) True
B) False
A
31) The most important objectives for financial instruments are existence and
consistency.
A) True
B) False
B
32) Presentation and disclosure objectives are important when auditing financial
instruments.
A) True
B) False
A
33) Tests related to realizable value will vary according to the type of security and
the associated accounting standard.
A) True
B) False
A
34) Auditing guidance is provided for auditing accounting estimates specifically for
fair values estimates as considerable auditor judgment is involved.
A) True
B) False
A
35) Cutoff is more important in testing transactions as a client may want to record
a gain or a loss on the sale at the end of the year.
A) True
B) False
A
36) When an auditor is verifying quoted market prices, they are concerned about
the balance-related audit objective of accuracy.
A) True
B) False
B
37) Securities and contracts will typically be held by the broker-dealer.
A) True
B) False
A
THIS SET IS OFTEN IN FOLDERS WITH...
© 2021 Quizlet Inc.
Which of the following is the focus of an audit of cash for most companies?
a. General cash account.
b. Payroll cash account.
c. Petty cash account.
d. Money market account.
A
The test of details of balances procedure that requires the auditor to foot the
outstanding check list and deposits in
transit is an attempt to satisfy which audit objective?
a. Cutoff.
b. Presentation and disclosure.
c. Detail tie-in.
d. Completeness.
C
Which of the following cycles does not affect cash in bank?
a. Capital acquisitions cycle.
b. Inventory and warehousing.
c. Payroll and personnel cycle.
d. Acquisitions and disbursements.
B
The audit objective of determining that cash in bank, as stated on the
reconciliation, foots correctly and agrees with
the general ledger can be tested by which of the following procedures?
a. Performing tests for kiting.
b. Receiving and testing a cutoff bank statement.
c. Footing the outstanding checks list and the list of deposits in transit.
d. Examining the minutes of the board of directors for restrictions on the use of
cash.
C
Which of the following statements is correct?
a. Auditors must obtain bank confirmations on every audit.
b. Auditors obtain bank confirmations at their discretion.
c. Auditing standards do not address specific requirements regarding bank
confirmations.
d. Auditing standards do not require bank confirmations except when there are an
unusually large number of
inactive bank accounts.
D
Which of the following statements is correct?
a. Bank personnel are responsible for providing reasonable assurance that a
response to a bank
confirmation is accurate.
b. Bank personnel are responsible for providing complete assurance that a bank
confirmation is
complete.
c. Bank personnel are not responsible for searching their records for bank balances
or loans beyond
those included on the bank confirmation.
d. Bank personnel are not responsible for providing information related to interest
on the bank
confirmation.
C
The general cash account is considered significant in almost all audits:
a. where the ending balance is material.
b. even when the ending balance is immaterial.
c. except those of not-for- profit organizations.
d. where either the beginning or ending balance is material.
B
Which of the following errors would be least likely to be discovered during the
audit of the acquisitions and
payments cycle?
a. Duplicate payment of a vendor's invoice.
b. Improper payments of officers' personal expenditures.
c. Payment of interest to a related party for an amount in excess of the going rate.
d. Payment for raw materials that were not received.
C
Testing the reasonableness of the cash balance at year-end is less important when
the year-end bank reconciliation is
verified:
a. on a 100% basis.
b. by someone in client's organization who is independent of the treasurer's
function.
c. by someone in client's organization who is independent of the controller's
function.
d. by the owner/manager.
A
The starting point for the verification of the balance in the general bank account is
to obtain:
a. a bank reconciliation from the client.
b. the client's cash account from the general ledger.
c. a cutoff bank statement directly from the bank.
d. the client's year-end bank statement and reconcile it.
A
In an effort to satisfy the completeness objective, the auditor could perform which
of the following test of details of
balance procedures?
a. Trace the book balance on the reconciliation to the general ledger.
b. Trace outstanding checks to subsequent period bank statements.
c. Perform a four-column proof of cash.
d. Review financial statements to make sure that material savings accounts and
certificates of deposit are
disclosed separately.
C
The audit procedure which requires the auditor to record the last check number
used on the last day of the year and
subsequently trace to the outstanding checks and the cash disbursements records
is performed to satisfy the audit
objective of:
a. detail tie-in.
b. existence.
c. completeness.
d. cutoff.
D
The direct receipt of a confirmation from every bank with which the client does
business is:
a. required by auditing standards for every audit.
b. not necessary unless material fraud is suspected.
c. typically done but not required by auditing standards.
d. necessary for every audit except when there are an unusually large number of
active accounts.
C
The reason for testing the client's bank reconciliation is to verify whether the
client's recorded bank balance is the
same amount as the actual cash in bank, except for deposits in transit, checks
outstanding, and other reconciling
items. The information needed to complete the tests of the reconciliation are
provided by the:
a. client's records and ledgers for the year under audit.
b. cutoff bank statement.
c. client's records and ledgers for the subsequent year.
d. canceled checks for the year under audit.
B
Which of the following items would not normally appear on bank reconciliations?
a. Balance per bank
b. List of deposits in transit
c. Outstanding deposits
d. Outstanding checks
C
A proof of cash is effective at identifying which of the following misstatements?
a. Checks written for incorrect amounts.
b. Checks issued to invalid vendors.
c. Fraudulent checks.
d. Checks recorded by the books for an amount different than the check.
D
If a bank does not respond to a bank confirmation request, an auditor may:
Perform alternative
procedures
Send a second request
Ask the client to communicate with the
bank to ask them to complete and return
the confirmation
No Yes Yes
No No Yes
Yes No Yes
Yes Yes No
A
Which of the following cash transfers results in a misstatement of cash at
December 31, 2007?
Bank Transfer Schedule
Recorded Disbursement Recorded Date
transfer paid by transfer received
in books by bank in books by bank
a. 12/31/07 1/04/08 12/31/07 12/31/07
b. 1/04/08 1/05/08 12/31/07 1/04/08
c. 12/31/07 1/05/08 12/31/07 1/04/08
d. 1/04/08 1/11/08 1/04/08 1/04/08
B
_____ is cash stolen from an organization before it is recorded in the accounting
records.
a. Theft
b. Cash larceny
c. Skimming
d. Floating
C
During his examination of a January 19, 2008 cutoff bank statement, an auditor
noticed that the majority of checks
listed as outstanding at December 31, 2007, had not cleared the bank. This would
indicate:
a. a high probability of kiting.
b. a high probability of lapping.
c. that the 2007 cash disbursements records had been closed prior to December
31, 2007.
d. that the 2007 cash disbursements records had been held open past December
31, 2007.
D
Which of the following errors would be least likely to be discovered during the
tests of the bank reconciliation?
a. Payment was made to an employee for more hours than he worked.
b. Cash received by the client subsequent to the balance sheet date was recorded
as cash receipts in the current
year.
c. Payments on notes payable were debited directly to the bank balance by the
bank were not entered in the
client's records.
d. Deposits were recorded in the cash receipts records near the end of the year,
deposited in the bank, and were
included in the bank reconciliation as a deposit in transit.
A
A proof of cash is not an effective procedure for identifying which of the following
types of misstatements?
a. All recorded disbursements were paid by the bank.
b. All recorded cash receipts were deposited.
c. All amounts that were paid by the bank were recorded.
d. Some checks were written for incorrect amounts.
D
Under which of the following circumstances would an auditor be most likely to
intensify an examination of a $500
imprest petty cash fund?
a. Reimbursement occurs twice each week.
b. The custodian endorses reimbursement checks.
c. Reimbursement vouchers are not prenumbered.
d. The custodian occasionally uses the cash fund to cash employee checks.
A
Contact with banks for the purpose of opening company bank accounts should
normally be the responsibility of the
corporate:
a. board of directors.
b. treasurer.
c. controller.
d. executive committee.
B
On the last day of the fiscal year, the cash disbursements clerk drew a company
check on bank A and deposited the
check in the company account in bank B to cover a previous theft of cash. The
disbursement has not been recorded.
The auditor will best detect this form of kiting by:
a. examining the composition of deposits in both bank A and bank B subsequent to
year-end.
b. examining paid checks returned with the bank statement of the next account
period after year-end.
c. preparing, from the cash disbursements records, a summary of bank transfers
for one week prior to and
subsequent to year-end.
d. comparing the detail of cash receipts as shown by the client's cash receipts
records with the detail on the
confirmed duplicate deposit tickets for three days prior to and subsequent to yearend.
B
If an auditor "proves" the bank statement in the month subsequent to the balance
sheet date, it is primarily a test for:
a. errors.
b. omissions.
c. kiting.
d. intentional misstatements.
B
1. Which of the following is not an audit objective related to cash?
a. Reported cash exists
b. The client has ownership rights in the reported cash.
c. Compensating cash balances are reported as other assets.
d. The reported cash balance includes all cash transaction that should have been
recorded.
C
2. The process of transferring money from one bank account to another and
improperly
recording the transaction
a. Lapping
b. Embezzling
c. Kiting
d. Defalcation
C
3. An auditor who is engaged to examine the financial statements of a business
enterprise
will request a cut-off bank statement primarily in order to
a. Verify the cash balance reported on the bank confirmation inquiry form.
b. Verify reconciling items on the client's bank reconciliation.
c. Detect lapping
d. Detect kiting
B
4. To gather evidence regarding the balance per bank in a bank reconciliation, an
auditor
would examine all of the following except
a. cut-off bank statement
b. bank confirmation
c. year-end bank statement
d. general ledger
D
5. The auditor should ordinarily mail confirmation requests to all banks which the
client
has conducted any business during the year, regardless of the year-end balance,
since
a. The confirmation form also seeks information about indebtedness to the bank.
b. This procedure will detect kiting activities which would otherwise not be
detected.
c. The mailing confirmation forms to all such banks are required by PSA.
d. Tis procedure relieves the auditor of any responsibility with respect to nondetection
of forged checks.
A
6. Which of the following sets of information does an auditor usually confirm on
one form?
a. Accounts payable and purchase commitments.
b. Cash in bank and collateral for loans.
c. Inventory on consignments and contingent liabilities.
d. Accounts receivable and accrued interest receivable
B
7. In October, three months before year-end, the bookkeeper erroneously
recorded the
receipt of a one year bank loan with a debit to cash and credit to miscellaneous
revenue.
Select the most effective method for detecting this type of error.
a. Foot the cash receipts journal for October
b. Send a bank confirmation as of the year-end
c. Prepare bank reconciliation as of the year-end.
d. Prepare a bank transfer schedule as of the year-end
B
8. Which of the following error will be discovered as a result of the audit of the
bank
reconciliation?
a. Failure to record bank deposits
b. Billing customer for an improper amount
c. Payment for raw materials that were not received
d. Payment of interest to an affiliate for an amount in excess of the existing rate
A
9. An auditor ordinarily sends a standard confirmation request to all banks with
which the
client has done business during the year under audit, regardless of the year-end
balance.
A purpose of this procedure is to
a. Provide the data necessary to prepare a proof of cash
b. Request that cut-off bank statement and related checks be sent to the auditor.
c. Detect kiting activities that may otherwise no bet discovered.
d. Seek information about other deposit and loan amounts that come to the
attention of
the institution in the process of completing the confirmation
D
10. As one of the year-end audit procedures, the auditor instructed the client's
personnel to
prepare a standard bank confirmation request for a bank account that had been
closed
during the year. After the client's treasurer had signed the request, it was mailed
by the
assistant treasurer. What is the major flaw in this audit procedure?
a. The confirmation request was signed by the treasurer
b. Sending the request was meaningless because the account was closed before
the year-
end
c. The request was mailed by assistant treasurer.
d. The CPA did not sign the confirmation request before it was mailed.
C
11. The auditors' count of cash should be coordinated with the:
a. Consideration of the internal controls with respect to cash.
b. Close business on the balance sheet date
c. Count of marketable securities
d. Count of inventories
C
12. The receipt of the completed standard bank confirmation form would provide
the auditor
with all of the following items except
a. The balances in all bank accounts with that bank
b. Any restrictions on withdrawals
c. The adjusted cash balances
d. Loan balances with that bank
C
13. An auditor should trace bank transfers for the last part of the audit period and
first part of
the subsequent period to detect whether
a. The cash receipts journal was held open for a few days after year-end.
b. The last checks recorded before the year-end were actually mailed by the yearend
c. Cash balances were overstated because of kiting.
d. Any unusual payments to or receipts from related parties occurred.
C
***The information below was taken from the bank transfer schedule prepared
during the audit
of BAY Co.'s financial statement for the year ended December 31, 2013. Assume all
checks are
dated and issued on December 30, 2013.
Disbursement date Receipt date
Check no. From To Per books Per bank Per books Per bank
101 National Federal Dec. 30 Jan.4 Dec.30 Jan. 3
202 Country State Jan.3 Jan.2 Dec.30 Dec.31
303 Federal American Dec. 31 Jan.3 Jan.2 Jan. 2
404 State Republic Jan. 2 Jan.2 Jan.2 Dec.31
14. Which of the above checks might indicate kiting?
a. #101 and #303
b. #202 and #404
c. #101 and #404
d. #202 and #303
B
15. A cash shortage may be concealed by transporting funds from one location to
another or
by converting negotiable assets to cash. Because of this, which of the following is
vital?
a. simultaneous confirmations
b. simultaneous bank reconciliations
c. simultaneous verifications
d. simultaneous surprise cash count.
D
16. When negotiable instrument securities are of considerable volume, planning by
the
auditor is necessary to guard against
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted.
c. Substitution of securities already counted for other securities which should be
on
hand but are not.
d. Substitution of authentic securities with counterfeit securities.
A
17. A client has large and active investment portfolio that kept in bank safe deposit
box. If
the auditor is unable to count the securities at the balance sheet date, the auditor
most
likely will
a. Request the bank to confirm to the auditor the contents of the safe deposit box
at the
balance sheet date.
b. Examine supporting evidence for transactions occurring during the year.
c. Count the securities at the subsequent date and confirm with the bank whether
securities were added or removed since the balance sheet date.
d. Request the client to have the bank seal the safe deposit until the auditor can
count the
securities at a subsequent date.
D
18. By preparing a four-column reconciliation ("proof of cash") for the last month
of the
year, an auditor will generally be able to detect:
a. An unrecorded check written at the beginning of the month which was cashed
during
the period covered by the reconciliation.
b. A cash sale which was not recorded on the books and was stolen by a
bookkeeper
c. An embezzlement of unrecorded cash receipts on receivables before they had
been
deposited into the bank.
d. A credit sale which has been recorded twice in the sales journal.
A
19. Jones embezzled P10, 000 from his company's account in Bank A. At year-end
he did the
shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has
not
recorded the transaction on the books. This an example of
a. Lapping
b. Effective cash management
c. Kiting
d. Related party transactions
C
20. Which of the following is most likely to be effective in detecting kiting?
a. Bank confirmation
b. Bank transfer schedule prepared using only the cash receipts and cash
disbursements
journals
c. Comparison of bank cut-off statement to the cash receipts and disbursements
records
d. Receivable confirmation
A
21. Which of the following manipulations of cash transactions would overstate the
cash
balance on the financial statements?
a. Understatement of outstanding checks
b. Overstatement of outstanding checks
c. Understatement of deposit in transit
d. Overstatement of deposit in transit
A
22. The standard form to confirm account balances with Financial Institutions
includes
information on all of the following except:
a. Date due of direct liability
b. The principal amount paid on direct liability
c. Description of collateral for direct liability
d. The interest date of the direct liability
B
23. Which of the following is one of the better auditing techniques that might be
used by an
auditor to detect kiting?
a. Review composition of authenticated deposit slips
b. Review subsequent bank statements and cancelled checks received directly
from the
banks
c. Prepare a schedule of bank transfers
d. Prepare year-end bank reconciliations
C
24. On receiving the bank cut-off statement, the auditor should trace:
a. Deposits in transit on the year-end bank reconciliation to deposits in the cash
receipts
journal
b. Checks dated prior to year end to the outstanding checks listed on the year-end
reconciliation
c. Deposits listed on the cut-off statement to deposits in the cash receipts journal
d. Checks dated subsequent to year end to the outstanding checks listed on the
year-end
bank reconciliation
B
25. Which of the following cash transfers result in a misstatement of cash at
December 31,
2011?
Disbursement Receipts
Recorded in
books
Paid by bank
Recorded in
books
Received by
bank
A. 12/31/11 01/04/12 12/31/11 12/31/11
B. 01/04/12 01/05/12 12/31/11 12/31/11
C. 12/31/11 01/05/12 12/31/11 01/04/12
D. 01/04/12 01/11/12 01/04/12 01/04/12
B
AUDIT OF INVENTORY
1) Receipt of ordered materials by the receiving department will generate the
completion of a form called the:
A) bill of lading.
B) receiving report.
C) materials requisition.
D) inventory acquisition summary.
b
2) ________ is normally characterized as a difficult and complex account to audit.
A) Property, plant and equipment
B) Cash
C) Inventory
D) Prepaid insurance
c
3) Inventory is a complex area to audit for all but which of the following reasons?
A) Inventory is often in different locations.
B) There are several acceptable valuation methods and some entities use different
methods for different types of inventory.
C) Inventory is often the largest account on the balance sheet.
D) Inventory valuation includes few estimates.
d
4) In most manufacturing companies, the inventory and warehousing cycle begins
with the:
A) receipt of a customer's order.
B) completion of production of a customer's order.
C) initiation of production of a customer's order.
D) acquisition of raw materials for production of an order.
d
5) ________ accumulate costs by individual jobs as material is issued into
production and labor costs are incurred.
A) Just-in-time production systems
B) Job order cost systems
C) Process cost systems
D) Manufacturing systems
b
8) The inventory and warehousing cycle can be thought of as having two separate
but closely related systems, one involving the actual physical flow of goods, and
the other the:
A) related costs.
B) storage of the goods.
C) internal control over those goods.
D) prevention of waste, obsolescence, and theft.
a
10) What are two factors affecting the complexity of the audit of inventory?
• Inventory is often the largest account on the balance sheet.
• Inventory is often in different locations.
• Diverse items in inventory are often difficult to value.
• Inventory valuation is difficult due to the estimates involved.
• There are several acceptable methods of valuing inventory and some entities use
different
1) The audit tests to verify that the client is using an inventory method which is
generally accepted and to verify that physical counts were correctly summarized
are performed during the audit of the:
A) acquisition and payments cycle.
B) payroll and personnel cycle.
C) inventory and warehousing cycle.
D) sales and collection cycle.
c
2) Handling the receipt of ordered goods is a part of the ________ cycle.
A) purchasing
B) acquisition and payment
C) inventory
D) inventory and warehousing
b
4) The audit of the inventory and warehousing cycle will be affected by the results
from other business processes. Identify the "other" business cycles and how they
impact the audit of inventory.
Acquisition and Payment: Acquire and record raw materials, labor, overhead
Sale and collection: Ship goods and record revenue and the appropriate costs
) The physical observation of the inventory and the acquisition of raw materials are
part of the inventory and warehousing cycle.
A) True
B) False
b
1) Auditor tests of the physical controls over raw materials, work in process, and
finished goods are generally limited to:
A) observation and confirmation.
B) observation and inquiry.
C) inquiry and reconciliation.
D) observation and reconciliation.
b
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2) Almost all companies need physical controls over their assets to prevent loss.
Which of the following is not an example of such a control?
A) Perpetual inventory master files
B) Segregated, limited-access storage areas
C) Custody of assets assigned to specific responsible individuals
D) Approved prenumbered documents for authorizing movement of inventory
a
3) The reliability of perpetual inventory master files affects the timing and
________ of the auditor's physical examination of inventory.
A) cutoff
B) accuracy
C) nature
D) extent
d
4) When auditing inventory cost accounting, the auditor is concerned with all of
the following except for:
A) net realizable value.
B) unit cost records.
C) physical controls over inventory.
D) documents and records for transferring inventory.
a
6) To assure proper segregation of duties, who should maintain the perpetual
inventory master files?
A) Production personnel
B) Inventory storeroom personnel
C) Inventory receiving personnel
D) Accounting department personnel
d
7) Which of the following statements is correct regarding the audit of inventory
cost accounting?
A) Cost accounting systems and controls are the same for all manufacturing
companies.
B) All companies that have work-in-process must use a perpetual inventory system.
C) Auditors test perpetual inventory master files by examining documentation that
supports additions and reductions of inventory amounts in the master files.
D) Manufacturing companies keep their cost accounting records separate from the
production and other accounting records.
c
10) When auditing manufacturing overhead costs assigned to inventory, auditors
should keep in mind that:
A) GAAP has strict procedures that must be followed when assigning overhead to
work-in-process inventory.
B) overhead costs must be allocated to raw materials, work-in-process, and
finished goods inventory.
C) management typically allocates overhead using total direct labor dollars as the
basis for the allocation.
D) determining the reasonableness of the allocation method is relatively simple for
work-in-process inventory.
c
11) A major difficulty in the verification of inventory cost records for the purpose
of inventory valuation is in determining the reasonableness of the:
A) direct labor hourly rate.
B) raw material per unit cost.
C) manufacturing overhead costs.
D) number of direct labor hours applied.
c
12) Auditor tests of physical controls over raw materials, work-in-process, and
finished goods are performed by:
A)
Examination Observation Inquiry
Yes No Yes
B)
Examination Observation Inquiry
No Yes No
C)
Examination Observation Inquiry
Yes Yes No
D)
Examination Observation Inquiry
No Yes Yes
d
13) If the perpetual inventory master files show lower quantities of inventory than
the physical count, an explanation of the difference might be unrecorded:
A) sales.
B) sales discounts.
C) purchases.
D) purchase discounts.
c
14) Cost accounting controls are those related to the physical inventory and the
consequent costs from the point at which:
A) materials are ordered for purchase until the finished product is sold.
B) the customer's order is received until the finished product is shipped.
C) raw materials are requisitioned until the finished product is sent to storage.
D) raw materials are requisitioned until the finished product is completely
manufactured.
c
15) In order to strengthen controls over cost accounting information, a company
should consider implementing:
A) perpetual inventory master files.
B) a job order cost accounting system.
C) an accounting system that keeps separate the records of the accounting
department from the records of the production department.
D) an economic quantity order system.
a
1) Which one of the following analytical procedures would be most useful in
alerting the auditor to the possibility of obsolete inventory?
A) Compare gross margin percentage with previous years'.
B) Compare unit costs of inventory with previous years'.
C) Compare inventory turnover ratio with previous years'.
D) Compare current year manufacturing costs with previous years'.
c
4) A comparison of the current year's inventory turnover ratio with previous years'
may indicate the presence of obsolete inventory.
A) True
B) False
a
1) You are auditing the inventory account and are concerned about the possibility
of an inventory overstatement. What is the best audit procedure to detect
damaged inventory?
A) Observe the condition of inventory during the client's physical count.
B) Compare the condition of inventory from the previous year's count to the
current year.
C) Compare inventory turnover from the previous year's inventory to the current
year's inventory.
D) Reconcile the inventory counts to the cost accounting records.
a
2) When determining the sample size for the number of items the auditor should
count during the physical inventory:
A) it is easy to quantify the number of items based on a formula developed by the
AICPA.
B) one of the key determinants that must be considered is internal control over the
physical count.
C) one of the key determinants that must be considered is the time involved.
D) generally accepted auditing standards require that at least 80% of the dollar
value of the inventory should be included in the sample.
b
3) There must be a periodic physical count by the client of the inventory items on
hand:
A) only if the client uses the LIFO method.
B) only if the client uses a lower-of-cost-or-market method.
C) regardless of the client's inventory valuation method.
D) only if the client uses either the LIFO or FIFO method.
c
5) From which of the following evidence-gathering audit procedures would an
auditor obtain most assurance concerning the existence of inventories?
A) Observation of physical inventory counts
B) Written inventory representations from management
C) Confirmation of inventories in a public warehouse
D) Auditor's recomputation of inventory extensions
a
6) When auditors observe the client counting inventory, they should be careful to
do all of the following except:
A) inquire about items that are likely to be obsolete or damaged.
B) calculate the unit cost of the inventory items.
C) discuss with management the reasons for excluding any material items.
D) observe the counting of the most significant items.
b
8) Comparing the physical counts with the perpetual inventory master files satisfies
the balance-related audit objective of:
A) classification.
B) observation.
C) completeness.
D) accuracy.
d
9) Which of the following statements is correct regarding the auditor's
responsibility with respect to the year-end inventory procedures of an audit client?
A)
The auditor is responsible for setting up the procedures for taking an accurate
physical inventory. The auditor is responsible for taking and compiling the
inventory.
The auditor is responsible for observing the physical counting of inventory.
Yes No No
B)
The auditor is responsible for setting up the procedures for taking an accurate
physical inventory. The auditor is responsible for taking and compiling the
inventory.
The auditor is responsible for observing the physical counting of inventory.
No No Yes
C)
The auditor is responsible for setting up the procedures for taking an accurate
physical inventory. The auditor is responsible for taking and compiling the
inventory.
The auditor is responsible for observing the physical counting of inventory.
Yes No Yes
D)
The auditor is responsible for setting up the procedures for taking an accurate
physical inventory. The auditor is responsible for taking and compiling the
inventory.
The auditor is responsible for observing the physical counting of inventory.
No Yes No
b
13) The most important part of the observation of inventory is to determine
whether:
A) all counts are accurate.
B) the inventory-takers are qualified.
C) obsolete inventory has been identified.
D) the physical count is being taken in accordance with the client's instructions.
d
14) A useful starting point for becoming familiar with the client's inventory is for
the auditor to:
A) read the AICPA's Industry Audit Guide.
B) review accounting theory covering special inventory problems.
C) read the client's accounting manual.
D) tour the client's facility.
d
17) A common inventory observation procedure is to be alert for items that are
damaged, rust- or dust-covered, or located in inappropriate places. The balancerelated audit objective being achieved by this procedure is:
A) classification.
B) cutoff.
C) realizable value.
D) rights.
c
18) The test of details of balance procedure which requires the auditor to account
for unused inventory tag numbers to make sure none have been deleted is
associated with the audit objective of:
A) accuracy.
B) existence.
C) detail tie-in.
D) completeness.
d
20) The auditor's tour of the client's inventory facilities should be led by:
A) a member of the audit committee.
B) the CFO.
C) a plant supervisor.
D) the company president.
c
24) 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 yearend was not recorded as a:
A) sale in the current period.
B) sale in the subsequent period.
C) purchase in the current period.
D) purchase return in the subsequent period.
a
28) An auditor must inquire about consigned or customer inventory included on
the client's premises to satisfy the balance-related audit objective of:
A) cutoff.
B) classification.
C) rights.
D) completeness.
c
30) Boxes or other containers holding inventory should also be opened during test
counts to determine the ________ of the inventory.
A) classification
B) detail tie-in
C) existence
D) realizable value
c
Auditing standards require that auditors satisfy themselves about the effectiveness
of the client's methods of counting inventory and the reliance they can place on
the client's representations about the quantities and physical condition of the
inventories. To meet this requirement auditors must perform four activities. List
below.
• Be present at the time the client counts the inventory
• Observe the client's counting procedures
• Make inquiries of client personnel about their counting procedures
• Make their own independent tests of the physical count
3) You are gathering evidence for the audit objective that existing inventory items
are included in the inventory listing schedule. The audit procedure that would
provide you with the best evidence to confirm this objective is:
A) trace from inventory tags to the inventory listing schedule and make sure the
inventory tag is included.
B) trace the inventory totals to the general ledger.
C) perform tests of lower-of-cost-or-market.
D) account for unused tags shown in the auditor's documentation to make sure no
tags have been added.
a
4) The test of details of balance procedure which requires the auditor to perform
tests of lower of cost or market, selling price, and obsolescence is an attempt to
satisfy the objective of:
A) existence.
B) completeness.
C) accuracy.
D) realizable value.
d
5) A major source of cutoff information for sales and purchases of inventory is:
A) confirmations from outside parties.
B) the test of details of balances.
C) physical observation.
D) the performance of analytical procedures.
c
11) In valuing inventory, the auditor must consider all but which of the following
factors?
A) The valuation method must be in accordance with GAAP.
B) The valuation method must be applied on a consistent basis.
C) The inventory must be valued at the lower of cost or market.
D) LIFO must be used for work-in-process inventory.
d
1) When labor is a significant part of inventory, verifying the proper accounting of
these costs should be tested in the:
A) inventory and warehousing cycle.
B) payroll and personnel cycle.
C) acquisitions and payments cycle.
D) cash cycle.
b
AUDIT OF RECEIVABLES
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Auditing 2 Exam 1
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Obtaining a receipt for every disbursement
Which of the following is NOT a control that generally is established over cash transactions?
A bank lockbox system
Which of the following controls would be most likely to reduce the risk of diversion of customer receipts
by a company's employees?
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Terms in this set (137)
Obtaining a receipt for every disbursement
Which of the following is NOT a control that generally is established over cash
transactions?
A bank lockbox system
Which of the following controls would be most likely to reduce the risk of diversion
of customer receipts by a company's employees?
To insure accurate posting, the accounts receivable clerk should post the
customers receipts from customers checks
Which of the following is NOT a control that generally is established over cash
receipts?
Receive a cut off statement directly from the clients bank
Which procedure is an auditor most likely to use to detect a check outstanding at
year end that was NOT recorded as outstanding on the year end bank
reconciliation?
Standard confirmation form- yes
Jan 1-10 cutoff statement- yes
An auditor may obtain Information on the December 31 month end balance per
bank in which of the following?
Kiting
Jones embezzled $10000 from his company's account in bank A. At year end he hid
the shortage by making a deposit on December 31 in bank B. He has NOT recorded
the transaction on the books. This is an example of:
Separate recordkeeping from accounting for cash to the extent possible
Which of the following is NOT a universal rule for achieving internal control over
cash?
Prepare a schedule of bank transfers
Which of the following is one of the better auditing techniques that might be used
by an auditor to detect kiting?
Detect kiting
What is the primary objective of the procedure: preparing a bank transfer schedule
Reconcile cash receipt and disbursement totals between company records and
bank records
What is the primary objective of the procedure: preparing a four column proof of
cash
Verify year end cash and liability balance information
What is the primary objective of the procedure: use a standard confirmation form
to confirm account balance information
Verify reconciling items on the year end bank reconciliation
What is the primary objective of the procedure: obtain bank cut off statements
Identify related party transactions
What is the primary objective of the procedure: search for large checks to
directors, officers, employees
A bank lockbox system
Which of the following controls would most likely reduce the risk of diversion of
customer receipts by a clients employees?
Stamped paid by the check signer
To provide assurance that each voucher is submitted and paid only once, the
auditors most likely would examine a sample of paid vouchers and determine
whether each voucher is:
Is responsible for mailing the checks
In testing controls over cash disbursement's the auditors most likely would
determine that the person who signs checks also:
General ledger
To gather evidence regarding the balance per bank in a bank reconciliation, the
auditors would examine any of the following EXCEPT:
Coordinate the count of cash with the count of marketable securities and other
negotiable assets
You have been assigned to the year end audit of a financial institution and are
planning the timing of audit procedures relating to cash. You decide that it would
be preferable to:
Observe the consistency of the employees use of cash registers and tapes
Which of the following procedures would the auditors most likely perform to test
controls relating to managements assertion about the completeness of cash
receipts for cash sales at a retail outlet?
Processes cash dispursements
Reconciliation of the bank account should not be performed by an individual who
also:
Details of bank deposit slips with details of credits to customer accounts
The auditors suspect that a clients cashier is misappropriating cash receipts for
personal use by lapping customer checks received in the mail. In attempting to
uncover this embezzlement scheme, the auditors most likely would compare:
Confirm directly with bank
Trace items on the bank reconciliation to cut off statement
Select two procedures: balance per bank
Trace items on the bank reconciliation to cut off statement
Trace items on the cut off statement to bank reconciliation
Trace to cash receipts journal
Ascertain reason for unusual delay
Inspector supporting documents for reconciling item not appearing on cut off
statement
Select five procedures: deposits in transit
Trace to cash disbursements journal
Ascertain reason for unusual delay
Inspector supporting documents for reconciling item not appearing on cut off
statement
Trace items on the bank reconciliation to cut off statement
Trace items on the cut off statement to bank reconciliation
Select five procedures: outstanding checks
Inspect bank credit memo
Select one procedure: customer note collected by bank
Trace items on the bank reconciliation to cut off statement
Inspected bank Credit memo
Select two procedures: error: check number 1282; written on 9/26/X5
Compared to 9/30/X5 general ledger
Select one procedure: balance per books
Not legitimate AR. Possibly fraud. Send that other company a confirm now
What would you do?: Yes we ordered $20,000 worth of merchandise from the
company in November. However, we mailed the company a check for $20,000 on
December 18. Note: check was received and deposited on 12-28, but posted to the
wrong customer's account
Look at shipping documents to make sure. Not a legitimate AR
What would you do?: No way forget it. Company said we'd have these goods in 10
days on December 2. When we didn't receive them I cancel the order on
December 12. The other company shipped a similar goods overnight. Will never
deal with the company again as long as I am around
Not Enough information to tell. Use alternative procedures. Send another request
with more detailed information
What would you do?: We use a voucher system by individual invoice. We cannot
verify the balance, but company is one of our regular suppliers. We probably owe
them something.
Legitimate AR. Just a timing issue.
What would you do?: Our record show that we sent them a check for the amount
due on December 29.
Cannot tell. Check the address and resend to correct address. Company might be
out of business
What would you do?: The confirmation was returned by the Postal Service as
"return to sender, address unknown"
Legitimate AR. Check to make sure we got the checks
What would you do?: We mailed that check for the full amount on January 3. The
merchandise was not received until December 23
Not legitimate AR because they have the right to return. So it's not a sale. Look at
terms of sale
What would you do?: Yes I guess we owe this amount, but the company made
clear to us that we could return any of the items we did not sell. But so far sales
are good and we've sold most of the items.
Not legitimate AR. Determine the terms of the sale.
What would you do?: We receive $24,000 worth of goods on consignment from
company on February 10. But they are not sold yet
Depends on shipping agreement. Is it FOB destination or FOB shipping point? Look
at shipping records
What would you do?: Yes we ordered $42,000 worth of merchandise on October
15 but the company was out of stock until recently. They seem to always be out of
stock. We finally received the goods on January 4.
Authorization of credit memos by personnel who receive cash may permit the
misappropriation of cash
Which of the following fraudulent activities most likely could be perpetrated due
to the lack of effective internal control over the revenue cycle?
Sales department
For effective internal control, the billing function should NOT be prepared by the:
A new CFO is redesigning Anthony companies accounting policies and procedures
The existence of which of the following is most likely to increase audit risk in an
audit client?
Valuation and accuracy
Primary audit objectives of obtaining age listing of receivables and reconciling two
letters. Obtaining analysis of notes receivable and related interest.
Existence, occurrence, and rights
Primary audit objectives of inspecting notes on hand and confirming those not on
hand
Existence, occurrence, and rights, valuation and accuracy
Primary audit objectives of confirming receivables with the debtors
Existence, occurrence, and rights, completeness, cut off
Primary audit objectives of reviewing the year end cut off of sales transactions
Existence occurrence and rights, completeness valuation and accuracy
Primary audit objectives of performing analytical procedures and reviewing
significant year end sales contracts
Existence, occurrence, and rights, completeness
Primary audit objectives of verifying interest earned on notes receivable
Valuation and accuracy
Primary audit objectives of evaluating the propriety of clients accounting for
transactions and evaluating accounting estimates related to revenues
Valuation
Primary audit objectives for determining adequacy of allowance for uncollectible
accounts
Presentation and disclosure
Primary audit objectives of ascertaining the evidence of pledged receivables and
investigating receivables from related parties
Valuation and accuracy presentation and disclosure
Primary audit objectives of evaluating the business purpose of significant and
unusual sales transactions
Presentation and disclosure
Primary audit objectives of evaluating financial statement presentation and
disclosure
Perform tests of subsequent cash receipts after the balance sheet date
What substantiative test would most likely provide support for the objective of
verifying existence of accounts receivables
Review and assess an aging schedule of accounts receivable
Wide substantive test would most likely provide support for the objective of
determining that accounts receivable are valued at their net realizable value
Read of the financial statements including notes for completeness
What substantial up test would most likely provide support for the objective of
determining the proper receivable disclosures are presented
Physically examine items sold
Which of the following is least likely to be typically considered to be an alternate
procedure for handling not applies to accounts receivable confirmation request
Examine cash receipts received after year end
Which of the following is a likely procedure to test the adequacy of the allowance
for doubtful accounts
The write off of receivables by personnel who receive cash permits the
misappropriation of cash
Which of the following fraudulent activities most likely could be perpetrated due
to the lack of affective internal controls in the revenue cycle?
Billed sales were shipped
Tracing copies of sales invoices to shipping documents will provide evidence that
all
Over recorded sales due to a lack of control over the sales entry function
Which of the following is least likely to be considered an inherent risk relating to
receivables and revenues?
Assess the allowance for uncollectible accounts for reasonableness
Which of the following would provide the most assurance concerning the valuation
of accounts receivable?
Recording sales when the customer is likely to return the goods
Which of the following is most likely to be an example of fraudulent financial
reporting relating to sales?
Theft of cash register sales
Which of the following is an example of misappropriation of assets relating to
sales?
Accounts receivable are in material or the use of confirmations would be
ineffective
The auditor should confirm accounts receivable unless the auditors assessment of
the risk of material miss statement is low and
Delivery has occurred or is scheduled to occur in the near future
Which of the following is not among the criteria that ordinarily exist for revenue
should be recognized?
Shipping documents file
To determine that all sales have been recorded, the auditors would select a sample
of transactions from the:
Inflated sales for the year
Which of the following would most likely be detected by an auditor's review of the
clients sales cut off?
Accounts receivable subsidiary ledger
To test the existence assertion for recorded receivables, the auditors would select
a sample from:
Completeness
Which assertion relating to sales is most directly addressed when the auditors
compare a sample of shipping documents to related sales invoices?
Send a positive confirmation requests
Cooper, CPA, is auditing the financial statements of a small rural municipality. The
receivable balances represent residence delinquent real estate taxes. Internal
control at the municipality is weak. To determine the existence of the accounts
receivable balances at the balance sheet date, Cooper would most likely:
Write offs must be approved by a responsible official after review of credit
department recommendations and supporting evidence
Identify the control that is most likely to prevent the concealment of a cash
shortage resulting from the improper write off of a trade accounts receivable
Confirmation
What kind of audit procedure? Requested responses directly from customers as to
amounts due
substantive procedures
What kind of audit procedure is a confirmation?
Analytical procedure
What audit procedure? Compared total bad debts this year with the totals for the
previous two years
Substantiative procedures
What classification of audit procedure is an analytical procedure
Inquiry
What audit procedure? Question management about likely total uncollectible
accounts
Substantive procedures
What classification of audit procedure is an inquiry?
Observation
What other procedure? Watched the accounting clerk record the daily deposit of
cash receipts
Test of controls
What classification of audit procedure is observation
Inspection of records or documents
What audit procedure? Examined invoice to obtain evidence in support of the
ending recorded balance of a customer
Substantive procedures
What classification of audit procedure is inspection of records or documents?
Re-performance
What audit procedure? Compared a sample of sales invoices to credit files to
determine whether the customers were on the approved customer list
Test of controls
What classification of audit procedure is reperformance?
Inspection of records or documents
What audit procedure? Examine a sample of sales invoices to see if they were
initialize by the credit manager indicating credit approval
Examine shipping documents and or subsequent cash receipts
What should you do if customer replies "we mailed the check for this on December
31"
Exception; propose an adjustment
What should you do if a customer replies "we were turned those goods on
December 2 and "you have been able to determine that the goods were received
by the client on December 29 but not recorded until January 2
Verify whether the additional invoices noted on the confirmation reply pertain to
the year under audit or the subsequent year
What should you do if a customer replies "We also owe for two more invoices for
purchases we made around your end. I'm not sure of the exact date"
Send a second confirmation request to the customer or examine shipping
documents and or subsequent cash receipts
What should you do if customer replies "we are very satisfied with Gelco and plan
to purchase from them in the future"
Examine shipping documents and or subsequent cash receipts
What should you do if a customer replies "well that's what we owe, we didn't know
what I December 31 since we didn't receive the goods until January 2 of year to"
Not an exception. No further audit work is necessary
What should you do if customer Does not reply to a negative confirmation request
Examine shipping documents and or subsequent cash receipts
What should you do if you received no reply to a positive confirmation request to
Blake company. Subsequently recalled that Blake company has a policy of not
responding to confirmations in writing or orally
True
True false: the confirmation request should be mailed to respondents by the CPAs
False
True or false: a combination of positive and negative request forms must be used if
receivables are significant
True
True or false: second requests are ordinarily sent for positive form confirmation
requests when the first request is not returned
True
True or false: confirmations address existence more than they address
completeness
True
True or false: confirmation of accounts receivable is a generally accepted auditing
standards
True
True or false: the auditors ordinarily should confirm accounts receivable
True
True or false: auditors may ignore individually immaterial accounts when
confirming accounts receivable
False
True or false: auditor should always confirm the total balances of accounts rather
than individual portions
Trace a sample of sales invoices from late in December to the sales journal and to
postings in Accounts Receivable and sales accounts
What audit procedure would be used when all receivables that should be recorded
are recorded as of year-end
Review the aged trial balance for significant past due accounts
What audit procedure would be used when recorded receivables are at
appropriate net realizable value
Vouch year end account receivable balances to supporting documents
What audit procedure would be used when recorded receivables exist
Vouch year end Accounts receivable balances to supporting documents
What audit procedure would be used when the client has rights to recorded year
end receivables
Review drafts of financial statements. Disclosure.
What audit procedure would be used When the presentation and disclosure of
receivables are adequate
General cash, branch bank accounts, payroll, and petty cash
Cash normally include:
Purchase order (client approval)
Invoice (vendor)
Receiver (receiving department)
Accounts payable requires a three way Match of what
A written narrative, a flow chart, or internal control questionnaire
What might an auditor use when obtaining an understanding of internal control
over cash
To compare cash in the general ledger to the bank statement
What is the goal of a bank reconciliation?
Are on the books in the first month but not on the bank. The next month, they are
not on the books but on the bank
Deposits in transit...
Are charged on the book but not on the bank. The next month they are charged on
the bank but not on the book
Outstanding checks...
Are deposited on the bank but not on the book
Bank credits...
Are an error on the bank but not on the book
Bank or deposit or errors...
Are charged on the bank but not on the box
Bank charges...
Debit to cash, credit interest revenue
Interest collected by bank journal entry
Debit to bank service expense, credit to cash
Bank service charge journal entry
Debit two accounts receivable, credit to cash
NSF check returned journal entry
On a bank but not on books
NSF check returned...
Debit to cash, credit two accounts payable
Error in recording check where check was written for an amount that is less than
the accounts payable journal entry
Concealing a shortage by having one check in 2 banks
What is kiting?
To disclose overstatement of cash balances resulting from kiting
What is the purpose of analyzing bank transfers?
It's OK
In schedule a bank transfers, one yes and one no means
Overstatement
In a schedule of bank transfers, two yeses means
Understatement
In a schedule a bank transfers, 2 no's mean
Overstatement
When something happens before the end of the year and everything else is
recorded afterwords, it results in one yes and one no which means
Overall account balance is immaterial
External confirmation procedures would be ineffective
Auditors assessed level of risk material miss statement at relevant assertion level is
low and other planned substantive procedures address the assessed risk
Auditor is required to use external confirmation procedures for account receivable
unless:
1. Audit evidence is more reliable when obtained from independent sources
2. Audit evidence obtained directly by auditor is more reliable than evidence
obtained indirectly
3. Audit evidence is more reliable when it exists in documentary form
What are the three generalizations applicable to audit evidence as it relates to
external confirmations?
Exception
A response that indicates a difference between information requested to be
confirmed, or contained in entities records, and information provided by the
confirming party
External confirmation
Audit evidence obtained as a direct written response to the auditor from a thirdparty either in paper form or electronic medium
Negative confirmation request
Request for confirming party respond directly to Autre only if confirming party
disagrees with the information provided in the request
Non-response
A failure of the confirming party to respond or fully respond to a positive
confirmation request or confirmation request returned undelivered
Positive confirmation request
A request that the confirming party respond directly to the auditor by providing
the requested information or indicating whether they agree or disagree with the
information in the request
1. Inquire about managements reasons for refusal and seek audit evidence about
the validity and reasonableness
2. Evaluate implications of management's refusal on auditors assessment of
relevant risks, fraud, and On nature timing and extent of other procedures
3. Perform alternative audit procedures designed to obtain relevant and reliable
audit evidence
Watch the Audrey do if management refuses to allow the auditor to perform
external confirmation procedures?
Perform alternative audit procedures to obtain relevant and reliable audit
evidence
What should Autre do in the case of a non-response?
1. The auditor has assessed risks as low and obtain sufficient audit evidence of
controls
2. Population of items subject to negative confirmation procedures is a large
number of small account balances, transactions, or conditions
3. A very low exception rate is expected
4. Auditor is not aware of circumstances that would cause recipients to disregard
request
The Autre should use positive confirmation request unless...
Confirming party may reply to the confirmation request without verifying that the
information is correct
What risks exist with a properly designed positive confirmation request?
Whether it was received by the auditor in directly or if it appeared not to come
from the originally intended confirming party
What are factors that may indicate doubts about the reliability of a response?
1. Information is furnished as a matter of courtesy without a duty to do so and
without responsibility, liability or warranties expressed or implied
2. Reply is giving a Soli for purpose of audit without responsibility of respondents,
employees or agents and does not relieve auditor from any other inquiry or
performance of other duty
What are examples of boilerplate disclaimers of liability?
1. Information is obtained from electronic data sources which may not contain all
information in the respondents possession
2. Information is not guaranteed to be accurate nor current and maybe a matter of
opinion
3. The recipient may not rely upon the information in the confirmation
What are examples of restrictive language on confirmations?
Because it is not a direct written response to the auditor
Why doesn't an oral response meet the definition of an external confirmation?
4.20
Auditing standards do not require auditors of financial statements to
a. Understand the nature of errors and frauds.
b. Assess the risk of occurrence of errors and frauds.
c. Design audits to provide reasonable assurance of detecting errors and frauds.
d. Report all errors and frauds found to police authorities.
D
Auditors are not required to report all finding of errors and frauds to police
authorities.
4.21
If sales were overstated by recording a false credit sale at the end of the year,
where could you find the false "dangling debit"?
a. Inventory
b. Cost of goods sold.
c. Bad debt expense.
d. Accounts receivable
D
In (fictitious) credit sales and (fictitious) receivables.
4.22
One of the typical characteristics of management fraud is
a. Falsification of documents in order to misappropriate funds from an employer.
b. Victimization of investors through the use of materially misleading financial
statements.
c. Illegal acts committed by management to evade laws and regulations.
d. Conversion of stolen inventory to cash deposited in a falsified bank account.
B
Management fraud is victimization of investors through the use of materially
misleading financial statements.
4.23
Which of the following circumstances would most likely cause an audit team to
perform extended procedures?
a. Supporting documents are produced when requested.
b. The client made several large adjustments at or near year-end.
c. The company has recently hired a new chief financial officer after the previous
one retired.
d. The company maintains several different petty cash funds.
B
If the client made several large adjustments at year-end (a red flag), extended
procedures would be considered necessary to ensure that fraud was not taking
place.
4.24
The likelihood that material misstatements may have entered the accounting
system and not been detected and corrected by the client's internal control is
referred to as
a. Inherent risk.
b. Control risk.
c. Detection risk.
d. Risk of material misstatement.
D
This is the definition of the risk of material misstatement.
4.25
The risk of material misstatement is composed of which audit risk components?
a. Inherent risk and control risk.
b. Control risk and detection risk.
c. Inherent risk and detection risk.
d. Inherent risk, control risk, and detection risk.
A
The risk of material misstatement is composed of inherent risk and control risk.
4.26
The risk that the auditors' own testing procedures will lead to the decision that
material misstatements do not exist in the financial statements when in fact such
misstatements do exist is
a. Audit risk.
b. Inherent risk.
c. Control risk.
d. Detection risk.
D
This is the definition of detection risk.
4.27
The auditors assessed risk of material misstatement at 0.50 and said they wanted
to achieve a 0.05 risk of failing to express a correct opinion on financial statements
that were materially misstated. What detection risk do the auditors plan to use for
planning the remainder of the audit work?
a. 0.20
b. 0.10
c. 0.75
d. 0.00
B
DR = AR/ (IR x CR) = 0.05/0.50 = 0.10.
4.28
If tests of controls induce the audit team to change the assessed level of control
risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain
constant, the acceptable level of detection risk is most likely to
a. Change from 0.1 to 0.04
b. Change from 0.2 to 0.3
c. Change from 0.25 to 0.1
d. Be unchanged.
C
This solution is both mathematically and practically correct.
4.29
Which of the following is a specific audit procedure that would be completed in
response to a particular fraud risk in an account balance or class of transactions?
a. Exercising more professional skepticism.
b. Carefully avoiding conducting interviews with people in areas that are most
susceptible to fraud.
c. Performing procedures such as inventory observation and cash counts on a
surprise or unannounced basis.
d. studying management's selection and application of accounting principles more
carefully.
C
This is a specific procedural response mentioned in audit standards.
4.30
Analytical procedures are generally used to produce evidence from
a. Confirmations mailed directly to the auditors by client customers.
b. Physical observations of inventories.
c. Relationships among current financial balances and prior balances, forecasts,
and nonfinancial data.
d. Detailed examination of external, external-internal, and internal documents.
C
Analytical procedures incorporate information from a variety of sources.
4.31
Which of the following relationships between types of analytical procedures and
sources of information are most logical?
B. Comparison of current account balances with expected balances (Type of
analytical procedure), Company's budgets and forecasts (Source of information).
B
A client's budgets and forecasts are sources of information for "comparison of
current account balances with expected balances."
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4.32
Analytical procedures can be used in which of the following ways?
a. As a means of overall review near the end of the audit.
b. As "attention-directing" methods when planning an audit at the beginning.
c. As substantive audit procedures to obtain evidence during an audit.
d. All of the above.
D
The answer is all of the above. Analytical procedures can be used when planning
the audit, when performing substantive procedures during an audit, and as a
method of overall review at the end of an audit.
4.33
Analytical procedures used when planning an audit should concentrate on
a. Weaknesses in the company's internal control activities.
b. Predictability of account balances based on individual significant transactions.
c. Management assertions in financial statements.
d. Accounts and relationships that can represent specific potential problems and
risks in the financial statements.
D
With preliminary analytical procedures, the auditors are looking for signs of
accounts and relationships that may represent specific potential problems and
risks in the financial statements.
4.34
When a company that sells its products with a positive gross profit increases its
sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold
ratio will
a. Increase.
b. Decrease.
c. Remain unchanged.
d. Not be able to be determined with the information provided.
B
The numerator (cost of goods sold) increases relatively less than the denominator
(sales) increases.
4.35
Auditors are not responsible for accounting estimates with respect to
a. Making the estimates.
b. Determining the reasonableness of estimates.
c. determining that estimates are presented in conformity with GAAP.
d. Determining that estimates are adequately disclosed in the financial statements.
A
Management is responsible for making the estimates in the first place, just as
management is primarily responsible for all the financial statement elements.
4.36
An audit strategy memorandum contains
a. Specifications of auditing standards relevant to the financial statements being
audited.
b. Specifications of procedures the auditors believe appropriate for the financial
statements under audit.
c. Documentation of the assertions under audit, the evidence obtained, and the
conclusions reached.
d. Reconciliation of the account balances in the financial statements with the
account balances in the client's general ledger.
B
An audit strategy contains specifications of procedures the auditors believe
appropriate for the financial statements under audit.
4.37
It is acceptable under GAAS for an audit team to
a. Assess risk of material misstatement at high and achieve an acceptable low audit
risk by performing extensive substantive tests.
b. Assess control risk at zero and perform a minimum of detection work.
c. Assess inherent risk at zero and perform a minimum of detection risk.
d. Decide that audit risk can be 40 percent.
A
The objective is to perform a quality audit and keep audit risk low.
4.38
Under the Private Securities Litigation Reform Act (the Act), independent auditors
are required to first
a. Report in writing all instances of noncompliance with the Act to the client's
board of directors.
b. Report to the SEC all instances of noncompliance with the Act they believe have
a material effect on financial statements if the board of directors does not first
report to the SEC.
c. Report clearly inconsequential noncompliance with the Act to the audit
committee of the client's board of directors.
d. Resign from the audit engagements and report the instances of noncompliance
with the Act to the SEC.
B
Once informed, the board of directors has the first responsibility to report to the
SEC. If the board does not report these items to the SEC, the law then requires the
auditors to do so.
4.39
When evaluating whether accounting estimates made by management are
reasonable, auditors would be most interested in which of the following?
a. Key factors that are consistent with prior periods.
b. Assumptions that are similar to industry guidelines.
c. Measurements that are objective and not susceptible to bias.
d. Evidence of a conservative systematic bias.
D
Evidence of a systematic bias, whether aggressive or conservative, would be of
most concern to the audit team.
4.40
An audit committee is
a. Composed of internal auditors.
b. Composed of members of the audit team.
c. Composed of members of a company's board of directors who are not involved
in the day-to-day operations of the company.
d. A committee composed of persons not associating in any way with the client or
the board of directors.
C
An audit committee is composed of members of a company's board of directors
who are not involved in the day-to-day operations of the company.
4.41
When auditors become aware of noncompliance with a law or regulation
committed by client personnel, the primary reason that the auditors should obtain
a better understanding of the nature of the act is to
a. Recommend remedial actions to the audit committee.
b. Evaluate the effect of the noncompliance on the financial statements.
c. Determine whether to contact law enforcement officials.
d. Determine whether other similar acts could have occurred.
B
The audit team's first concern is the effect of the noncompliance on the financial
statements.
4.42
Which of the following statements best describes auditors' responsibility for
detecting a client's noncompliance with a law or regulation?
a. The responsibility for detecting noncompliance exactly parallels the
responsibility for errors and fraud.
b. Auditors must design tests to detect all material noncompliance that indirectly
affects the financial statements.
c. Auditors must design tests to obtain reasonable assurance that all
noncompliance with direct material financial statements is detected.
d. Auditors must design tests to detect all noncompliance that directly affects the
financial statements.
C
Auditors must design tests to obtain reasonable assurance that all noncompliance
with direct material financial statement effects is detected.
4.43
Auditors perform analytical procedures in the planning stage of an audit for the
purpose of
a. Deciding the matters to cover in an engagement letter.
b. Identifying unusual conditions that deserve more auditing effort.
c. Determining which of the financial statement assertions are the most important
for the client's financial statements.
d. Determining the nature, timing, and extent of further audit procedures for
auditing the inventory.
B
This is the "attention directing" purpose.
4.44
A primary objective of analytical procedures used in the final review stage of an
audit is to
a. Idenitfy account balances that represent specific risks relevant to the audit.
b. Gather evidence from tests of details to corroborate financial statement
assertions.
c. Detect fraud that may cause the financial statements to be misstated.
d. Assist the auditor in evaluating the overall financial statement presentation.
D
This is the correct answer. At the final review stage, analytical review procedures
are designed to provide an overall test of reasonableness about the financial
statements being reviewed, in light of all available evidence.
4.45
An auditor's analytical procedures indicated a lower than expected return on an
equity method investment. This situation most likely could have been caused by
a. An error in recording amortization of the excess of the investor's cost over the
investment's underlying book value.
b. The investee's decision to reduce cash dividends declared per share of its
common stock.
c. An error in recording the unrealized gain from an increase in the fair value of
available-for-sale securities in the income account for trading securities.
d. A substantial fluctuation in the price of the investee's common stock on a
national stock exchange.
A
This is the correct answer. An error in recording amortization of the excess of the
investor's cost over the investment's underlying book value could have been the
cause of a lower than expected return on an equity method investment.
4.46
Which of the following risk types increase when an auditor performs substantive
analytical audit procedures for financial statement accounts at an interim date?
a. Inherent.
b. Control.
c. Detection.
d. Sampling.
C
The decision to perform substantive analytical procedures (as compared to a test
of details) at interim (as compared to the balance sheet date) would increase
detection risk.
4.47
Which of the following matters relating to an entity's operations would an auditor
most likely consider as an inherent risk factor in planning an audit?
a. The entity's fiscal year ends on June 30.
b. The entity enters into significant derivative transactions as hedges.
c. The entity's financial statements are generated at an outside service center.
d. The entity's financial data is available only in computer-readable form.
B
By their very nature, derivative transactions are designed to be used as hedges for
exposure on existing contracts are quite complex. The accounting rules that
provide the basis for GAAP in this area are also complex. As a result of this
complexity, the inherent risk of material misstatement is higher.
4.48
What is the primary objective of the fraud brainstorming session?
a. Determine audit risk and materiality.
b. Identify whether analytical procedures should be applied to the revenue
account.
c. Assess the potential for material misstatement due to fraud.
d. Determine whether the planned procedures in the audit plan will satisfy the
general audit objectives.
C
The fraud brainstorming session is primarily focused on fraud risk assessment,
which is the potential for material misstatement due to fraud in the financial
statements. This is the primary objective of the session, according to professional
standards (i.e., SAS No. 99).
Chapter 10: Auditing Cash and Marketable Securities
Key
1. An imprest payroll account should never reach a zero balance.
FALSE
2. When the year-end cash balance is immaterial, audit procedures on the cash account
are unnecessary. FALSE
3. Cash flow is often managed by organizations through the use of lockboxes and
outsourced cash management arrangements with banks. TRUE
4. The risk of the company issuing checks near year-end and mailing them subsequently
is not important to the auditor because the action does not affect cash
balances. FALSE
5. The audit of the cash account is inherently risky due to volume of activity, liquidity
and the account's susceptibility to fraud. TRUE
6. Working capital may be tied to certain debt covenants causing cash to be considered
significant for audit purposes. TRUE
7. The existence or occurrence assertion as related to cash is concerned with proper
classification on the balance sheet. FALSE
8. A lockbox is a mailbox type of depository device that is located in front of the client's
premises, allowing customers to remit payment in a timely manner. FALSE
9. An analysis of the client's internal control over cash and marketable securities should
take place during the performance of the substantive tests on these accounts. FALSE
10. The deposit of cash directly at the bank to speed collections often involves the use of
a lockbox. TRUE
11. When a lockbox is used, the financial institution records the deposit and then
forwards customer transaction data to the client to update cash and accounts receivable
records. TRUE
12. The auditor is responsible for auditing the necessary disclosures when material lines
of credit and compensating balance arrangements have been made by the client with a
lender. TRUE
13. Electronic Funds Transfers have controls built into the process and do not require
further reconciliation by the client. FALSE
14. The auditor’s performance of an independent reconciliation of the client’s bank
accounts provides evidence as to the rights and obligations of the year-end cash
balances. FALSE
15. Customer checks received at the client company should be restrictively endorsed
within one week of receipt in the mail. FALSE
16. A turnaround document is an effective control because it lists useful information for
further processing of the collection on account. TRUE
17. In assessing risk relating to fraud, auditors brainstorm about potential fraud
risks. TRUE
18. Auditors usually perform relatively limited substantive analytics for cash accounts
and instead focus on substantive tests of details. TRUE
19. The cash balance that a financial institution requires its customer to maintain in a
non-interest-bearing account to offset a line of credit is a compensating
balance. TRUE
20. A perception of being underpaid is not a typical incentive for a fraudster
FALSE
21. Internal audits are seldom an effective deterrent to the theft of cash.
FALSE
22. An independent bank reconciliation provides evidence of the correctness of the yearend cash balance. TRUE
23. The primary purpose of the cutoff bank statement is to verify the reconciling items on
the bank reconciliation. TRUE
24. Kiting is an example of a technique used to intentionally and materially overstate
cash. TRUE
25. The standard bank confirmation is used by the auditor to test for lapping.
FALSE
26. The standard bank confirmation should be sent to all banks used by the client during
the year except those with a zero balance. FALSE
27. The auditor may discover evidence of lapping by preparing an interbank transfer
schedule. FALSE
28. The standard bank confirmation includes the confirmation of cash accounts but not
liabilities with financial institutions. FALSE
29. Kiting fraudulently places the company's marketable securities in the name of the
officers. FALSE
30. Kiting involves the overstatement of a bank account by transferring funds at the end
of the year to another bank account and failing to record the disbursement. TRUE
31. The cutoff statement is mailed to the client for an agreed upon-date and then copied
for the audit files. FALSE
32. The valuation/allocation and completeness assertions are usually the most relevant for
auditing cash. TRUE
33. The recording of a marketable security depends, in large part, on management’s
intention with the investment. TRUE
34. Notes issued by major corporations are known as commercial paper.
TRUE
35. The auditor obtains the current market value of marketable securities by confirmation
with the holder of the security. FALSE
36. Commercial paper is the term applied to notes issued by those major corporations
with poor credit ratings. FALSE
37. Auditors test the assertion of completeness by determining if any restrictions on the
use of commercial paper by an entity are disclosed in the footnotes. FALSE
38. The valuation assertion is most relevant to the audit of marketable
securities. TRUE
39. Testing debt securities and commercial paper would typically include an analysis of
interest income. TRUE
40. Gains and losses are not considered in audit testing, as they do not need to be
disclosed. FALSE
41. The ending price of securities can be verified through reliable publications and
websites such as the Wall Street Journal. TRUE
42. Derivative instruments are long-term hybrid-type securities meant to increase the
return on investments. FALSE
43. Inadequate records of cash by the company can provide opportunity for
fraud. TRUE
44. Effective internal control over the cash account requires that the person responsible
for making the bank deposit does not post the increase to cash in the accounting
system. TRUE
45. Which one of the following risks is not a risk associated with cash? A. The large
volume of transactions. B. Importance of meeting debt covenants. C. Documents are
prenumbered. D. Easy to manipulate.
46. Which of the following is a cash management arrangement with a bank whereby the
organization's customers send payments directly to the client's bank, which deposits the
remittance to the client's account? A. Lockbox. B. Bank transfer. C. Imprest bank
account. D. Imprest Account.
47. The cash account is significant to the auditor for which of the following
reasons? A. The cash account is the culmination of a large volume of
transactions. B. The cash account is not as susceptible to fraud as most other
accounts. C. Cash is the only account that provides opportunity for
fraud. D. Automated systems do not possess the capability to maintain strong internal
controls over cash.
48. Which of the following situations would normally be discovered as part of the test of
the bank reconciliation? A. Failure to bill a customer. B. Failure to include a deposit
in transit on the bank reconciliation. C. Duplicate payment of a vendor’s
invoice. D. Payment to an employee for more hours than she worked.
49. Management has developed cash management techniques for which of the following
reasons? A. Increase the time to collect billings. B. Reduce the amount of volume of
cash transactions. C. Automate the cash management process. D. Increase the
liquidity of cash balances.
50. Lockbox arrangements for the collection of cash have which of the following
advantages? A. The manual processing associated with maintaining control of the
receipts is now shifted to a computer. B. Cash is deposited directly into the
bank. C. The bank usually establishes only one lockbox geographically next to the
client to minimize delay in collections. D. Eliminates the customer decision for the due
date of payment.
51. A company must do which of the following, if a company maintains a compensating
balance of cash? A. Disclose the compensating account arrangement in financial
statements. B. Close out the balance prior to year-end. C. Tie balances to debt
covenants. D. Provide a lockbox for appropriate line-of-credit draws.
52. A compensating balance arrangement usually results in which of the following for a
company? A. Increase its interest income. B. Increase the effective interest rate on
corporate borrowing. C. Decrease the effective interest rate on corporate
borrowing. D. Exhibit no change in the effective interest rate on corporate borrowing.
53. Which one of the following is not a fundamental internal control the auditor would
expect to find in place for a cash processing system? A. Segregation of
duties B. Electronic payments C. Authorization of transactions D. Periodic internal
audits
54. During the testing of a year end bank reconciliation, an auditor noticed that the
majority of checks listed as outstanding at year-end had not cleared the bank. Which of
the following is a likely explanation? A. A high probability of kiting. B. A high
probability of lapping. C. The year-end cash disbursements records had been closed
prior to year-end. D. The year-end cash disbursements records had been held open past
year-end.
55. As cash processing systems become more automated and integrated, which of the
following is true about the general concept of segregation of duties? A. Segregation of
duties becomes less important. B. Segregation of duties becomes more
important. C. The importance of segregation of duties does not
change. D. Segregation of duties becomes completely computerized without human
involvement.
56. Which of the following controls would be most successful in mitigating the theft of
customer checks received in the mail? A. Custody of receipts by the accounts
receivable manager. B. Restricted endorsements placed on the check as soon as it
arrives. C. Weekly deposits to a secure bank. D. Reconciliation of bank accounts each
month.
57. Which of the following controls over cash would an auditor expect to
observe? A. Reconciliation of the general ledger to the subsidiary ledger. B. Checks
permanently marked "for deposit only" with the proper routing information. C. Internal
audits of marketable securities held in the company's lockbox. D. Authorization
privileges given only to those employees using the accounting system.
58. What form of evidence is used by the auditor to verify bank reconciliation
items? A. Cash counting observation. B. General ledger. C. Bank
reconciliation. D. Cutoff statement.
59. Electronic authorization privileges for cash transactions may be best assigned to
individuals based on which of the following? A. Roles and activities falling within
appropriate segregation of duties. B. Identification cards with picture
identification. C. Encrypted passwords memorized by employees. D. The principle of
"absolute knowledge".
60. Which of the following describes documents that accompany customer payments to
help the clerk identify the payments? A. Receipts such as register
tapes. B. Accommodation certificates such as authenticated customer
tokens. C. Turnaround documents such as remittance advices. D. Checks stamped
with restrictive endorsements such as customer signatures.
61. Which of the following best describes kiting? A. Theft of cash for personal use and
cover-up using the bank statement. B. A fraudulent cash scheme to overstate cash assets
at year end by recording deposits in transit. C. Manipulation of financial reporting by
increasing both cash and debt by the same amount. D. Colluding to steal cash by wiring
money to a fictional vendor and concealing it with customer payments.
62. Which of the following represents a typical substantive audit procedure for cash
balances? A. Verify material deposits-in-transit to subsequent statements. B. Review
cash confirms received by the client from the bank. C. Foot cutoff bank statements
provided by the financial institutions. D. Perform kiting techniques to transfer cash
between two client accounts.
63. How will the auditor most likely utilize the bank reconciliation as evidence in the
audit of cash? A. The auditor sends the reconciliation to the bank for independent
verification. B. The auditor performs the reconciliation for the client to record the
proper cash balance. C. The auditor traces the book balance of the reconciliation to the
cutoff bank statement. D. The auditor tests deposits-in-transit and outstanding items to
other corroborating evidence.
64. Which of the following is the primary reason the auditor obtains and reviews a cutoff
bank statement? A. Verify the balance of cash per the bank's general ledger at the
balance sheet date. B. Verify the reconciling items on the year-end bank
reconciliation. C. Test for intentional lapping of bank transfers. D. Foot the cutoff
bank statement for completeness.
65. The auditor will send a standard bank confirmation to which of the
following? A. Financial institutions of customers using the lockbox. B. Financial
institutions for which the client has a balance greater than $0 at the end of the
year. C. Financial institutions with which the client has transacted during the
year. D. Financial institutions used by significant shareholders.
66. The ease with which cash can be stolen is most related to which of the following
risks? A. Control risk. B. Inherent risk. C. Detection risk. D. Liquidity risk.
67. Which of the following best describes a fraudulent cash scheme to overstate cash
assets at year end by recording deposits in transit in both the account from which the cash
is withdrawn and the account to which it is transferred? A. Lapping of
cash. B. Kiting of cash. C. Embezzlement of cash. D. Restrictive endorsements of
cash.
68. The emphasis in verifying petty cash is normally on which of the
following? A. Year-end balance. B. Controls over petty cash. C. Transactions for
the period. D. Balance sheet classification.
69. When auditing marketable securities, the auditor will do which of the
following? A. Examine broker's advices evidencing purchase of
securities. B. Recompute income. C. Foot schedule. D. Both A and B.
the above.
E. All of
70. The reported fair market value of securities held by the client can be verified by the
auditor through which of the following procedures? A. Comparing the values to those
securities held by the auditing firm. B. Confirming the fair values with the client as of
the close of the year. C. comparing the fair values with the fair values of similar
securities. D. comparing the fair values to credible publications and websites.
71. Which of the following items would not normally appear on bank
reconciliations? A. Balance per bank. B. Outstanding deposits list.
books. D. Outstanding checks list.
C. Balance per
72. Investments in securities are classified as which of the following? A. Held-tomaturity. B. Trading securities. C. Available-for-sale securities. D. All of the above.
73. Which of the following is the most relevant assertion with regards to the audit of
cash? A. Completeness. B. Rights and obligations. C. Valuation and
allocation. D. Presentation and disclosure.
74. Which of the following would not be used as part of analytical procedure for
marketable securities? A. Develop expectations about the level of amounts in ending
balances. B. Develop expectations about the relationship between the
balances. C. Verify ending balances prior to calculating the percent
change. D. Review changes in the balances, risk composition, and classification types.
75. Which of the following would the auditor use to determine the existence of
investments? A. Footing the schedule of recorded investments. B. Confirming or
examining recorded investments. C. Examining the recorded investments for name and
title. D. Recomputing interest and/or gains and losses.
76. Which assertion related to investments is tested when the auditor examines the
documents for any
restrictions?
A. Existence.
B. Rights.
C. Completeness.
D. Valuation.
77. Which of the following is required by accounting standards for the presentation and
disclosure of investments in marketable securities? A. By classification as trading,
available-for-sale or held-to maturity. B. For an analyst's determination of
liquidity. C. For the company's physical possession of the security versus agent
holdings. D. For the expected success of the organization of investment.
78. Which of the following procedures does the auditor typically perform when testing
the existence of cash? A. Counting cash at the depository institution. B. Inquiry of
management. C. Sending a standard bank confirmation. D. Tracing the bank
reconciliation to the general ledger.
79. When testing cash balances at the balance sheet date, the auditor foots the bank
reconciliation and traces its reported book balance to the trial balance and its bank
balance to the standard confirmation. Which of the following assertions is being tested
with these procedures? A. Rights. B. Valuation. C. Existence. D. All of the
above.
80. Assume that an auditor notes a large series of checks that does not clear the bank for
an unusually long time after period end. Which of the following would the auditor likely
suspect from this observation? A. Vendors are eager to get their payments. B. The
reconciliation is accurate. C. Cash does not exist. D. The presence of held-checks at
period-end.
81. The standard bank confirmation includes a designated place for the financial
institution to report which of the following? A. Loans and collateral. B. A
reconciliation of the lockbox. C. Cash held on consignment. D. Maturity dates for
certificates of deposit.
82. Which of the following is not a common test of control for marketable
securities? A. Review the minutes of the board meetings. B. Review broker’s advice
for accurate recording of security C. Inquire of management about its process for
reclassifications. D. Review reports of internal audits.
83. Which of the following would be used by the auditor to address kiting? A. Cut-off
bank reconciliations. B. Bank transfer schedules. C. Bank confirmations-account
balances. D. Bank confirmations-loan guarantees.
84. Bank transfer schedules are used by the auditor to address which of the following
concerns? A. Lapping. B. Kiting. C. Embezzlement by omitting outstanding checks
on reconciliation. D. All of the above.
85. The cutoff bank statement is used by the auditor to address which of the following
concerns? A. Lapping. B. Kiting. C. Omitting outstanding checks on
reconciliations. D. All of the above.
86. Which of the following would not be included as part of the documentation related to
the substantive procedures for marketable securities? A. A schedule of marketable
securities prepared by the client. B. Reports of any outside valuation
experts. C. Calculation of any potential impairments. D. Policies over purchase or
sale of marketable securities.
87. Which of the following is not a reason for a client to employ cash management
techniques? A. Speed the collection and deposit of cash. B. Reduce the effect of
compensating balances. C. Reduce the amount of paperwork. D. Automate the cash
management process.
88. Which of the following is not a cash management technique frequently used by
management? A. Imprest funds. B. Lockboxes. C. Electronic funds
transfers. D. Cash management agreement with financial institutions. E. All of the
above.
89. The auditor prepares a schedule for marketable securities. Which of the following is
not one of the items included related to the value of the securities? A. Cost. B. Yearend market value. C. Carrying value for debt instruments. D. Interest and dividends.
90. Which of the following is not an internal control the auditor would expect to find in
place for all cash processing systems? A. Restrictive endorsement of
checks. B. Independent reconciliation. C. Walkthrough. D. Prenumbered cash
receipt documents.
91. Which of the following is not a normal edit test as part of computerized control for
checks? A. Field checks. B. Self-checking digits. C. Crossreferences. D. Reasonableness tests.
CHAPTER 3 - Audit of Cash &
Cash Equivalents
Problem 1
The “CASH” account of Don Corporation’s ledger on December 31, 2006 showed the following:
a. Petty cash fund (including P7,500 unreplenished
voucher of which P2,400 is dated January 3, 2007)
b.
Redemption Fund Account – PNB
c. Traveler’s check
P
15,000
500,000
100,000
d. Money order
10,000
e. Treasury bill, purchased December 1, 2006 (due on Feb. 1, 2007)
50,000
f.
50,000
Time deposit due on March 31, 2007
g. 180-day Treasury bill, due March 15, 2007
h. Note receivable in the possession of a collecting agency
i.
PNB – Checking Account #211-009-091
j.
Cash on hand, including customer postdated check of P15,000
k. Savings deposit, earmarked for acquisition of equipment
120,000
20,000
325,900
23,000
210,000
l.
A check payable to San Ignacio Incorporated, dated January 5, 2007,
that was included in the December 31 PNB Checking Account
#211-009-091
50,000
m. Bond Sinking Fund (used to finance the maturing long-term obligation
on March 31, 2007)
n. Overdraft in PNB Checking Account #211-099-085
o. Check #801 in payment to Accounts Payable, dated Dec. 31, 2006
not mailed until January 5, 2007
p. Advances to Officers/Employees for Seminars (no liquidation is
required)
q. Money market placement (due June 30, 2007)
r. Listed stock held as temporary investment
s. Check #789 in payment to Suppliers, dated January 5, 2007 and
recorded December 31, 2006.
t. Customers’ certified checks
u. Pension Fund
TOTAL
Questions
1. The entry to correct/adjust item F is:
a. Investment
50,000
Cash
b. Other assets
50,000
50,000
Cash
c. Short-term investment
50,000
50,000
Cash
50,000
d. No adjustment
2. The entry to correct/adjust item L is:
a. Accounts payable
50,000
Cash
b. Cash
50,000
50,000
Other liabilities
c. Cash
Accounts payable
50,000
50,000
50,000
150,000
( 50,000)
20,000
80,000
600,000
100,000
35,000
10,000
150,000
2,568,900
d. No adjustment
3. The entry to correct/adjust item M is:
a. Investment
150,000
Cash
150,000
b. Other assets
150,000
Cash
150,000
c. Short-tem investment
150,000
Cash
150,000
d. No adjustment
4. DON CORPORATION’S cash and cash equivalents balance at December 31, 2006 is:
a. Overstated by P1,950,100
c. Overstated by P 1,845,100
b. Overstated by P 1,895,100
d. Overstated by P 1,795,100
5. DON CORPORATION’S adjusted cash and cash equivalents balance at December 31, 2006
is:
a. P 618,800
b. P 623,800
c. P 673,800
Solution
a.
Operating expenses
5,100
Cash
b.
Investment
5,100
500,000
Cash
c.
No adjustment
d.
e.
f.
g.
No adjustment
No adjustment
No adjustment
Short-term investment
Cash
h.
Notes receivable
Cash
i.
j.
No adjustment
Accounts receivable
Cash
500,000
120,000
20,000
15,000
120,000
20,000
15,000
d. P 723,800
k.
Cash – restricted
Cash
l.
No adjustment
m. Investment – current
Cash
210,000
150,000
n.
o.
p.
No adjustment
No adjustment
Operating expenses
Cash
q.
Short-term investment
Cash
600,000
r.
Short-term investment
Cash
100,000
s.
t.
u.
No adjustment
No adjustment
Investment
Cash
80,000
150,000
210,000
150,000
80,000
600,000
100,000
150,000
Answer:
1. D
2. D
3. C
4. A
5. A
Problem 2
The following items are found in the cash account of Ivie Company at December 31, 2006.
The company’s controller asks your opinion whether the items listed below should be
considered as part of cash account and come up with adjusting entry to adjust the cash
account.
1. Customers’ check dated December 25, 2006, P25,000.
2. Company’s check (P30,000) dated December 26, 2006 which was drawn in payment for
merchandise purchased on that date but not delivered until January 3, 2007. This check
was deducted in the cash balance.
3. A check worth P196,000 from customer who paid the account net of the 2% discount. The
company records the transaction as credit to Accounts Receivable for the proceeds.
4. Cash in closed bank (Urban Bank), P95,000.
5. Redemption fund, P100,000
6. Sinking fund, P100,000. This will be used on March 1, 2007 to redeem the bonds payable.
7. Metro Bank Checking Account No. 0004568, P210,000.
8. RCBC Checking Account No. 0002347, P115,000.
9. Overdraft in PNB Checking Account No. 00011256, P50,000.
10. Company’s check dated January 3, 2007 in payment of account, P50,000. This was
recorded in the company’s disbursement ledger at December 31, 2006.
11. Overdraft in RCBC Checking Account No. 0056791, P15,000.
12. Postage stamps, P2,000.
13. 90-day Treasury Bills (purchase on November 1, 2006), P100,000
14. Treasury Bills that matures on February 1, 2007, P50,000.
15. Change fund, P10,000.
16. Customers’ certified check, P20,000.
17. Company’s certified check, P50,000. (This was included in the cash disbursement for
December).
Questions
1. The entry to correct/adjust item number 3 is:
a. Accounts receivable
4,000
Sales discounts
b. Sales discounts
4,000
4,000
Accounts receivable
c. Accounts receivable
4,000
4,000
Sales
4,000
d. No adjustments
2. The entry to correct/adjust item number 10 is:
a. Accounts payable
50,000
Cash
b. Other liabilities
50,000
50,000
Cash
c. Cash
50,000
50,000
Accounts payable
50,000
d. No adjustment
3. The entry to correct/adjust item number 17 is:
a. Accounts payable
50,000
Cash
b. Cash
50,000
50,000
Accounts receivable
c. Cash
Accounts payable
d. No adjustments
50,000
50,000
50,000
4. The entry to correct/adjust item number 16 is:
a. Accounts receivable
20,000
Cash
20,000
b. Cash
20,000
Accounts payable
20,000
c. Cash
20,000
Accounts receivable
20,000
d. No adjustments
5. IVIE COMPANY’S adjusted cash and cash equivalents balance at December 31, 2006 is:
a. P 771,000
b. P 741,000
Solution
Item 1
- Cash
Item 2
- Cash
Item 3
- Cash
Item 4
- Other Assets
Item 5
- Investment
Item 6
- Investment – current
Item 7
- Cash
Item 8
- Cash
Item 9
- Current liability
Item 10 – Offset to cash
Item 11 – Offset to Cash
Item 12 – Unused supplies
Item 13 – Cash as cash equivalents
Item 14 – Short-term investment
Item 15 – Cash
Item 16 – Cash
Item 17 – property recorded as disbursement
Answer:
c. P 721,000s
d. P 691,000
1. B
2. A
3. D
4. D
5. D
Problem 3
Your audit of the December 31, 2006, financial statements of Mato Corporation
reveals the following:
1. Current account at PBCom
P (35,000)
2. Current account at PNB
65,000
3. Treasury bills (acquired 3 months before maturity)
200,000
4. Treasury bills (maturity date is 12/31/07)
500,000
5. Payroll account
175,000
6. Foreign bank account - restricted (translated using the
12/31/06 exchange rate)
900,000
7. Postage stamps
600
8. Employees’ checks marked “DAIF”
10,000
9. IOU from the vice-president
50,000
10. Credit memo from a supplier for a purchase returns
25,000
11. Traveler’s check
60,000
12. Money order
10,000
13. Company’s check dated 12/30/06 but not mailed at year-end
30,000
14. Petty cash fund (P4,000 in currency and expense receipts for
(P6,000)
10,000
Questions
1. The entry to adjust the employees’ checks marked “DAIF” is:
a. Accounts receivable
Cash
10,000
b. Cash
Accounts receivable
10,000
c. Employees’ advances
10,000
10,000
Cash
d. Cash
10,000
10,000
10,000
Employees’ advances
10,000
2. MATO CORPORATION’S adjusted cash and cash equivalents balance at December 31, 2006
is:
a. P 560,000
b. P 544,000
c. P 514,000
d. P 509,000
Solution
Current account at PNB
65,000
Treasury bills acquired 3 mos. Before maturity
200,000
Payroll account
175,000
Traveler’s check
60,000
Money order
10,000
Company’s undelivered check
30,000
Petty cash fund
4,000
TOTAL
544,000
Answer:
1. C
B. B
Problem 4
The controller of Pacatang Company is attempting to determine the amount of cash to be
reported on its December 31, 2006 balance sheet. The following information is provided:
a. Commercial savings account of P1,000,000 and a commercial checking account balance
of P900,000 are held at Phil. Banking Corporation.
b. Money market fund account held at Allied Bank, P600,000
c. Travel advance of P180,000 for executive travel for the first quarter of next year
(employee to reimburse through salary reduction)
d. A separate fund in the amount of P1,500,000 is restricted for the retirement of long-term
debt.
e. Petty cash fund, P5,000
f. An IOU from David Santos, a company officer, in the amount of P10,000.
g. A bank overdraft of P110,000 has occurred at one of the banks the company uses to
deposit its cash receipts. At the present time, the company has no other deposits at this
bank.
h. The company has two certificates of deposit, each totaling P500,000. These certificates
of deposit have a maturity of 120 days.
i. Pacatang Company has received a check that is dated January 12, 2007 in the amount of
P125,000.
j. Currency and coins on hand amounted to P5,300.
Questions
1. PACATANG COMPANY’S adjusted cash and cash equivalents balance at December 31, 2006
is:
a. P 1,910,300
b. P 2,400,300
c. P 2,510,300
d. P 3,510,300
2. The travel advance of P180,000 for executive travel should be classified as:
a. Accounts receivable
c. Prepaid expenses
b. Travel expenses
d. Advances to employees
Solution
Commercial savings account
P1,000,000
Commercial checking account
900,000
Petty cash fund
5,000
Currency and coin on hand
5,300
Amount of cash to be reported on balance sheet at 12.31.03
(2)
Money market fund acct.
(3)
Travel advance for executive travel (employee to reimburse
through salary deduction)
P1,910,300
M/S or Temp. Investments
Advances to Employees
(4)
Bond Retirement Fund
Long-term Investment
(6)
IOU from company officer
Advance to officers
(7)
Bank overdraft (the co. has no other deposits at this bank)
Current Liabilities
(8)
Certificates of deposit (maturity of 120 days
Marketable securities
(9)
Postdated check January 12, 2004
Receivable
Answer:
1. A
2. D
Problem 5
Present journal entries to record the following transactions in the books of Marites
Corporation, which uses a calendar year as accounting period. Assume that the company is
using the imprest method in accounting for petty cash fund:
a. A petty cash fund was set up on November 1, 2006 in the amount of P2,400.
b. On November 29, 2006, a check was issued to replenish the fund, the composition of
which was as follows:
Currency – bills and coins
166
Vouchers showing expenditures for:
Office supplies
270
Charges from purchased of supplies
124
Repairs and maintenance
350
Wages paid to casual employees
950
Charges from purchased of goods to be sold
400
c. On December 18, 2006, the fund was replenished and correspondingly increased to
P3,000; its composition included the following:
Currency – bills and coins
158
Vouchers showing expenditures for:
Store supplies
304
Accounts payable
914
Charges from purchased of goods to be sold
242
Miscellaneous expenses
782
d. An examination on December 31, 2006, disclosed the following composition of the fund,
although it was not replenished on this date:
Currency – bills and coins
958
Check of office manager, dated January 5, 2007
1,000
Vouchers showing expenditures for:
Office supplies
126
Miscellaneous expenses
90
Accounts payable
800
e. On January 5, 2007, the check of office manager was cashed and the proceeds were added
to the petty cash fund.
f.
On January 6, 2007, replenished disbursement from December 18, 2006 to January 5,
2007.
Questions
1. The entry to record the November 29 replenishment of petty cash fund is:
a. Operating expenses
1,694
Freight-in
400
Cash short/over
140
Cash
b. Operating expenses
2,234
2,234
Petty cash fun d
c. Operating expenses
Freight-in
2,234
1,694
400
Cash short/(over)
140
Petty cash fund
2,234
d. No entry since the company is using an impress fund system.
2. The adjusted Petty Cash Fund balance of MARITES CORPORATION at December 31, 2006
is:
a. P 3,000
b. P 1,958
c. P 984
d. P 958
3. The entry to record the December 31, 2006 adjustment of petty cash fund is:
a. Operating expenses
216
Accounts payable
800
Cash short/over
26
Petty cash fund
1,042
b. Operating expenses
216
Accounts payable
800
Cash short/over
26
Cash
1,042
c. Operating expenses
216
Accounts payable
800
Advances – employees
1,000
Cash short/(over)
26
Petty cash fund
2,042
d. No entry since there is no replenishment yet.
4. The entry to record the January 6, 2004 replenishment of petty cash fund is:
a. Operating expenses
216
Accounts payable
800
Cash short/over
26
Petty cash fund
1,042
b. Operating expenses
216
Accounts payable
800
Cash short/over
26
Cash
1,042
c. Operating expenses
216
Accounts payable
800
Advances – employees
1,000
Cash short/(over)
26
Cash
2,042
d. No entry since the account has been adjusted on December 31.
Solution
a.
Petty cash fund
Cash
2,400
2,400
b.
Operating expenses
1,694
2,400
400
Accountability
Cash short/over
140
Shortage
140
2,234
Operating expenses
1,086
TCAF
2,400
2,400
Accounts payable
914
Accountability
Freight-in
242
Shortage
Cash
0
2,242
Petty cash fund
600
Cash
d.
2,260
Freight-in
Cash
c.
TCAF
600
Operating expenses
Advances to employees
Accounts payable
Cash short/over
216
1,000
800
TCAF
2,994
Accountability
3,000
Shortage
26
26
Petty cash fund
2,042
Reversing entry – January 1
Petty cash fund
2,042
Operating expenses
216
Advances to employees
1,000
Accounts payable
800
Cash short/over
26
e.
No entry
f.
Operating expenses
216
Accounts payable
800
Cash short/over
26
Cash
1,042
Answer:
1. A
2. D
3. C
4. B
Problem 6
Your audit of the petty cash (P10,000) of Juliet Company as of December 31, 2006 revealed
the following: (cash count date is January 3, 2007 at 5:00 pm)
Bills: 10 - P500 bill 15 - P100 bill
18 - P50
15 - P20
5 - P10
Coins: P180 in P5 pieces; P42 in P1.00 pieces; P23 in P0.25 pieces.
IOU’s submitted were:
Dec. 18
Nap R. -
P 750
Dec. 28
Ruel R.
125
Dec. 30
Sonny S.
500
Cashed checks:
Dec. 28, 2006
check drawn by the manager
P 1,125
Dec. 28, 2006
check drawn by an employee
500
Dec. 30, 2006
check drawn by a customer
350
Jan 1, 2007
check drawn by an employee
1,250
The cashier informed you that owing to the lack of cash it was necessary for him to open
certain payroll envelopes unclaimed by employees and use the cash found herein. They
were as follows:
Dec. 15, 2006 - Ed A.
P
1,250
Dec. 30, 2006 - Andoy
1,750
Dec. 30, 2006 - Macky
650
Dec. 30, 2006 - Paz
1,000
The cashier also informed you that all cash sales receipts were passed through his fund
and that cash sales tickets Nos. 2059 to 2061 under dates of Dec. 30, Jan. 3 and Jan. 4
for P350, 500 and P545, respectively, had not yet been turned over to the general cashier.
The petty cash vouchers found in the petty cash box were as follows:
Dec. 30, 2006 Transportation
P515
Dec. 30, 2006 Token gifts to visitors
650
Dec. 30, 2006 Freight for office supplies purchase
215
Jan. 1, 2007 Freight for mdse. purchased
125
Jan. 2, 2007 Freight for mdse. sold
575
Questions
1. JULIET COMPANY’S cash shortage at December 31, 2006 is:
a. P 2,072.75
b. P 1,370.00
c. P 1,027.75
d. P 327.75
2. The adjusted petty cash balance of JULIET COMPANY at December 31, 2006 is:
a. P 10,000
b. P 9,625
c. P 5,975
d. P 4,625
3. The entry to adjust the unclaimed payroll at December 31, 2006 is:
a. Petty Cash Fund
Salaries expense
c. Cash
Accrued salaries
b. Salaries expense
Petty cash fund
d. Accrued salaries
Cash
4. The cashed check dated January 1, 2007
a. Should be adjusted since it was dated January 1, 2007, hence a postdated check.
b. Should be adjusted since it was received December 31, 2006 but the check is dated
January 1, 2007, hence a postdated check.
c. Should not be adjusted since the check is dated January 1, 2007.
d. Should not be adjusted since the check was received December 31, 2007.
5. The Cash account (excluding PCF) of JULIET COMPANY is understated at December 31,
2006 by:
a. P 4,650
b. P 4,900
c. P 6,045
d. P 6,370
Solution
Cash Count
Bills
Due to custodian
7,750
Petty cash fund
Coins
245
IOUs
1,375
Advances to employees
Checks
3,225
Petty cash fund
Vouchers
2,080
TCAF
14,675
Accountability
1,370
Cash
1,370
1,375
1,375
350
Sales
PCF per ledger
(10,000)
Unclaimed payroll
( 4,650)
Advances to employees
350
1,250
Undeposited sales
( 1,395)
Cash shortage
Petty cash fund
1,250
1,370
Cash
4,650
Accrued salaries
4,650
Operating expenses
1,380
Petty cash fund
1,380
ANSWER:
1. B
2. D
3. C
4. B
5. B
Problem 7
You are making an audit of the Darwin Corporation for the past calendar year. The balance
of the Petty Cash account at December 31, 2006 was P1,300. Your count of the imprest cash
count made at 8:30 am on January 3, 2007, in the presence of the petty cash custodian,
revealed:
Currency and coins
571.38
Checks:
Date
12/28/06
12/29/06
12/31/06
01/02/07
01/10/07
Maker
Bank
Macky, vice-president
PNB
360.00
Andy, employee
DBP
60.00
Bobot, customer
RCBC
153.80
Neil, customer
PNB
121.36
Jeff, employee
PNB
60.00
(check received Dec. 29)
(These checks were all considered good when deposited after dates shown on the
checks. The first four checks were actually deposited Jan. 3; the last check was
deposited Jan. 11; all five checks proved to be good.)
Vouchers:
Dec. 11
Dec. 28
Dec. 29
Dec. 31
Jan. 2
IOU
#261 Richard, shipping clerk – temporary advance for the use of the
receiving department. Your count of Mr. Richard’s fund revealed:
currency – P28.80; merchandise freight bills, P31.20.
P 60.00
# 301 Postage
12.00
# 302 Freight bill on merchandise purchases
47.30
# 305 Freight bill on office supplies
88.93
# 500 Freight bill on merchandise purchases
29.36
Dec. 21
Mabel, employee
36.00
Sales Invoices (for cash sales, collections handled by the petty cashier):
Invoice # 315
Dec. 30
P 120.00
328
Dec. 31
153.80
334
Jan. 2
121.36
(As a general rule, the petty cashier endeavored to turn over the proceeds of cash
sales to the general cashier on the 10th, 20th and last days of each month. Proceeds
on these sales were recorded and deposited by the general cashier.)
Postage Stamps:
Three one-peso stamps. The petty cashier handled postage stamps. These stamps
represent the unused stamps purchased on Voucher # 301.
Questions
1. The petty cash fund shortage at December 31, 2006 is:
a. P 216.39
b. P 123.83
c. P 98.03
d. P 95.03
2. The adjusted petty cash fund balance of DARWIN CORPORATION at December 31, 2006
is:
a. P 900.74
b. P 960.74
c. P 1,174.54 d. P 1,234.54
3. DARWIN CORPORATION’S operating expenses found in the petty cash fund at December
31, 2006 is:
a. P 208.23
b. P 205.75
c. P 174.03
d. P 97.93
4. The Cash account (excluding PCF) of DARWIN CORPORATION is understated at December
31, 2006 by:
a. P 395.16
b. P 273.80
c. P 153.80
d. P 120.00
Solution
Cash count
Currency and coins
571.38
Checks
755.16
Vouchers
237.59
IOU
36.00
TCAF
1,600.13
Due to custodian
95.03
PCF
Cash
95.03
273.80
Sales (SI#328 & 315)
273.80
Accountability
PCF per ledger
Undeposited sales
Cash shortage
(1,300.00)
(
395.16)
Adv. to employee
60.00
PCF
60.00
95.03
Adv. to employee
Operating expenses
60.00
100.93
Freight-in
47.30
PCF
208.23
Freight-in
31.20
Adv. to employee
Adv. to employee
31.20
36.00
PCF
36.00
Unused postage
3.00
Operating expenses
3.00
Answer:
1. D
2. A
3. D
4. B
Problem 8
In connection with your audit of the financial statements of Reyes Corporation for the year
ended December 31, 2006, you conducted a surprise count of the company’s petty cash and
undeposited collections at 9:10 am on January 3, 2007. You count disclosed the following:
Bills and counts
Bills
Coins
P100.00
5 pieces
P1.00
205 pieces
50.00
40 pieces
0.50
162 pieces
20.00
35 pieces
0.25
32 pieces
10.00
27 pieces
Postage stamps (unused) - P365
Checks
Date
Payee
Maker
Amount
Dec. 30
Cash
Custodian
P 1,200
Dec. 30
Reyes Corp.
Karren, Inc.
14,000
Dec. 31
Reyes Corp.
Sheryl, sales manager
Dec. 31
Reyes Corp.
Victor Corp.
Dec. 31
Reyes Corp.
Ma. Karen, Inc.
Dec. 31
Merry Corp.
Reyes Corp.
1,680
17,800
8,300
27,000
(not endorsed)
Unreimbursed vouchers
Date
Payee
Description
Amount
Dec. 23
Sheryl, sales mgr.
Advance for trip
P 7,000
Dec. 28
Post Office
Postage stamps
1,620
Dec. 29
Messengers
Transportation
150
Dec. 29
Ace, Inc.
Computer repair
800
Other items found inside the cash box:
1.
Unclaimed pay envelope of Jeanette. Indicated on the pay slip is his net salary of P7,500.
Your inquiry revealed that Jeanette’s salary is mingled with the petty cash fund.
2.
The sales manager’s liquidation report for this Baguio Trip.
Cash Advance received on Dec. 23
P 7,000
Less: Hotel accomodation, meals, etc. P 4,500
Bus fare for two
400
Cash given to Carlo, salesman
300
Balance
5,200
P 1,800
Accounted for as follows:
Cash returned by Carlo to the sales manager
Personal check of the sales manager
Total
Additional information:
1. The custodian is not authorized to cash checks.
P
120
1,680
P 1,800
2. The last official receipt included in the deposit on December 30 is No. 4351 and the last
official receipt issued for the current year is No. 4355. The following official receipts are
all dated December 31, 2006.
OR No.
Amount
Form of Payment
4352
P 13,600
4353
17,800
Check
4354
3,600
Cash
4355
8,300
Check
Cash
3. The petty cash balance per general ledger is P10,000. The last replenishment of the fund
was made on December 22, 2006.
Questions
1. REYES CORPORATION’S cash shortage/overage at December 31, 2006 is:
a. P 61,166 short
c. P 34,166 over
b. P 20,166 short
d. P 22,514 over
2. The adjusted petty cash balance of REYES CORPORATION at December 31, 2006 is:
a. P 4,964
b. P 2,110
c. P 1,200
d. P 430
3.
The undeposited sales/collection of REYES CORPORATION at December 31, 2006 is:
a. P 66,480
b. P 64,800
c. P 57,300
d. P 43,300
Solution
Bills and coins
Checks
Vouchers
TCAF
3,764
69,980
9,570
83,314
Accountability
PCF per ledger
(10,000)
Undeposited sales – with receipts
(43,300)
Unclaimed payroll
( 7,500)
Unendorsed check
(27,000)
Undeposited sales – without receipts
(14,000)
Check endorsed by sales manager
( 1,680)
Cash shortage
(20,166)
Due to custodian
20,166
Cash
20,166
Cash
57,300
Sales (with and without receipts)
57,300
Cash
7,500
Accrued salary
7,500
Petty cash fund
1,680
Advances to employees
1,680
Advances to employees
7,000
Operating expenses
2,570
Petty cash fund
9,570
Operating expenses
5,080
Advances to employees
Answer: 1. B
5,080
2. B
3. C
Problem 9
Mary Jane is the cashier of Adlawan Corporation. AS representative of the Zarate and
Associates, CPAs, you were assigned to verify her cash on hand in the morning of January 3,
2007. You began to count at 9:00 AM in the presence of Mary Jane. In the course of your
counting, you found currencies in paper bills and coins together with checks, vouchers, and
other items, which are mentioned below:
Bills:
(2) P500;
(8) P100;
Coins:
P 5.00
1.00
0.25
0.10
0.05
11 loose
24 loose
5 rolls and 32 loose (50 pieces to a roll)
10 rolls and 15 loose (50 pieces to a roll)
14 rolls and 20 loose (40 pieces to a roll)
Checks:
Date
12/22/06
12/26/06
IOUs:
Date
Maker
Vivian, Asst. Mgr
Mary Jane, cashier
Maker
(12) P50;
(5) P20
Payee
Adlawan Corp.
Adlawan Corp.
Amount
P 6,000
4,000
Amount
12/20/06
12/22/06
12/24/06
Yap, Janitor
Felix, clerk
Ablay, bookkeeper
P 500
750
500
PETTY CASH VOUCHERS FOR REPLENISHMENT
Date
Payee
Accounts Charged
12/16/06 Wagan, messenger
Advances to employees
12/17/06 Maren and Co.
Supplies
12/18/06 Eeman Liner
Freight in
12/18/06 Posts Office
Supplies
12/20/06 Alejandre, carpenter
Repairs
12/21/06 Violan
Miscellaneous expense
Amount
P1,000.00
545.00
982.50
300.00
2,950.00
554.00
Your investigation also disclosed the following:
1. The balance of petty cash fund per books is P20,000.00.
2. Cash sale of January 2, 2007 amounted to P8,650 per sales records, while cash
receipts book and bank deposit slip showed that only P7,650 was deposited in the bank
on January 3, 2007
3. The following employees’ pay envelopes had been opened and the money removed.
Each envelope was marked “Unclaimed” - Ernesto, P332.50; Secinando, P447.50.
Questions
1. The petty cash shortage of ADLAWAN CORPORATION at December 31, 2006 is:
a. P 2,748.50
b. P 1,748.50
c. P 968.50
d. P 188.50
2. The adjusted petty cash balance of ADLAWAN CORPORATION at December 31, 2006 is:
a. P 10,950
b. P 11,950
c. P 11,730
d. P 12,730
3. The undeposited sales/collection of ADLAWAN CORPORATION at December 31, 2006 is:
a. P 8,650
b. P 7,650
c. P 1,000
d. P 0
Solution
Cash count
Bills and coins
2,730.00
Checks
10,000.00
Due to custodian
968.50
Petty cash fund
968.50
IOUs
1,750.00
PCF Vouchers
6,331.50
Adv. to employees
20,811.50
Petty cash fund
PCF per ledger
(20,000.00)
Adv. to employees
1,000.00
Uneposited sales
( 1,000.00)
Operating expenses
4,349.00
Unclaimed payroll
(
Freight-in
TCAF
1,750.00
1,750.00
Accountability
Cash shortage
780.00)
968.50
Petty cash fund
982.50
6,331.50
Cash
780.00
Accrued salary
780.00
Answer:
1. C
2. A
3. D
Problem 10
In your year-end audit of Angela Corp., the cashier showed a cash accountability of
P1,100,000 as at December 31, 2006. The following transactions were extracted in the books
of the company, in summary form:
Accounts receivable, beginning
Accounts receivable, end
Sales (80% on credit)
Accounts written-off
P 275,000
385,000
1,850,000
25,000
Recovery of accounts written-off, included in the collection
of account receivable
15,000
Depreciation of fixed assets
150,000
Inventory, end
185,000
Inventory, beg
203,000
Cost of sales
960,000
Income tax accrued
18,500
Payment of bank loan
200,000
Subscription receivable
250,000
Subscribed capital stock
950,000
Purchases of fixed assets
320,000
Proceeds from short-term bank loan
300,000
Accounts payable, end
425,000
Accounts payable, beg.
200,000
Questions
1. The correct cashier’s accountability at December 31, 2006 is:
a. P 1,493,000
b. P 1,123,000
c. P 793,000
d. P 423,000
2. ANGELA CORPORATION’S cash account at December31, 2006 is:
a. Understated by P 307,000
b. Understated by P 393,000
c. Overstated by P 693,000
d. Overstated by P 677,000
Solution
Proceeds from collection of accounts receivable
1,360,000 *
Proceeds from cash sales
370,000
Proceeds from bank loan
300,000
Proceeds from issuance of capital stock (P950,000 – P250,000)
700,000
Payment of accounts payable
( 717,000) **
Payment of short-term bank loan
( 200,000)
Purchase of fixed assets
( 320,000)
Total Accountability
1,493,000
Total Cash
1,100,000
Cash shortage
*
Accounts Receivable
Beg. bal
275,000
Cr. Sales 1,480,000
Recovery
End bal
**
Payment
393,000
Collection
Write-off
25,000
15,000
________
1,770,000
1,385,000
385,000
Accounts payable
717,000
Beg. bal.
_______ Purchases
717,000
*** Beg. Inv.
203,000
200,000
Purchases
942,000
942,000 ***
TGAS
1,145,000
End inv.
185,000
1,142,000
End bal.
Answer:
1,360,000 squeeze figure
425,000
COS
960,000
1.
A
2. B
Problem 11
The following data are gathered from the cash books and bank statement received from Davao
Bank by Grace Company:
The cash in bank ledger account shows a debit balance of P290,438.50 as of May 31.
The bank statement shows a credit balance of P318,560 as of May 31.
An examination of the checks encashed by the bank shows that the following checks are not
presented for payment:
No. 187, P3,608; No. 189, P15,499; No. 191, P4,400;
No. 192, P1,545.50, No. 193, P23,001
A certified check for P24,750 payable to creditor, was encashed by the bank during May.
The bank statement shows a deduction of P10,802 for check No. 184. The check was actually
made out at P10,208.
A check deposited on May 27 for P34,100 was returned by the bank on May 28 marked Refer
to Maker.
A non-interest bearing note for P44,000 was collected by the bank for the account Grace
Company. Collection fee deducted by the bank is P330.
A deposit for P20,900 was recorded in the books twice.
Check No. 179 for P26,400 was erroneously recorded in the books as P46,200.
Interest on an outstanding loan payable, deducted by the bank on May 31, P1,320.
Collections on May 31 to be deposited on June 1, P26,488.
Questions
1. GRACE COMPANY’S adjusted cash balance at May 31, 2006 is:
a. P 341,939.50
b. P 283,288.50
c. P 297,588.50
d. P 273,168.50
2. The recorded cash of GRACE COMPANY at May 31 is:
a. Understated by P 17,270
c. Overstated by P 7,150
b. Understated by P 7,150
d. Overstated by P 17,270
Solution
Unadjusted Book balance 290,438.50
Unadjusted Bank balance 318,560.00
Returned check
Outstanding checks
(34,100.00)
Collection of Notes
43,670.00
Error
(20,900.00)
Error
19,800.00
Error
(
Adjusted book balance
297,588.50
Error
594.00
Deposit in transit
1,320.00)
Adjusted bank balance
34,100
Cash
34,100
Cash
43,670
Collection fee
330
Notes receivable
Accounts receivable
44,000
20,900
Cash
20,900
Cash
19,800
Accounts payable
Interest expense
1,320
Answer:
1. C
Problem 12
19,800
1,320
Cash
2. B
26,488.00
_________
Adjusting entry:
Accounts receivable
(48,053.50)
297,588.50
The following data pertaining to the cash transactions and bank account of Abiso Company
for May 2006 are available to you:
Cash balance, per accounting records, May 31, 2006
P 51,582
Cash balance, per bank statement, May 31, 2006
95,874
Bank service charge for May
327
Debit memo for the cost of printed checks delivered by the bank;
the charge has not been recorded in the accounting records
375
Outstanding checks, May 31, 2006
20,184
Deposit of May 30 not recorded by bank until June 1
14,610
Proceeds of bank loan on May 30, not recorded in the accounting
records, net of interest of P900
17,100
Proceeds from a customer’s promissory note; principal amount P24,000,
collected by the bank, taken up in the books with interest
24,300
Check No. 1086 issued to a supplier entered in the accounting records
as P6,300 but deducted in the bank statement at an erroneous amount
of
3,600
Stolen check lacking an authorized signature, deducted from Abiso’s
account by the bank in error
2,400
Customer’s checks returned by the bank marked NSF, indicating that the
customer’s balance was not adequate to cover the checks; no entry has
been made in the accounting records to record the returned check
2,280
Questions
1. The adjusted cash in bank balance of ABISO COMPANY at May 31, 2006 is:
a. P 87,570
b. P 90,000
c. P 90,570
d. P 90,900
2. The cash in bank balance of ABISO COMPANY at May 31, 2006 is:
a. Understated by P39,318
c. Understated by P38,418
b. Understated by P38,988
d. Understated by P35,988
Solution
Book
Bank
Unadjusted balance
51,582
Service charge
(
327)
DM – printed checks
(
375)
Outstanding checks
95,874
(20,184)
Deposit in transit
14,610
Loan proceed
17,100
Proceed from note collection
24,300
Bank error
( 2,700)
Bank error
2,400
NSF
Adjusted balance
( 2,280)
__________
90,000
90,000
Adjusting entry:
Service charge
327
Cash
327
Service charge
375
Cash
375
Cash
17,100
Prepaid interest
900
Bank loan
18,000
Cash
24,300
Note receivable
24,000
Interest income
300
Accounts receivable
Cash
2,280
2,280
Answer:
1. B
2. C
Problem 13
In connection with an audit, you are given the following bank reconciliation.
BANK RECONCILIATION
December 31, 2006
Balance per ledger, 12/31/03
Add:
P 34,349.72
Collections received on the last day of
December and charged to “Cash in Bank”
on books but not deposited
5,324.50
Debit memo for customer’s checks returned
unpaid (check is on hand but no entry has been
made on the books)
4,000.00
Debit memo for bank service charge for December
1,000.00
P 46,674.22
Deduct:
Outstanding checks
P 18,625
(see details below)
Credit memo for proceeds of a note receivable
which had been left at the bank for collection
but which has not been recorded as collected
8,000
Check for an account payable entered on books
as P12,625 but drawn and paid by bank as
16,225
3,600
32,225.00
Computed balance
Unlocated difference
P 14,449.22
36,601.00
Balance per bank (check to confirmation)
P 51,050.22
LIST OF OUTSTANDING CHECKS
December 31, 2006
Check No.
Amount
14344
P 5,820
14358
1,295
14367
3,543
14399
2,001
14401
4,892
14407
5,074
P 18,625
Questions:
1. The adjusted cash balance at December 31, 2006 is:
a. P 33,749.72
b. P 34,949.72
c. P 37,749.72
d.P40,949.72
2. A check for an account payable entered on books as P12,625 but drawn and paid by bank
as 16,225
a. Should not be included in the reconciliation since the bank already gave the money to
the payee.
b. Should not be included in the reconciliation since bank’s record is always followed.
c. Should be included as deduction in the book reconciliation since this is considered as
book error, thus a reconciling item.
d. Should be included as addition in the book reconciliation since this is considered as
book error, thus a reconciling item.
3. The outstanding checks at December 31, 2006 is:
a. P 15,025
b. P 18,625
c. P 19,025
d. P 22,625
4. The cash balance of the company per record at December 31, 2006 is:
a. Overstated by P600
c. Understated by P 3,400
b. Overstated by P1,200
d. Overstated by P 6,600
Solution
Bank
Unadjusted balance
Book
51,050.22
34,349.72
Returned checks
( 4,000.00)
Service charge
( 1,000.00)
Collection of note receivable
Deposit in transit
Outstanding checks
Book error
Adjusted balance
8,000.00
5,324.50
(22,625.00)
____________
( 3,600.00)
33,749.72
33,749.72
Adjusting entry
Accounts receivable
Cash
4,000
4,000
Service charge
1,000
Cash
1,000
Cash
8,000
Note receivable
8,000
Accounts receivable
3,600
Cash
3,600
Answer:
1. A
2. C
3. D
4. A
Problem 14
The cash books of Grace Corporation show the following entries during the month of June
2006.
Cash Receipts Journal
Check Register
Date
Amount
Date
Check No.
Amount
June 1Balance
762,000
June2
801
15,625
4Deposit
113,000
3
802
7,526
4Deposit
811,000
5
803
229,205
7Deposit
152,200
7
804
169,555
10 Deposit
11,300
8
805
74,936
10 Deposit
12,700
10
806
274,600
11 Deposit
73,000
11
807
34,842
17 Deposit
110,075
13
808
250,000
18 Deposit
3,725
14
809
1,070,000
18 Deposit
65,000
17
810
167,300
19 Deposit
26,463
19
811
3,130
20 Deposit
133,037
21
812
82,730
27 Deposit
273,628
23
813
127,200
30 Deposit
92,400
25
814
93,080
30
815
720
The bank statement for the month of June 2006 shows:
Checks No.
Deposits
Balance
924,000
Date
Amount
May
31
798,000
June
5
1,722,000
800
36,000
6
1,686,000
804
169,555
7
1,516,445
805
74,936
8
1,658,709
801
16,525
803
229,205
9
1,412,979
807
34,842
97,000
12
1,475,137
924
75,000
200
40,400 CM
13
1,440,337
809 1,070,000
14
370,337
808
15
120,337
198,000 CM
16
318,337
217,200
(collection charge)
250,000
810
167,300
113,800
19
264,837
812
82,730
159,500
21
341,607
806
274,600
24
67,007
28
340,635
30
337,205
273,628
811
DM
3,130
300
Upon investigation, the following are discovered:
CM - Represents a 60-day, 6% note for P40,000 collected by the bank for the account of
Grace Company.
CM - Represents a 60-day, 6% own note for P200,000 discounted by Grace Corporation with
the bank and not yet recorded in the books.
DM - Represents bank service charge for the month.
Check No. 924 represents a check signed by Graciele Company.
Collection charge – represents collection fee charged by the bank.
Questions
1. The unadjusted cash ledger balance of GRACE CORPORATION at June 30, 2006 is:
a. P 114,079
b. P 113,179
c. P 39,079
d. P 38,179
2. The unadjusted cash bank balance of GRACE CORPORATION at June 30, 2006 is:
a. P 261,305
b. P 336,305
c. P 337,205s
d. P 412,205
3. The deposit in transit of GRACE CORPORATION at June 30, 2006 is:
a. P 92,400
b. P 104,500
c. P 182,000
d. P 0
4. The outstanding checks of GRACE CORPORATION at June 30, 2006 is:
a. P 302,806
b. P 228,526
c. P 227,806
d. P 153,526
5. The adjusted cash balance of GRACE CORPORATION at June 30, 2006 is:
a. P 277,879
b. P 276,079
c. P 261,305
d. P 201,079
6. The error made in check number 801 is known as:
a. Fundamental error
c. Transplacement error
b. Balance sheet error
d. Transposition error
7. In the discounting of P200,000 note, the company should credit
a. Notes receivable discounting
c. Notes payable
b. Notes Receivable
d. Notes discounting
Solution
Unadjusted book bal.
39,079
Unadjusted bank bal.
Error –
337,205
Deposit in transit
Check # 801 – P 15,625
Correct
92,400
Outstanding checks:
16,525
(
900)
# 802
7,526
Collection fee
(
200)
# 813
127,200
DM
(
300)
# 814
93,080
CM
40,400
# 815
720
CM
198,000
Error
Adjusted balance
276,079
Adjusted balance
Adjusting entry:
Accounts payable
900
Cash
Cash
Collection fee
900
40,200
200
(228,526)
75,000
276,079
Notes receivable
40,000
Interest income
Service charge
400
300
Cash
300
Cash
198,000
Interest expense
2,000
Notes payable
200,000
Answer:
1. C
2. C
6. D
7. B
3. A
4. B
5. B
Problem 15
The bank portion of the bank reconciliation for Angelo Company at October 31, 2006 was as
follows:
Angelo Company
Bank Reconciliation
October 31, 2006
Cash Balance per Bank
P 12,367.90
Add: Deposit in transit
1,530.20
P 13,898.10
Less: Outstanding checks
Check Number
Check Amount
2451
2470
2471
2472
2474
P 1,260.40
720.10
844.50
426.80
1,050.00
Adjusted cash balance per bank
4,301.80
P 9,596.30
The adjusted cash balance per bank agreed with the cash balance per books at October 31.
The November bank statement showed the following checks and deposits.
Bank Statement
Checks
Deposits
Date
Number
11-1
2470
720.10
11-1
1,530.20
11-2
2471
844.50
11-4
1,211.60
11-5
2474
1,050.00
11-8
990.10
11-4
2475
1,640.70
11-13
2,575.00
11-8
2476
2,830.00
11-18
1,472.70
11-10 2477
600.00
11-21
2,945.00
11-15 2479
1,750.00
11-25
2,567.30
11-18 2480
1,330.00
11-28
1,650.00
11-27 2481
695.40
11-30
1,186.00
11-30 2483
575.50
Total
16,127.90
11-29 2486
900.00
Total
Amount
Date
Amount
12,936.20
The cash records per books for November showed the following:
Cash Receipts
Cash Payments Journal
Date
Number
11-1
11-2
2475
2476
11-2
2477
11-4
Amount
Date
Journal____
Number
Amount
Date
575.50
829.50
11-3
11-7
600.00 11-23 2485
974.80
11-12 2,575.00
2478
538.20 11-24 2486
900.00
11-17 1,472.70
11-8
2479
1,570.00 11-29 2487
398.00
11-20 2,954.00
11-10
2480
1,330.00 11-30 2488
800.00
11-24 2,567.30
11-15
2481
695.40 Total
14,294.10
11-27 1,650.00
11-18
2482
612.00
1,640.70 11-20 2483
2,830.00 11-22 2484
Amount
1,211.60
990.10
11-29 1,186.00
11-30
Total
1,225.00
15,831.70
The bank statement contained two bank memoranda:
1. A credit of P2,105.00 for the collection of a P2,000 note for Angelo Company plus interest
of P120 and less a collection fee of P15. Angelo company has not accrued any interest on
the note.
2. A debit for the printing of additional company checks, P50.
At November 30, the cash balance per books was P11,123.90, and the cash balance per the
bank statement was P17,604.60. The bank did not make any errors, but Angelo Company
made two errors.
Note: The correction of any errors pertaining to recording checks should be made to Accounts
Payable. The correction of any errors relating to recording cash receipts should be made to
Accounts Receivable
Questions
1. The unadjusted cash ledger balance of ANGELO COMPANY at November 30, 2006 is:
a. P 11,133.90
b. P 12,990.90
c. P 13,188.90
d. P 13,377.90
2. The unadjusted bank balance of ANGELO COMPANY at November 30, 2006 is:
a. P 12,828.90
b. P 13,008.90
c. P 13,188.90
d. P 17,614.60
3. The outstanding checks of ANGELO COMPANY at November 30, 2006 is:
a. P 5,659.70
b. P 5,830.70
c. P 5,839.70
d. P 6,028.70
4. The deposit in transit of ANGELO COMPANY at November 30, 2006 is:
a. P 1,225
b. P 1,216
c. P 1,234
d. P 1,396
5. The adjusted book balance of ANGELO COMPANY at November 30, 2006 is:
a. P 11,133.90
b. P 12,990.90
c. P 13,188.90
d. P 13,377.90
Solution
Unadjusted bank bal.
Deposit in transit
Outstanding checks:
#2451
1,260.40
17,614.60
Unadjusted book bal.
11,133.90
1,225.00
CM – notes collected
2,105.00
DM – service charge
Error – overstatement of
(
50.00)
#2473
426.80
#2478
538.20
#2482
612.00
#2483
829.50
#2484
974.80
#2488
800.00
Adjusted balance
recorded receipts
(
9.00)
(
180.00)
Error- understatement of
disbursement
( 5,839.70)
_________
12,990.90
Adjusted balance
12,990.90
Adjusting entry:
Cash
2,105
Service charge
15
Notes receivable
2,000
Interest income
Service charge
120
50
Cash
50
Accounts receivable
9
Cash
9
Accounts payable
180
Cash
180
Answer:
1. A
2. D
3. C
4. A
5. B
Problem 16
The following information pertains to the cash of Jenny Company:
Nov 31
Dec. 31
P 27,380
P 26,960
25,780
25,000
Outstanding checks
8,630
10,150
Deposits in transit
6,850
12,450
Balance shown on bank statement
Balance shown in general ledger before
reconciling the bank account
For Dec.
Deposits shown in bank statement
P 55,880
Charges shown on bank statement
56,300
Cash receipts shown in company’s books
53,980
Cash payments shown in company’s books
54,760
The bank service charge was P180 in November (recorded by the company during December)
and P240 in December (not yet recorded by the company).
Included with the December bank statement was a check for P5,000 that had been received
on December 25 from a customer on account. The returned check marked “NSF” by the bank,
has not yet been recorded on the company’s books.
During December the bank collected P7,500 of bond interest for the company and credited
the proceeds to the company’s account. The company earned the interest during the current
accounting period but has not yet recorded it.
During December the company issued a check for P6,960 for equipment. The check, which
cleared the bank during December, was incorrectly recorded by the company for P8,960.
Questions
1. The adjusted cash receipts of JENNY COMPANY at December 31 is:
a. P 61,480
b. P 53,980
c. P 50,280
d. P 46,480
2. The adjusted cash disbursements of JENNY COMPANY at December 31 is:
a. P 63,980
b. P 61,980
c. P 57,820
d. P 54,780
3. In a proof of cash, the NSF check:
a. Should be added in the December 31 column since this was returned back by the bank.
b. Should be deducted in the December 31 column since this was returned back by the
bank.
c. Should be deducted in the December 31 column since this was returned back and not
paid by the bank, thus not considered as receipts.
d. Should be added in the December 31 column since this was returned back and not
paid by the bank, thus not considered as receipts.
4. The adjusted December 31 cash balance of JENNY COMPANY is:
a. P 29,760
b. P 29,260
c. P 27,260
d. P 25,600
5. The adjusted November 31 cash balance of JENNY COMPANY is:
a. P 29,160
b. P 27,260
c. P 26,160
d. P 25,600
6. The check issued but was incorrectly recorded as P8,960 should be adjusted by:
a. Accounts payable
2,000
c. Cash
2,000
Cash
2,000
Accounts payable 2,000
b. Equipment
2,000
d. Cash
2,000
Cash
2,000
Equipment
2,000
Solution
Nov. 30
Balance per book
25,780
Service charge – Nov. 30
Receipts
53,980
(180)
NSF check
Adjusted Balance
(240)
5,000
(5,000)
_________
(2,000)
2,000
25,600
61,480
57,820
29,260
Balance per bank
27,380
Outstanding check – Nov.
(8,630)
Receipts
55,880
Adjusted balance
10,150
(10,150)
__________
12,450
_________
12,450
25,600
61,480
57,820
29,260
240
240
5,000
Cash
Cash
26,960
(6,850)
Cash
Accounts receivable
56,300
Dec. 31
6,850
Adjusting entry
Service charge
Disburs.
(8,630)
- Dec.
- Dec
7,500
__________
Nov. 30
Deposit in transit - Nov
25,000
240
7,500
Book error
5,000
7,500
Interest income
Cash
54,760
Dec. 31
(180)
- Dec. 31
Interest earned
Disburs.
7,500
2,000
Equipment
2,000
Answer:
1. A
2. C
3. C
4. B
5. D
6. D
Problem 17
ELEFANTE’s check register shows the following entries for the month of December
Date
Checks
Deposits
Balance
2006
Dec
1
Beginning Balance
P 83,900
5
Deposit
7
Check # 14344
32,500
120,800
11
Check # 14345
14,000
106,800
26
Deposit
29
Check #14346
P 65,000
49,000
8,600
147,200
ELEFANTE’s bank reconciliation for November revealed one outstanding check (No.14343) for
P12,000 (written on November 28), and one deposit in transit for P5,550 (made November
29).
The following is from Elefante’s bank statement for December 2006:
Date
Checks
Deposits
Balance
2006
Dec.
1
Beginning balance
P 95,970
1
Deposit
4
Check No. 14344
5
Deposit
14
Check No. 14345
15
Loan Proceeds
20
NSF check
7,600
603,200
29
Service charge
1,000
602,200
31
Interest
P
5,550
P 32,500
101,300
68,800
56,000
14,000
124,800
110,800
500,000
3,600
610,800
605,800
Note: All errors noted in this problem were committed by the Elefante, not the bank. It is
also noted that the company failed to record one deposit in the book.
Questions
1. The unadjusted cash receipts per ledger of ELEFANTE COMPANY for the month of
December is:
a. P 119,620
b. P 114,000
c. P 110,620
d. P 105,000
2. The unadjusted cash receipts per bank of ELEFANTE COMPANY for the month of December
is:
a. P 574,150
b. P 568,600
c. P 565,150
d. P 559,600
3. The adjusted December 1 cash ledger balance of ELEFANTE COMPANY is:
a. P 95,970
b. P 89,520
c. P 83,900
d. P 78,280
4. The adjusted December31 cash bank balance of ELEFANTE COMPANY is:
a. P 634,420
b. P 628,800
c. P 623,180
d. P 577,620
5. The overstatement of deposit should be:
a. Deducted in the bank December 31 column.
b. Added in the bank December 31 column.
c. Deducted in the book December 31 column.
d. Added in the book December 31 column.
Solution
Dec. 1
Bank balance
Deposit in transit – Dec. 1
Receipts
95,970
565,150
5,550
(5,550)
- Dec. 31
Disburs.
55,100
49,000
Dec. 31
606,020
49,000
Outstanding checks
Dec. 1 - #14343
(12,000)
(12,000)
Dec. 31 - #14343 – P12,000
#14346 -
8,600
Adjusted balance
__________
________
20,600
(20,600)
89,520
608,900
63,700
634,420
Dec. 1
Book balance
Overstatement of deposit
Loan proceeds
Interest income
NSF
83,900
Receipts
114,000
Disburs.
55,100
Dec. 31
142,800
(9,000)
(9,000)
500,000
500,000
3,600
3,600
7,600
(7,600)
Service charge
Total
Unrecorded collection
Adjusted balance
__________
________
1,000
(1,000)
83,900
608,600
63,700
628,800
5,620
________
_________
5,620
89,520
608,900
63,700
634,420
Adjusting entry
Accounts receivable
9,000
Cash
9,000
Cash
500,000
Notes payable
500,000
Cash
3,600
Interest income
3,600
Accounts receivable
7,600
Cash
7,600
Service charge
1,000
Cash
1,000
Answer:
1. B
2. C
3. B
4. A
5. C
Problem 18
Juliet Company maintains a checking account at the Davao Bank. At July 31, selected data
from the ledger balance and the bank statement are as follows:
Cash in Bank
Balance, July 1
July Receipts
Per Books
Per Bank
P 17,600
P 19,200
82,000
July Credits
July Disbursement
80,070
76,900
July Debits
.
P 22,700
74,740
P 24,530
Analysis of the bank data reveals that the credits consist of P78,000 of July deposits and a
credit memorandum of P2,070 for collection of a P2,000 note plus interest revenue of P70.
The July debits per bank consist of checks cleared, P74,700 and a debit memorandum of P40
for printing additional company checks.
You also discover the following errors involving July checks: (1) a check for P230 to a creditor
on account that cleared the bank in July was journalized and posted as P320, and (2) a salary
check to an employee for P255 was recorded by the bank for P155.
The June 30 bank reconciliation contained only two reconciling items: deposits in transit,
P1,000 and outstanding checks, P2,600.
Assume that the interest on the note has been accrued.
Questions
1. The deposit in transit of JULIET COMPANY at July 31 is
a. P 5,000
c. P 1,000
b. P 2,930
d. Cannot be determined
2. The outstanding check of JULIET COMPANY at July 31 is:
a. P 4,700
b. P 4,660
c. P 4,610
d. P 4,520
3. The adjusted cash ledger balance of JULIET COMPANY at July 31 is:
a. P 25,020
b. P 24,820
c. P 24,730
d. P 24,640
4. The adjusted cash bank balance of JULIET COMPANY at July 31 is:
a. P 25,020
b. P 24,820
c. P 24,730
d. P 24,640
Solution
Book balance
22,700
CM – collection
DM – service charge
2,070
(
40)
Error – overstatement of
disbursement
Adjusted book balance
Bank balance
Error – understatement of
withdrawal
Deposit in transit
90
24,820
24,530
(
100)
5,000
Outstanding checks
(4,610)
Adjusted bank balance
24,820
DIT – beg.
1,000
+ Book receipts
OC – beg
82,000
+ Book disbursement
- Bank credits
2,600
78,810
- Bank debits
(excluding all CMs)
78,000
DIT – end
(excluding all DMs)
5,000
OC – end
74,800
4,610
Adjusting entry:
Cash
2,070
Notes receivable
2,000
Interest income
70
Service charge
40
Cash
40
Cash
90
Accounts payable
90
Answer:
1. A
2. C
3. B
4. B
Problem 19
You are asked to audit the cash of Letty Corporation. Letty Corporation carries its checking
account with Mindanao Bank. The following data are available:
a. Letty Company Cash account for December:
Balance, November 30
Deposits during December
P 20,900
93,400
Checks written during December
( 83,000)
Balance, December 31
P 32,300
b. Bank statement for December:
Balance, November 30
Deposits during December
P 20,000
92,300
Checks cleared during December
( 82,150)
Funds transferred from foreign operations revenue
(in peso amount not yet recorded by Letty Corp.)
25,000
NSF check, Customer Nelly
(
180)
Bank Service charge
(
70)
Balance, December 31
P 54,900
c. Additional data:
1. Balance in Petty Cash account, P200 (not included in Letty Cash account).
2. The deposits of P93,400 by Letty Company are overstated by P100; the bank recorded
the correct amount.
3. The checks cleared by the bank of P82,150 erroneously included a P300 check drawn
by Laity Corporation; the bank has not yet corrected this error.
4. November 30: deposits outstanding, P2,000; and checks outstanding, P1,500.
Questions
1. The deposit in transit of LETTY COMPANY at December 31 is:
a. P 3,100
b. P 3,000
c. P 2,900
d. P 2,000
2. The outstanding checks of LETTY COMPANY at December 31 is:
a. P 1,650
b. P 1,500
c. P 2,050
d. P 2,350
3. The adjusted cash balance of LETTY COMPANY at December 31 is:
a. P 56,050
b. P 55,950
c. P 55,650
d. P 55,550
4. The cash shortage of LETTY COMPANY at December 31 is:
a. P 0
b. P 400
c. P 500
d. P 600
Solution
Book balance
31,300
Bank balance
CM
25,000
Error
DM
(
70)
Deposit in transit
NSF
(
180)
Error
(
100)
Total
55,950
Shortage
(
400)
Outstanding checks
54,900
300
3,000
(2,650)
______
Total
55,550
______
Adjusted balance
55,550
DIT – beg
2,000
55,550
OC – beg
1,500
+ Book receipts
93,300
+ Book disbursement
83,000
- Bank deposits
92,300
- Bank disbursement
81,850
DIT – end
3,000
OC – end
2,650
Adjusting entry:
Cash
25,000
Cash – foreign bank
Service charge
25,000
70
Cash
70
Accounts receivable
180
Cash
180
Accounts receivable
100
Cash
100
Due to custodian
400
Cash
400
Answer:
1. B
2. A
3. D
4. B
Problem 20
In Your audit of the accounts of Cleenenth Company, you find the following facts on December
31, 2006.
Balance of cash in bank account
P1,350,000
Balance of bank statement
1,200,000
Outstanding checks, December 31:
No. 000567
10,000
581
55,000
582
40,000
602
25,000
615
65,000
616
70,000
Receipts of December 31, deposited the following month
265,000
275,000
The bank statement shows the following charges:
Service charge for December
5,000
NSF check received from a customer
85,000
Additional information:
The stub for check number 000581 and the invoice relating thereto show that it was for
P35,000 but was incorrectly recorded as P55,000. This was in payment of the accounts
payable.
Payment has been stopped on check number 000567 which was drawn in payment of accounts
payable. The payee cannot be located.
Included in the bank statement was a canceled check the company had failed to record. The
check was in payment of accounts payable.
Questions
1. The unrecorded disbursement of CLEENETH COMPANY at December 31, 2006 is:
a. P 80,000
b. P 50,000
c. P 40,000
d. P 10,000
2. Cancellation of check number 567 should be recorded as:
a. Debit to Accounts Payable
c. Credit to Accounts Payable
b. Credit to Cash
d. No adjustment/entry
3. Cash shortage of CLEENETH COMPANY at December 31, 2006 is:
a. P 0
b. P 50,000
c. P 40,000
d. P 10,000
4. The adjusted cash balance of CLEENETH COMPANY at December 31, 2006 is:
a. P 1,290,000
b. P 1,240,000
c. P 1,210,000
d. P 1,180,000
Solution
Balance per book
1,350,000
Service charge
(
5,000)
NSF check
(
85,000)
Overstatement of disburs
Accounts payable
50,000
Cash
Service charge
50,000
5,000
check # 581
20,000
Cash
5,000
Cancellation of check
# 567
10,000
Total
1,290,000
Unrecorded disburs. *
Adjusted balance
(
Accounts receivable
85,000
Cash
85,000
50,000)
1,240,000
Cash
20,000
Accounts payable
Balance per bank
Outstanding checks
20,000
1,200,000
( 265,000)
Deposit in transit
275,000
Cash
Accounts payable
10,000
10,000
Overstatement of disburs
check # 581
20,000
Cancellation of check
# 567
10,000
Adjusted balance
1,240,000
* squeeze figure
Answer:
1. B
2. C
3. A
4. B
Problem 21
Dema-ala Company is very profitable small business. It has not, however, given much
consideration to internal control. For example, in an attempt to keep clerical and office
expenses to a minimum, the company has combined the jobs of cashier and bookkeeper. As
a result, Maria handles all cash receipts, keeps the accounting records, and prepares the
monthly bank reconciliation.
The balance per bank statement on October 31, 2006, was P73,520. Outstanding checks
were: No. 62 for P507, No. 183 for P600, No. 284 for P1,103, No. 862 for P762.84, No. 863
for P907.20, No. 864 for P661.12. Included with the statement was a credit memorandum of
P800 indicating the collection of a note receivable for Dema-ala Company by the bank on
October 25. Dema-ala Company has not recorded this memorandum.
The company’s ledger showed one cash account with a balance of P87,570.88. The balance
included undeposited cash on hand. Because of the lack of internal control, Maria took for
personal use all the undeposited receipts in excess of P15,182.04. She then prepared the
following bank reconciliation in an effort to conceal her theft of cash.
Cash balance per books, October 31
P 87,570.88
Add: Outstanding checks
No. 862
P 762.84
No. 863
907.20
No. 864
661.12
1,931.16
P 89,502.04
Less: Undeposited receipts
15,182.04
Unadjusted balance per bank, October 31
P 74,320.00
Less: Bank credit memorandum
800.00
Cash balance per bank statement, October 31
P 73,520.00
Questions
1. DEMA-ALA COMPANY’S cash shortage at October 31 is:
a. P 4,210
b. P 3,410
c. P 1,600
d. P 800
2. DEMA-ALA COMPANY’S adjusted cash balance at October 31 is:
a. P 88,370.88
b. P 87,570.88
c. P 86,770.88
d. P 84,160.88
Solution
Unadjusted balance
Collection of note
Book
Bank
87,570.88
73,520.00
800.00
Outstanding checks
# 62
P 507.00
#183
600.00
#284
1,103.00
#862
762.84
#863
907.20
#864
661.12
(
4,541.16)
Deposit in transit
_________
15,182.04
Total
88,370.88
84,160.88
Cash shortage
(4,210.00)
________
Adjusted cash balance
84,160.88
84,160.88
Adjusting entry:
Cash
800
Notes receivable
Due to custodian
800
4,210
Cash
4,210
Answer:
1. A
2. D
Problem 22
On December 15 of the current year, Darwin, who owns Herald Corporation, asks you to
investigate the cash-handling activities in his firm. He thinks that an employee might be
stealing funds. “I have no proof” he say, “but I’m fairly certain that the November 30
undeposited receipts amounted to more than P6,000 although the November 30 bank
reconciliation prepared by the cashier shows only P3,619.20. Also, the November bank
reconciliation doesn’t show several checks that have been outstanding for a long time. The
cashier told me that these checks needn’t appear on the reconciliation because he has notified
the bank to stop payment on them and he had made the necessary payment on the books.
At your request, Darwin showed you the following November 30 bank reconciliation prepared
by the cashier.
Bal. Per bank statement
Deposit in transit
P
2,360.12
Bal. Per Books
3,619.20
Bank Service charge (
30.00)
Unrecorded bank CM (
600.00)
Outstanding checks
# 2351
550.10
2353
289.16
2354
484.84
Adjusted Balance
P
( 1,224.10)
P 4,755.22
5,385.22
________
Adjusted Balance
P
4,755.22
You discover that the P600 unrecorded bank credit represents a note collected by the bank
on Darwin’s behalf. It appears in the deposits column of the November bank statement. Your
investigation also reveals that the October 31 bank reconciliation showed three checks that
had been outstanding longer than 10 months: No. 1432 for P300, No. 1458 for P233.45, and
No. 1512 for P126.55.
You also discover that these items were never added back into the cash account in the books.
In confirming that the checks shown on the cashier’s November 30 bank reconciliation were
outstanding on that date, you discover that check No. 2353 was actually a payment of
P829.16 and had been recorded on the books for the amount.
To confirm the amount of undeposited receipts at November 30, you request a bank statement
for December 1-12 (called a cut-off bank statement). This indeed shows a December 1
deposit of P3,619.20.
Questions
1. The amount of fund stolen by the cashier is:
a. P 3,160
b. P 2,500
c. P 1,840
d. P 580
2. The total outstanding checks of HERALD CORPORATION at November 30 is:
a. P 2,524.10
b. P 1,884.10
c. P 1,864.10
d. P1,224.10
3. The adjusted cash balance of HERALD CORPORATION at November 30 is:
a. P 5,955.22
b. P 5,355.22
c. P 4,115.22
d. P 3,455.22
Solution
Book balance
5,385.22
CM
600.00
Service charge
(
30.00)
Stalled checks
Bank balance
2,360.12
Deposit in transit
3,619.20
Outstanding checks
#2351
550.10
#1432
300.00
#2353
829.16
#1458
233.45
#2354
484.84
#1512
126.55
Total
Cash shortage
Adjusted balance
660.00
6,615.22
________
Total
(2,500.00)
4,115.22
(1,864.10)
4,115.22
________
Adjusted balance
4,115.22
Adjusting entry:
Cash
600
Notes receivable
Service charge
600
30
Cash
30
Cash
660
Accounts payable
Due to custodian
660
2,500
Cash
2,500
Answer:
1. B
2. C
3. C
Problem 23
The bank statement for the account of ARNOLD COMPANY at December 31, 2006 showed a
credit balance of P20,000, while the company’s ledger balance of the cash account as of
November 30, 2006 was a debit of P40,000. During December, 2006, the ledger showed two
postings, a debit of P60,000 and a credit of P39,000 from the Cash Receipts and Check
Disbursements Journal, respectively.
Your examination revealed that the cash column of the receipts book was underfooted by
P6,400. The receipts book recorded only the collections from customers and did not include
a bank credit in December for P8,000, representing loan proceeds of a P10,000 promissory
note.
An examination of the customers’ subsidiary ledgers showed total credits to individual
accounts amounting to P70,400. The December Check Disbursements Journal which was
overfooted by P500, records only the checks issued by the company. In the month of
December, 2006, the bank charged ARNOLD COMPANY for P5,000 representing a loan
guaranteed by the client but was dishonored by the maker, the company vice-president. The
December bank service charges of P1,200 were erroneously charged by the bank to the
account of Ronald Company. The bank made the correction in January, 2007. The
outstanding checks as of December 31, 2006 amounted to P5,600.
On the morning of January 2, 2007, a cash count conducted produced the following:
Bills and coins
P 5,200
Three (3) duplicate copies of ARNOLD CO.
official receipts, all dated Jan. 2, 2007
1,800
Checks
2,900
NSF check charged by the bank on Jan. 2, 2007
1,400
Questions
1. The deposit in transit of ARNOLD COMPANY at December 31, 2006 is:
a. P 6,300
b. P 7,700
c. P 8,100
d. P 11,300
2. The cash shortage of ARNOLD COMPANY at December 31, 2006 is:
a. P 54,200
b. P 50,200
c. P 46,200
d. P 36,400
3. The maximum probable cash shortage of ARNOLD COMPANY at December 31, 2006 based
on the records is:
a. P 54,200
b. P 50,200
c. P 46,200
d. P 36,400
4. The adjusted cash balance of ARNODL COMPANY at December 31, 2006 is:
a. P 19,500
b. P 21,300
c. P 20,900
d. P 24,500
Solution
Unadjusted balance
Book
Bank
61,000
20,000
Cash shortage
- Bank Recon
Understatement of receipts
6,400
CM
8,000
-AR subsidiary
500
ledger credit
Overstatement of disbursements
DM – service charge
Cash shortage – AR ledger
(5,000)
posting
DM – service charge not recorded
postings *
(1,200)
Outstanding checks
(1,200)
______
6,300
69,700
19,500
Cash shortage
(50,200)
______
Adjusted cash balance
19,500
19,500
Total
66,400
4,000
Maximum Shortage
54,200
* Cash debit posting
60,000
(5,600)
Deposit in transit
(5,200 + 2,900 – 1,800)
70,400
- Cash debit
in the book and erroneously
recorded by the bank
50,200
unrecorded collection
6,400
66,400
Answer::
1. A
2. B
3. A
4. A
Problem 24
The PAMA CORPORATION engaged your services to audit its account. In your examination of
cash, you find that the Cash account represents both cash on hand and cash in bank. You
further noted that there is very poor internal control of cash.
Your audit covers period ended June 30, 2006. You started the audit on June 15. Upon cash
count on this date, cash on hand amounted to P4,800. Examination of the cash book and
other evidence of transaction disclosed the following:
1. July collections per duplicate receipts, P18,800
2. Total of duplicate deposit slips, all dated, July, P11,000, includes a deposit
representing collections of June 30.
3. Cash book balance at June 30, 2006 is P46,500, representing both cash on hand and
cash in bank.
4. Bank statement for June shows a balance of P42, 400.
5. Outstanding checks at June 30: May checks, No. 183 for P450, and No. 198 for P1,650;
June checks, No. 205 for P600, No. 254 for P400, No. 280 for P5,000, No. 302 for
P900, and No.317 for P2,500.
6. Undeposited collections at June 30, P5,000.
7. An amount of P900 representing proceeds of clean draft on a customer was credited
by bank, but is not yet taken up in the company’s books.
8. Bank service charges for June, P100.
The company cashier presented to you the following reconciliation statement for June, 2006
which he has prepared:
Balance per books, June 30, 2006
P46,500
Add: outstanding checks:
No. 205
P 600
254
400
280
500
302
700
317
1,500
Total
Bank charges
Undeposited collections
3,600
P49,200
(100)
( 5,100)
Balance per bank, June 30, 2006
P44,000
Questions
1. The outstanding checks of PAMA CORPORATION at June 30, 2006 is:
a. P 3,600
b. P 3,700
c. P 5,700
d. P 11,500
2. The cash shortage of PAMA CORPORATION at June 30, 2006 is:
a. P 7,800
b. P 11,400
c. P 12,800
d. P 19,400
3. The cash shortage of PAMA CORPORATION from July 1 to July 15, 2006 is:
a. P 8,000
b. P 7,800
c. P 3,000
d. P 2,800
4. The total cash shortage of PAMA CORPORATION up to July 15, 2006 is:
a. P 14,400
b. P 15,600
c. P 15,800
d. P 19,400
5. The adjusted cash balance of PAMA CORPORATION at June 30, 2006 is:
a. P 35,900
b. P 39,600
c. P 43,800
d. P 44,900
Solution
Unadjusted balance
Book
Bank
46,500
42,400
Outstanding checks
( 11,500)
Deposit in transit
5,000
CM
900
Service charge
(
Total
47,300
35,900
(11,400)
______
35,900
36,900
Cash shortage
Adjusted cash balance
100)
______
Cash shortage from July 1 to July 15
Collection per records
Deposit in transit – June 30
18,800
5,000
Cash that should be deposited
23,800
Deposited collection
11,000
Undeposited collection
12,800
Cash on hand – July 15
4,800
Cash shortage – July 1 to July 15
8,000
ANSWER:
1. D
2. B
3. A
4. D
5. A
Problem 25
In connection with the general examination of the accounts of Nelson Trading Company at
December 31, 2006, you obtained the information and data as shown below relative to your
verification of Cash.
The record kept by the accountant showed the following:
(a) Balances at the end of the month:
December 1, 2006
Per Bank Statement
December 31, 2006
P 54,000
P101,100
50,400
70,215
Undeposited collections
3,300
7,200
Outstanding checks
6,900 *
Per Books
* Composed of the following
12,000 *
#6515
510
#6552 P 1,800
6517
2,250
6553
5,700
6518
2,400
6554
2,550
6519
1,740
6555
1,950
(b) Totals for the month of December, 2006:
Cash Book:
Receipts
Disbursement
P 425,550
405,735
Bank Statement
Receipts
Disbursement
P 444,225
397,125
After application of the necessary auditing procedures, the following were noted:
a. Footing of disbursement should be P 404,235, instead of P 405,735.
b. Bank service charge of P15 for December has not been booked.
c. Cancelled checks (returned together with the December bank statement) include the
following which were charged in the statement:
1. Check #6530 dated December 15, 2006 for P2,400 - this was issued as
replacement of check # 6518 which was returned by the payee because of
certain erasures. No entry has been made to record the cancellation of check
#6518.
2. Check #6517 for P225 - this was erroneously recorded on the books as P2,250.
3. Check of Neil Trading for P900 - this was charged by bank in error.
d. Proceeds from sale of stocks amounting to P23,250 (cost is P18,000) transmitted
directly by the broker to the bank and credited on December 31, 2006. No entry has
been made on the books to record this sale of stock investment.
e. The company failed to record disbursement for payment of accounts payable at
December 31, 2006 for P1,500.
Questions
1. The adjusted cash receipts per ledger of NELSON TRADING COMPANY at December 31,
2006 is:
a. P 448,800
b. P 448,125
c. P 444,225
d. P 425,550
2. The adjusted cash disbursement per bank of NELSON TRADING COMPANY at December
31, 2006 is:
a. P 401,325
b. P 402,000
c. P 405,735
d. P 406,125
3. The adjusted cash ledger balance of NELSON TRADING COMPANY at December 31, 2006
is:
a. P 91,350
b. P 95,400
c. P 97,200
d. P 97,500
4. The adjusted cash in bank balance of NELSON TRADING COMPANY at December 31, 2006
is:
a. P 91,350
b. P 95,400
c. P 97,200
d. P 97,500
5. The cash shortage of NELSON TRADING COMPANY at December 31, 2006 is:
a. P 765
b. P 675
c. P 575
d. P 390
Solution
Dec. 1
Balance per book
Overfooting of disburse.
Service charge
50,400
Receipts
425,550
Disburse.
Dec. 31
405,735
70,215
( 1,500)
1,500
15
(
15)
Cancellation of check
# 6518
( 2,400)
2,400
( 2,025)
2,025
Overstatement of
disbursement
Proceeds from sale of
stock
23,250
Unrecorded disbursement
_________
_________
1,500
( 1,500)
50,400
448,800
401,325
97,875
Balance
Cash shortage
23,250
_________
Adjusted balance
50,400
Dec. 1
Balance per bank
54,000
(
675)
448,125
Receipts
444,225
_________
401,325
Disburse.
397,125
(
675)
97,200
Dec. 31
101,100
Deposit in transit
Dec. 1
3,300
Dec. 31
(
3,300)
7,200
7,200
Outstanding checks
Dec. 1
( 6,900)
( 6,900)
Dec. 31
Error
_________
_________
50,400
448,125
Adjusted balance
Adjusting entry:
Due to custodian
675
Cash
675
Service charge
15
Cash
Cash
15
2,025
Accounts payable
Accounts payable
1,500
Cash
Cash
2,205
1,500
1,500
Accounts payable
1,500
12,000
( 12,000)
900)
900
401,325
97,200
(
Cash
2,400
Accounts payable
Cash
2,400
23,250
Stock investment
Gain on sale
18,000
5,250
Answer:
1. B
2. A
3. C
4. C
5. B
CHAPTER 4 – Audit of Receivables
Problem 1
The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet
submitted to a banker for credit. You are called upon to audit the report and, upon analysis,
the asset was found to consist of the following items:
Due from customers on open account
Acknowledged claim for damages
P 1,125,000
22,500
Due from consignee at billed price – cost price
being P22,500
Investment in and advances to affiliated company
30,000
150,000
Loans to officers and employees
13,500
Deposits with municipalities – bids for contracts
67,500
Unpaid capital stock subscriptions
60,000
Advances to creditors for merchandise purchased
but not received
Cash advanced to salesmen for traveling expenses
24,000
4,500
Allowance for doubtful accounts
(
30,000)
P1,467,000
The amount of P1,125,000 due from customers was the remaining balance after deducting
accounts with credit balances of P6,000.
During your examination, you noted that on December 31, the company assigned P300,000
of customers’ accounts to secure a 17%, P240,000 note payable. A 1% commission based
on the accounts assigned was charged and deducted from the cash received. The client
recorded this transaction by a debit to cash and a credit to notes payable.
Questions
1. How much is the Accounts Receivable (gross) balance at December 31?
a. P 759,000
b. P 789,000
c. P 1,101,000
d. P 1,131,000
2. The total current non-trade receivable balance at December 31 is:
a. P 64,500
b. P 96,000
c. P 120,000
d. P 192,000
3. The liability for the accounts receivable – assigned is:
a. P 237,000
b. P 240,000
c. P 243,000
d. P 300,000
4. The total non-trade receivable balance at December 31 is:
a. P 342,000
b. P 318,000
c. P 313,500
d. P 245,000
Solution
(1) Claims Receivable
22,500
Accounts receivable
(2) Sales
22,500
30,000
Accounts receivable
(3) Advances to affiliates
Accounts receivable
(4) Receivables - officers/employee
30,000
150,000
150,000
13,500
Accounts receivable
(5) Deposits for contracts bidding
13,500
67,500
Accounts receivable
(6) Subscription receivable
Accounts receivable
67,500
60,000
60,000
(7) Advances to suppliers
24,000
Accounts receivable
24,000
(8) Advances to officers/employee
4,500
Accounts receivable
4,500
(9) Accounts receivable
30,000
Allowance for bad debts
30,000
(10) Accounts receivable
6,000
Customers with credit balance
6,000
(11)
OE: Cash
237,000
Notes payable
CE: Cash
Commission expense
237,000
237,000
3,000
Notes payable
Adj: Commission expense
300,000
3,000
Notes payable
3,000
Unadjusted AR
1,467,000
Non-trade AR
(1)
(
22,500)
Claims receivable
(2)
(
30,000)
Advances to affiliates
(3)
( 150,000)
Advances to off/empl
(4)
(
13,500)
( 13,500 + 4,500)
18,000
(5)
(
67,500)
Deposit for contracts
67,500
(6)
(
60,000)
Subscription receivable
60,000
(7)
(
24,000)
Advances to suppliers
24,000
(8)
(
4,500)
(9)
(10)
Adjusted balance
150,000
30,000
6,000
1,131,000
Current non-trade AR
Claims receivable
22,500
22,500
Advances to off/empl
( 13,500 + 4,500)
18,000
Advances to suppliers
24,000
__________
Total
342,000
Total
64,500
Answer:
1. D
2. A
3. B
4. A
Problem 2
In your audit of MENDOZA COMPANY for the past calendar year, you find the following
accounts:
ACCOUNTS RECEIVABLES
Jan. 1, 2002
P
Jan. – Dec. Sales
800,000
6,300,000
Jan. – Dec. 1992 collections P 5,900,000
Jan. – Dec. write-off
100,000
ALLOWANCE FOR BAD DEBTS
Jan. – Dec. Write-off of
last year’s receivables
Jan. 1, 2002
P
85,000
Dec. 31 provisions
P
95,000
315,000
Write-off of this year’s
Receivables
15,000
In your examination, you find that the balance of Accounts Receivable represents sales of the
current audit year only; that credit balances in the subsidiary ledger for accounts receivable
totaled P80,000; and that the current year’s provision for bad debts expense was 5% of sales
(as compared with 4½% last year, 4% of the year before, and 3½% the next previous year).
Sequential to aging the accounts receivable, you and the company’s treasurer agree on an
additional write-off of P50,000, and P300,000 as the probable loss to be sustained on
collection of the accounts receivable balance.
Questions
1. The adjusted Accounts Receivable balance is:
a. P 830,000
b. P 1,100,000
c. P 1,130,000
d. P 1,180,000
2. The adjusted Allowance for Bad Debts is:
a. P 260,000
b. P 300,000
c. P 315,000
d. P 355,000
3. The adjusted Bad Debts account is:
a. P 260,000
b. P 300,000
c. P 315,000
d. P 355,000
4. The provision per record at December 31 is:
a. P 260,000
b. P 300,000
c. P 315,000
d. P 355,000
Solution
Accounts Receivable
80,000
Customers’ credit balance
Allowance for bad debts
80,000
50,000
Accounts receivable
Bad debts expense
50,000
40,000
Allowance for bad debts
40,000
Computation:
*
Provision per records
315,000
Provision per audit
355,000
Adjustment
40,000
* Beg. balance
95,000
+ Provisions
355,000 squeezed figure
- Write-off per book
100,000
- Additional write-off
50,000
Ending balance
300,000
Answer:
1. C
2. B
3. D
4. C
Problem 3
The following selected transactions occurred during the year ended December 31, 2006 of
DOMINGO COMPANY:
Gross sales (cash and credit)
P 900,736.80
Collections from credit customers, net of 2% cash discount
294,000.00
Cash sales
180,000.00
Uncollectible accounts written off
19,200.00
Credit memos issued to credit customers for sales ret./allow.
10,080.00
Cash refunds given to cash customers for sales ret./allow.
15,168.00
Recoveries on accounts receivable written-off in prior years
(not included in cash received stated above)
6,505.20
At year-end, the company provides for estimated bad debts losses by crediting the Allowance
for Bad Debts account for 2% of its net credit sales for the year. The allowance for bad debts
at the beginning of the year is P19,327.20.
Questions
1. How much is the DOMINGO COMPANY’s gross sales?
a. P 900,736.80
b. P 720,736.80
c. P 704,656.80
2. DOMINGO COMPANY’s credit sales at December 31, 2006 is:
a. P 900,736.80
b. P 720,736.80
c. P 704,656.80
3. How much is the DOMINGO COMPANY’s net credit sales?
a. P 900,736.80
b. P 720,736.80
c. P 704,656.80
d. P 689,488.80
d. P 689,488.80
d. P 689,488.80
4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54
b. P 14,093.14
c. P 8,030.74
d. P7,829.14
5. The Accounts Receivable of DOMINGO COMPANY at December31, 2006 is:
a. P 408.042.00
b. P 407,536.80
c. P 401,536.80
d. P 391,456.80
6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54
b. P 14,093.14
c. P 8,030.74
d. P7,829.14
Solution
Accounts Receivable
Credit Sales
Recoveries
720,736.80
6,505.20
Collection
294,000.00
Sales discount
from credit cust.
Write-off
6,000.00
19,200.00
Sales returns from
credit customer
__________
Recoveries
727,242.00
Ending bal.
Net credit sales:
720,736.80
- Sales discounts from credit sales
( 6,000.00)
- Sales returns from credit sales
(10,080.00)
Net credit sales
Bad debts:
6,505.20
335,785.20
391,456.80
Credit sales
10,080.00
704,656.80
Net credit sales
704,656.80
x % of uncollectible
2%
Bad debts
14,093.136
Allowance for bad debts:
Beg. balance
19,327.20
Provision for bad debts
14,093.14
Recoveries
6,505.20
Less: Write-off
( 19,200.00)
Allowance ending balance
20,725.54
Answer:
1. A
2. B
3. C
4. B
5. D
6. A
Problem 4
Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of
December 31, 2006:
Unaudited Balances, 12/31/06
Selected Accounts
Cash
Accounts receivable
Allowance for doubtful accounts
Net sales
Debit
Credit
P 500,000
1,300,000
8,000
P 6,750,000
Additional information are as follows:
a. Goods amounting to P50,000 were invoiced for the accounts of Joy Store & Co., recorded
on January 2, 2007 with terms of net, 60 days, FOB shipping point. The goods were
shipped to Variety Store on December 30, 2006.
b. The bank returned on December 29, 2006, a customer’s check for P5,000 marked “DAIF”,
but no entry was made.
c. MARJORIE COMPANY estimates that allowance for uncollectible accounts should be one
and one-half percent (1½%) of the accounts receivable balance as of year-end. No
provision has yet been made for 2006.
Questions
1. What is the adjusted balance of Accounts Receivable on December 31, 2006?
a. P 1,355,000
b. P 1,350,000
c. P 1,305,000
d. P 1,300,000
2. What is the adjusted balance of Allowance for doubtful accounts on December 31, 2006?
a. P 36,325
b. P 28,325
c. P 20,325
d. P 8,000
3. What is the adjusted amount of 2006 Bad Debts Expense?
a. P 12,325
b. P 20,325
c. P 28,325
d. P 36,325
Solution
(1)
A
1,300,000 + 50,000 + 5,000
P1,355,000
(2)
C
P1,355,000 x 1 ½%
P20,325
(3)
C
P20,325 + P8,000 debit balance
P28,325
Problem 5
During December, 2006, the Accounts Receivable controlling account on the books of
FERNANDEZ COMPANY showed one debit posting and two credit postings. The debit
represents receivables from December sales, P780,000. One credit was for P470,400, made
a result of cash collections on November and December receivables; the second credit was
an adjustment for estimated uncollectibles, P90,000. The December 31 balance was
P270,000.
When receivables were collected, the bookkeeper credited Accounts Receivables for the cash
collected. All customers who paid their accounts during December took advantage of the 2%
cash discount.
As of December 1, debit balance in customers’ subsidiary accounts totaled P177,000. An
adjustment for estimated doubtful accounts of P18,000 had been posted to the Accounts
Receivable controlling account at the end of 2002, and no write-offs were recorded during
2006. In addition, a number of customers had overpaid their accounts, and as a result, some
of the customers’ subsidiary accounts had credit balances on December 1. No overpayments
were made during December nor were any credit balances in customers’ accounts reduced
during December.
Questions
1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY at
December 31, 2006 is:
a. P 50,400
b. P 68,400
c. P 252,000
d. P 270,000
2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY at
December 31, 2006 is:
a. P 50,400
b. P 68,400
c. P 252,000
d. P 270,000
3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ
COMPANY is:
a. P 48,600
b. P 66,600
c. P 108,600
d. P 126,600
4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is:
a. P 50,400
b. P 68,400
c. P 252,000
d. P 270,000
Solution
Computation for unadjusted AR beginning balance:
Accounts Receivable
* Beg. bal.
Sales
50,400
780,000
Collections
Allow. for BD
830,400
End bal.
470,400
90,000
560,400
270,000
* squeezed figure
Ending balance of AR control account
270,000
Add: Credits during December
560,400
Less: Debits during December
( 780,000)
Balance of AR control account – Dec. 1
50,400
Add: 2006 Est. allowance for BD
18,000
Adjusted AR control account – Dec. 1
68,400
Less: AR subsidiary account – Dec. 1
177,000
Credit balance of AR account – Dec. 1
108,600
Answer:
1. A
2. B
3. C
4. D
Problem 6
You are examining the financial statements of MATIAS CORPORATION for the year ended
December 31, 2006. During the audit of the accounts receivable and other related accounts,
certain information was obtained.
The December 31, 2006 debit balance in the Accounts Receivable control account is P197,000.
The only entries in the Bad Debts Expense account were: a credit for P324 on December 31,
2006, because Marlisa Company remitted in full for the accounts charged off October 31,
2006, and a debit on December 31 for the amount of the credit to the Allowance for Doubtful
Accounts.
The Allowance for Doubtful Accounts schedule is presented below:
Debit
Credit
January 1, 2006
Balance
P 3,658
October 21, 2006, Uncollectible;
Marlisa Co., - P324; Abonales Co.,
- P 820; Cherryl Co., - P564
December 31, 2006, 5% of P197,000
P 1,508
2,150
P 9,850
12,000
An aging schedule of the accounts receivable as of December 31, 2006 and the decision are
shown in the table below:
Age
Net Debit Balance
Amount to which the Allow.
is to be adjusted after adjust.
____________
0 – 1 month
_________________
93,240
1 percent
1 – 3 months
76,820
2 percent
3 – 6 months
22,180
3 percent
over 6 months
P
and corrections have been made
6,000
Definitely uncollectible, P1,000;
P2,000 is considered 50% uncollectible; the remainder is estimated to be 80% collectible.
There is a credit balance in one account receivable (0-1 month) of P2,000; it represents an
advance on a sales contract. Also, there is a credit balance in one of the 1-3 months accounts
receivable of P500 for which merchandise will be accepted by the customer.
The ledger accounts have not been closed as of December 31, 2006. The Accounts Receivable
control account is not in agreement with the subsidiary ledger. The difference cannot be
located, and the auditor decides to adjust the control to the sum of the subsidiaries after
corrections are made.
Questions
1. The adjusted balance of accounts receivable of MATIAS CORPORATION at December 31,
2006 is:
a. P 199,740
b. P 199,540
c. P 198,300
d. P 198,100
2. The adjusted write-off of accounts receivable balance of MATIAS CORPORATION at
December 31, 2006 is:
a. P 2,708.00
b. P 2,508.00
c. P 2,384.00
d. P 1,708.00
3. The adjusted allowance of bad debts account of MATIAS CORPORATION at December 31,
2006 is:
a. P 4,980.60
b. P 4,964.20
c. P 4,780.60
d. P 4,764.20
4. The bad debts expense per book of MATIAS CORPORATION at December 31, 2006 is:
a. P 9,850.00
c. P 4,764.20
b. P 6,359.80
d. Cannot be determined
5. The adjusted bad debts expense of MATIAS CORPORATION at December 31, 2006 is:
a. P 3,814.20
b. P 3,614.20
c. P 3,490.20
d. P 2,814.20
6. The entry to adjust the account of Marlisa Company is:
a. Bad debts
324
c. Allow. for BD
324
Allow. for BD
324
Bad debts
b. Bad debts
324
d. Accounts receiv. 324
Accounts receivable
324
Bad debts
324
324
7. The entry to reconcile the accounts receivable control ledger to subsidiary ledger is:
a. Accounts receivable 1,440
c. Accounts receiv. 1,440
Allow. for BD
1,440
Misc. income
1,440
b. Allow. for BD
1,440
d. No adjustment
Accounts receivable
1,440
8. The net realizable value of accounts receivable of MATIAS CORPORATION at December
31, 2006 is:
a. P 194,975.80
b. P 194,775.80
c. P 193,335.80
d.P193,319.40
Solution
Per
PER SUBSIDIARY LEDGERS
Control
Acct.
Bal. before adjustments
P 197,000
Over
0-1 mo.
P 93,240
1-3 mos
P 76,820
3-6 mos.
P 22,180
6 mos.
Total
P 6,000
P 198,240
(1,000)
(1,000)
Adjustments: Add(Deduct)
(2) Correction to 10.31.02
entry
to
write-off
uncollectible accts.
(200)
(3) Write-off
considered
uncollectible
of acct.
definitely
( 1,000)
(4)
Reclassification
credit balances
of
P
(5) To adjust the control
acct. to agree with SL
Adjusted balance
2,500
2,000
500
198,300
P 95,240
P 77,320
1,440
P 199,740
2,500
P 22,180
P 5,000
P 199,740
Audit adjustments as of 12.31.06
(1)
Bad Debts expense
324
Allowance for doubtful accounts
(2)
324
Allowance for doubtful accounts
200
Accounts Receivable
(3)
200
Allowance for doubtful accounts
1,000
Accounts Receivable
(4)
1,000
Accounts Receivable
2,500
Customer’s Accounts with Credit Balances
(5)
2,500
Accounts Receivable
1,440
Miscellaneous Revenue
(6)
1,440
Allowance for Doubtful Accounts
6,359.80
Bad Debts Expense
6,359.80
Required allowance on 12.31.06
0-1 mo.
P 95,240 x 1%
1-3 mos.
77,320 x 2 %
3-6 mos.
22,180 x 3%
Over 6 mos.
P
952.40
1,546.40
665.40
3,000 x 20%
600.00
2,000 x 50%
1,000.00
P 4,764.20
Beg. balance
3,658.00
+ Provision per audit
3,490.20
(squeezed figure)
- Write-off
2,384.00
Ending balance
4,764.20
Provision per book
9,850.00
Provision per audit
3,490.20
Adjustment
6,359.80
Answer:
1. A
2. C
3. D
6. A
7. C
8. A
4. A
5. C
Problem 7
You are auditing the Accounts Receivable and the related Allowance for Bad Debts account of
ROY COMPANY. The following data are available:
Accounts Receivable, general ledger balance
P 848,000
Allowance for bad debts:
Beginning balance
P
Provision per general ledger
20,000
48,000
Write-offs
( 16,000)
Balance, end
P
52,000
Summary of Aging Schedule
The summary of the subsidiary ledger as of December 31, 2006, was totaled as follows:
Debit balances:
Under on month
One to six months
Over six months
Credit balances:
Almario
Peter
Bituin
P 360,000
368,000
152,000
P 880,000
P
8,000 - OK; additional billing in
January 2004
14,000 – Should have been credited
To Manuel Co. - 1-6 mos.
classification.
18,000 - Advance on a sales contract
P 40,000
The customers’ ledger is not in agreement with the accounts receivable control. The client
instructs the auditor to adjust the control to the subsidiary ledger after corrections are made.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six
months are expected to require a reserve of 2 percent. Accounts over six months are analyzed
as follows:
Definitely bad
Doubtful (estimated to be 50% collectible)
Apparently good, but slow (90% collectible)
Total
P 48,000
24,000
80,000
P152,000
Questions
1. The entry to adjust the account of Almario is:
a. Accounts receivable 8,000
Sales
b. Sales
c. Accounts receivable
8,000
8,000
Accounts receivable
b. Sales
14,000
b. Sales
14,000
Cust. with Cr. bal.
14,000
14,000
18,000
18,000
Accounts receivable
c. Accounts receivable
d. No adjustment
3. The entry to adjust the account of Bituin is:
a. Accounts receivable 18,000
Sales
8,000
8,000
14,000
Accounts receivable
Cust. with Cr. bal.
d. No adjustment
2. The entry to adjust the account of Peter is:
a. Accounts receivable 14,000
Sales
8,000
c. Accounts receivable
18,000
Cust. with Cr. bal.
d. No adjustment
18,000
4. The entry to reconcile the control ledger to the subsidiary ledger is:
a. Miscellaneous loss
8,000
c. Accounts receivable
8,000
18,000
Accounts receivable
8,000
b. Accounts receivable 8,000
Miscellaneous gain
Sales
8,000
d. Sales
8,000
8,000
Accounts receivable
5. The entry to adjust the Bad Debts Expense is:
a. Bad Debts Expense 74,680
c. Bad Debts Expense 30,680
Allow. for BD
74,680
Allow. for BD
b. Bad Debts Expense 26,680
d. No adjustment
Allow. for BD
26,680
8,000
30,680
6. The Accounts Receivable balance at December 31, 2006 is:
a. P 840,000
b. P 826,000
c. P 818,000
d. P 786,000
7. The Allowance for Bad Debts at December 31, 2006 is:
a. P 74,680
b. P 48,000
c. P 30,680
d. P 26,680
8. The Bad Debts Expense at December 31, 2006 is:
a. P 74,680
b. P 48,000
c. P 30,680
d. P 26,680
Solution
* (1) Accounts receivable
8,000
Sales
(2) Accounts receivable
8,000
14,000
Accounts receivable
14,000
* (3) Accounts receivable 18,000
Customers’ deposit
18,000
(4) Allowance for bad debts
48,000
Accounts receivable
* (5) Miscellaneous losses
48,000
8,000
Accounts receivable
8,000
To reconcile control account with subsidiary ledger.
(6) Bad debts
26,680
Allowance for bad debts
26,680
* ignored in the aging of AR
Aging of AR
Under 1 to 6
Over 6
Control
Account
Unadjusted balance
1 mo.
848,000
(1)
mos.
mos.
360,000 368,000 152,000
8,000
(2)
-
(14,000)
(3)
18,000
(4)
(48,000)
(5)
( 8,000)
(48,000)
______
Adjusted balance 818,000
_______ _______
360,000 354,000
104,000
Under 1 mo.
360,000 x 1%
=
3,600
1 to 6 mos.
354,000 x 2%
=
7,080
Over 6 mos.
24,000 x 50%
= 12,000
80,000 x 10%
=
Required allowance for bad debts
8,000
30,680
Provision for bad debts per audit:
Beginning balance
20,000
+ Provision – squeezed figure
74,680
- Write-off per book
16,000
- Additional Write-off
48,000
Ending balance
30,680
Provision per book
48,000
Provision per audit
74,680
Adjustment
26,680
Answer:
1. A
2. D
3. C
4. A
5. B
6. C
7. C
8. A
Problem 8
KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information:
Invoice
Customer
Penas
Jefferson
Junsay
Cherryl
Baron
Riza
Account Balance – 12/31/06
P 70,360
41,840
61,200
90,280
63,200
34,800
Date
Amount
12/06/06
P 28,000
11/29/06
42,360
09/27/06
24,000
08/20/06
17,840
12/08/06
40,000
10/25/06
21,200
11/17/06
46,280
10/09/06
44,000
12/12/06
38,400
12/02/06
24,800
09/12/06
34,800
The estimated bad debt rates below are based on Karen Company’s receivable collection
experience.
Age of Accounts
Rate
0 – 30 days
1%
31 – 60 days
1.5%
61 – 90 days
3%
91 – 120 days
10%
Over 120 days
50%
The allowance for bad debts account had a credit balance of P7,000 on December 31, 2006,
before adjustment.
Questions
1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2006 is:
a. P 317,680
b. P 319,320
c. P 326,880
d. P 361,680
2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31,
2006 is:
a. P 9,698.80
b. P 10,188.80
c. P 12,397.60
d. P 19,397.60
3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2006
is:
a. P 9,698.80
b. P 10,188.80
c. P 12,397.60
d. P 19,397.60
4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31,
2006 is:
a. P 342,282.40
b. P 349,282.40
c. P 307,482.40
d. P 314,482.40
Solution
Aging of AR
Balance 0-30
Penas
Jefferson
31-60
61-90
12/31/06
Days
Days
P 70,360
28,000
42,360
41,840
91-120
Days
Over 120
Days
Days
24,000
17,840
Junsay
61,200
Cherryl
90,280
Baron
63,200
63,200
Riza
34,800
______
______
______
34,800
_____
131,200
88,640
65,200
58,800
17,840
1%
1.5%
Total
P361,680
x % of uncollectibility
40,000
21,200
46,280
Required Allowance
1,312
Bad debts expense
12,397.60
Allowance for bad debts
44,000
3%
1,329.60
1,956
10%
5,880
50%
8,920 = P 19,397.60
12,397.60
(P19,397.60 – P7,000)
Answer:
1. D
2. D
3. C
4. A
Problem 9
You are assigned to audit KENT COMPANY for the year ending December 31, 2006. The
accounts receivable were circularized as at December 31, 2006 and the following
exceptions/replies have not been disposed of at the date of your examination.
Customer
Balance
Duque
P 30,000
Odessa
74,000
Comments
Audit Findings
Balance was paid Dec.
Kent received mailed
29, 2006.
January 2, 2007.
Balance was offset by our
Kent credited accounts
Dec. 10 shipment of goods.
payable for P74,000 to
record purchase of goods
Solejon
Rubin
16,200
23,700
The above balance has
The payment was
been paid.
Credited to Dairen – cust.
We do not owe Kent any-
The shipment costing
thing as the goods were
received January, 2007,
P16,300 was made on
Dec. 29, 2006 and the
FOB Destination
goods were not included
in recording the year-end
inventory.
Jamea
150,000
Our deposit of P200,000
Kent had previously
should cover this balance
credited the deposit to
sales.
Ocsio
54,000
We never received these
The shipment was erro-
goods.
neously made to another
customer and the goods
worth P51,000 are now
on its way to Ocsio. The
shipment, FOB Shipping
Point, was made on Dec.
30, 2006.
Dela Cruz
100,000
We are rejecting the price,
Kent’s clerk erroneously
which is too much
computed the unit price
at P2,000. The correct
pricing should have been
at P1,200 per unit.
Ronel
18,000
Amount is okay. Since
Goods cost P12,000 and
this is on consignment, we
were appropriately inclu-
will remit payment upon
ded in Kent’s inventory
selling the goods.
KENT COMPANY has not recorded yet its 2006 inventory. The balance of inventory and
Accounts Receivable at December 31, 2006 (per trial balance) is P 456,000 and P345,900,
respectively.
Questions
1. The entry to adjust the finding made in the account of Duque is:
a. Cash
30,000
Accounts receivable
b. Cash
c. Accounts receivable 30,000
30,000
30,000
Sales
Cash
30,000
d. No adjustment
30,000
2. The entry to adjust the finding made in the account of Odessa is:
a. Purchases
74,000
Accounts receivable
b. Sales
c. Accounts payable
74,000
74,000
Purchases
74,000
Accounts receivable 74,000
d. No adjustment
74,000
3. The entry to adjust the finding made in the account of Solejon is:
a. Accounts receivable 16,200
Accounts receivable
b. Accounts payable
c. Accounts receivable 16,200
16,200
16,200
Accounts receivable
Accounts payable
16,200
d. No adjustment
16,200
4. The entry to adjust the finding made in the account of Rubin is (for sales):
a. Sales
23,700
Accounts receivable
b. Accounts payable
c. Accounts receivable
23,700
23,700
Purchases
23,700
Sales
23,700
d. No adjustment
23,700
5. Entry to adjust the finding made in the account of Rubin is (for cost of sales):
a. Cost of sales
16,300
c. Retained earnings
16,300
Inventory
16,300
b. Inventory
16,300
Cost of sales
Inventory
16,300
d. No adjustment
16,300
6. The entry to adjust the finding made in the account of Jamea is:
a. Customers’ advances 150,000
Sales
c. Sales
200,000
150,000 Customers’ advances
50,000
Accounts receivable
b. Customers’ advances150,000
Accounts receivable
d. Sales
150,000
150,000
150,000
Customers’ advances
150,000
7. The entry to adjust the finding made in the account of Ocsio is:
a. No adjustment
c. Sales
54,000
Accounts receivable
b. Accounts receivable 51,000
Sales
d. Sales
51,000
54,000
3,000
Accounts receivable
3,000
8. The entry to adjust the finding made in the account of Dela Cruz is:
a. Accounts receivable 40,000
Sales
b. Sales
c. Sales
40,000
40,000
Accounts receivable
60,000
Accounts receivable
60,000
d. No adjustment
40,000
9. The adjusted balance of Kent Company’s inventory at December 31, 2006 is:
a. 451,700
b. P 460,300
c. P 472,300
d. P 484,300
10. The adjusted balance of Kent Company’s accounts receivable at December 31, 2006 is:
a. P 37,200
b. P 55,200
c. P 187,200
d. P 205,200
Solution
For Doque
No adjustment
For Odessa
Accounts payable
74,000
Accounts receivable
For Solejon
Accounts receivable
74,000
16,200
Accounts receivable
For Rubin
Sales
16,200
23,700
Accounts receivable
Inventory
23,700
16,300
Cost of sales
For Jamea
16,300
Sales
200,000
Customers’ advances
50,000
Accounts receivable
For Ocsio.
Sales
150,000
3,000
Accounts receivable
For dela Cruz
Sales
3,000
40,000
Accounts receivable
For Ronel
Sales
40,000
18,000
Accounts receivable
Unadjusted Inventory
456,000
Adjustment - Rubin
16,300
18,000
Unadjusted AR
Adjustment - Odessa
( 74,000)
- Solejon
-
_________
Adjusted balance
472,300
345,900
- Rubin
( 23,700)
- Jamea
(150,000)
- Ocsio
(
- dela Cruz
( 40,000)
- Ronel
( 18,000)
Adjusted balance
3,000)
37,200
Answer:
1. D
2. C
3. A
4. A
5. B
6. C
7. D
8. B
9. C
10. A
Problem 10
You have been assigned to audit the financial statement MALAQUI INCORPORATED. The
company is a distributor of a variety of electronic appliances and parts. The company uses
the calendar year for reporting purposes. Information regarding balances of MALAQUI
INCORPORATED’S Accounts Receivable and the related Allowance for Doubtful Accounts as of
December 31, 2006 and the related audit finding, is given below.
The schedule of accounts receivable furnished you by the accountant reflects some errors.
The total figure in the schedule does not tally with the balance per subsidiary ledger of
P919,000. Based on your review of sales invoices, purchase orders and other related
documents, you noted the following information:
1. Sales on account of various electronics totaling P36,480 were returned by the customer
on December 28, 2006, but no entry was made in the books. The goods were included in
the year-end physical count.
2. Based on the findings per confirmation reply from a customer, he indicated that he has
already paid his account of P23,980 in October, 2006. Your verification disclosed that said
collection was credited to net sales account.
3. Collection of P12,950 on November 5, 2006 from Diana Corporation was credited to the
account of DNA Corporation.
The allowance for doubtful accounts is set at 3% of the outstanding accounts receivable at
the end of the period. As of December 31, 2006, the Allowance for Doubtful Accounts has a
balance of P32,400 before adjustment.
Questions
1. What is the adjusted balance of Accounts Receivable as of December 31, 2006?
a. P 919,000
b. P 895,020
c. P 882,520
d. P 858,540
2. What is the adjusted balance of Allowance for Doubtful Accounts as of December 31, 2006?
a. P 27,570.00
b. P 26,850.60
Solution
Sales
36,480
c. P 26,475.60
d. P 25,756.20
Accounts receivable
Sales
36,480
23,980
Accounts receivable
23,980
Answer:
1. D
2. D
Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:
1. The December 31 inventory was determined by a physical count on December 28 and
based on such count, the inventory was recorded by:
Inventory
1,400,000
Cost of sales
2.
3.
4.
5.
1,400,000
The 2006 ledger shows a sales balance of P20,000,000.
The company sells a mark-up of 20% based on sales.
The company recognizes sales upon passage of title to the customers.
All customers are within a four-day delivery area.
The sales register for December, 2006 and January, 2007, showed the following details:
December Register
Invoice No.
FOB Terms
Date Shipped
Amount
300
Destination
12/30
P 50,000
301
Shipping point
12/30
62,500
302
Destination
12/23
47,500
303
Destination
12/24
82,500
304
Shipping point
01/02
56,000
305
Shipping point
12/29
90,000
FOB Terms
Date Shipped
Amount
January Register
Invoice No.
306
Destination
12/29
67,500
307
Shipping point
12/29
74,500
308
Destination
01/02
140,000
309
Shipping point
01/04
73,000
310
Shipping point
12/27
67,500
Questions
1. The Sales for December is over/(under) by:
a. P 36,000 under
b. P 36,000 over
c. P 106,000 under
d. P 106,000 over
2. The Inventory for December is over/(under) by:
a. P 235,600 under
c. P 181,600 under
b. P 235,600 over
d. P 181,600 over
3. The adjusted inventory at December 31, 2006 is:
a. P 1,645,412
b. P 1,635,600
c. P 1,218,400
d. P 1,164,400
4. The adjusted sales at December 31, 2006 is:
a. P 20,106,000
b. P 20,036,000
c. P 19,964,000
d. P 19,894,000
5. How much sales for the month of December 2006 were erroneously recorded in January
2007?
a. P 282,000
b. P 272,500
c. P 198,000
d. P 142,000
6. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. P 228,500
b. P 188,500
c. P 180,500
d. P 106,000
Solution
(1) Sales
50,000
Accounts receivable
50,000
Invoice # 300
(2) Cost of sales
50,000
Inventory
50,000
(62,500 x 80%)
Invoice # 301
(3) Sales
56,000
Accounts receivable
56,000
Invoice # 304
(4) Cost of sales
72,000
Inventory
72,000
(90,000 x 80%)
Invoice # 305
(5) Accounts receiv.
74,500
Sales
74,500
Invoice # 307
(6) Cost of sales
59,600
Inventory
59,600
(74,500 x 80%)
(7) Accounts receiv.
Sales
67,500
67,500
Invoice # 310
Unadjusted Sales
20,000,000
Unadjusted inventory
1,400,000
(1)
(
50,000)
(2)
( 50,000)
(3)
(
56,000)
(4)
( 72,000)
74,500
(6)
( 59,600)
(5)
(7)
67,500
Adjusted Sales
20,036,000
_________
Adjusted inventory
1,218,400
Sales for the month of December that 2003
were erroneously recorded in January 2004:
Invoice # 307
74,500
Invoice # 310
67,500
Total
142,000
Sales for the month of January 2004
were erroneously recorded in December 2003:
Invoice # 300
50,000
Invoice # 304
56,000
Total
106,000
Answer:
1. A
2. D
3. C
Problem 12
4. B
5. D
6. D
You are engaged to perform an audit of the accounts of the JELLER CORPORATION for the
year ended December 31, 2006, and have observed the taking of the physical inventory of
the company on December 27, 2006. Only merchandise shipped by the Durian Corporation
to customers up to and including December 27, 2006 have been removed or excluded from
inventory. The inventory as determined by physical inventory count has been recorded on
the books by the company’s controller. No perpetual inventory records are maintained. All
sales are made on an FOB shipping point basis.
The following lists of sales invoices are entered in the sales books for the months of December
2006 and January 2007, respectively.
Sales Invoices
December 2006
January 2007
Date
Amount
Date Shipped
(a)
12/23/06
P 25,000
12/31/06
(b)
12/27/06
18,000
12/27/06
(c)
12/30/06
30,000
01/05/07
(d)
12/22/06
12,000
01/08/07
(e)
12/28/06
16,000
12/29/06
(f)
12/03/06
8,000
12/05/06
(g)
12/31/06
20,000
01/07/07
(h)
12/31/06
14,000
12/31/06
(i)
12/31/06
7,500
12/29/06
(j)
12/27/06
11,000
01/04/07
(k)
01/08/07
9,000
01/09/07
(l)
01/10/07
5,000
12/31/06
Questions
1. How much sales for month of December 2006 were erroneously recorded in January 2007?
a. P 7,500
b. P 12,500
c. P 18,500
d. P 20,000
2. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. Zero
b. P 12,500
c. P 20,000
d. P 62,000
3. How much is the correct amount of sales for the month ended December 31, 2006?
a. P 143,000
b. P 155,500
c. P 93,500
d. P 81,000
Solution
(1)
B
Item (I)P7,500 and Item (l), P5,000
P12,500
(2)
D
Items c, d, g
P62,000
(3)
C
Recorded sales for December
P143,000
December sales recorded in January
12,500
January sales recorded in December
(62,000)
Adjusted sales for December
P 93,500
Problem 13
On September 1, DY COMPANY assigns specific receivables totaling P750,000 to Davao Bank
as collateral on a P625,000, 12% note. DY COMPANY will continue to collect the assigned
accounts receivable. Davao Bank also assesses a 2% service charge on the total accounts
receivable assigned. DY COMPANY is to make monthly payments to Davao Bank with cash
collected on assigned accounts receivable. Collections of assigned accounts during September
totaled P260,000 less cash discounts of P3,500.
Questions
1. What were the proceeds from the assignment of DY COMPANYs’ accounts receivable on
September 1?
a. P 610,000
b. P 612,500
c. P 625,000
d. P 735,000
2. What amount is owed to Davao Bank by DY COMPANY for September collections plus
accrued interest on the note to September 30?
a. P 260,000
b. P 262,750
c. P 264,000
d. P 266,250
Solution
(1)
A
P625,000 – (2% x P750,000)
P610,000
(2)
B
P260,000 – P3,500 + (P625,000 x 12% x 1/12)
P262,750
Problem 14
On April 1, 2006, VAILOCES CORPORATION assigned accounts receivable totaling P400,000
as collateral on a P300,000, 16% note from Racel Bank. The assignment was done on a
nonnotification basis. In addition to the interest on the note, the bank also receives a 2%
service fee, deducted in advance on the P300,000 value of the note.
Additional information is as follows:
1. Collections of assigned accounts in April totaled P191,100, net of a 2% sales discount.
2. On May 1, VAILOCES CORPORATION paid the bank the amount owed for April collections
plus accrued interest on note to May 1.
3. The remaining accounts were collected by VAILOCES CORPORATION during May except
for P2,000 accounts written-off as worthless.
4. On June 1, VAILOCES CORPORATION paid the bank the remaining balance of the note
plus accrued interest.
Questions
1. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable
on April 1, 2006 is:
a. Cash
294,000
c. Cash
294,000
Finance charges
6,000
Finance charges
6,000
Accounts receivable
300,000
Notes payable
300,000
b. Cash
294,000
d. Cash
294,000
Finance charges
6,000
Commission exp.
6,000
AR – assigned
300,000
AR – assigned
300,000
2. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable
on April 1, 2006 assuming the assignment is on notification basis:
a. Cash
294,000
c. Cash
294,000
Finance charges
6,000
Finance charges
6,000
Accounts receivable
300,000
Notes payable
300,000
b. Cash
294,000
d. Cash
294,000
Finance charges
6,000
Commission exp.
6,000
AR – assigned
300,000
AR – assigned
300,000
3. The entry of VAILOCES CORPORATION on April collection of the assigned account is:
a. Cash
191,100
c. Cash
191,100
Sales discounts
3,900
Sales discounts
3,900
AR – assigned
195,000
Accounts receivable 195,000
b. Cash
191,100
d No journal entry
Accounts receivable
191,100
4. If the assignment is on notification basis, who should collect the assigned accounts
receivable?
a. Vailoces Corporation
c. A third party
b. Racel Bank
d. It is the option of the customer to
whom he/she will pay the account
5. Using the assumption in number 4 above, what will be the entry of VAILOCES
CORPORATION on the April collection of the assigned accounts receivable?
a. Cash
191,100
c. Cash
191,100
Sales discounts
3,900
Sales discounts
3,900
AR – assigned
195,000
b. Cash
191,100
Accounts receivable
191,100
d
Accounts receivable
No journal entry
195,000
6. The journal entry of VAILOCES CORPORATION on the on May 1, 2006 is:
a. Notes payable
187,100
c. Notes payable
188,500
Interest expense
4,000
Interest expense
2,600
Cash
191,100
Cash
191,100
b. Notes payable
195,000
d. Notes payable
195,000
Interest expense
5,333
Interest expense
4,000
Cash
200,333
Cash
199,000
7. Using the same information in number 6 (May 1 transaction) except that the assignment
is done on a notification basis, the entry should be:
a. Notes payable
187,100
c. Notes payable
188,500
Interest expense
4,000
Interest expense
2,600
Accounts receivable
191,100
AR –assigned
191,100
b. Notes payable
195,000
d. No journal entry
Interest expense
4,000
AR - assigned
199,000
8. The total interest expense of VAILOCES CORPORATION on the assigned accounts
receivable is:
a. P 5,400
b. P 8,066
d. P 10,000
c. P 11,400
Solution
April
1
Accounts receivable – assigned
400,000
Accounts receivable
1
Cash
400,000
294,000
Finance charges (300,000 x 2%)
6,000
Notes payable
(1)
Cash
300,000
191,100
Sales discounts
3,900
AR – assigned (191,100/98%)
(2)
Notes payable
Interest expense
195,000
195,000
4,000
(300,000 x 16% x 1/12)
Cash
(3)
Cash
199,000
203,000
Allowance for bad debts
2,000
AR – assigned
205,000
(400,000 – 195,000)
(4)
Notes payable (300,000 – 195,000)105,000
Interest expense
1,400
(105,000 x 16% x 1/12)
Cash
106,400
Answer:
1. C
2. C
3. A
6. D
7. B
8. A
4. B
5. D
Problem 15
UY FINANCE CORPORATION purchases the accounts receivable of other companies on a
without recourse, notification basis. At the time the receivables are factored, 15% of the
amount factored is charged to the client as commission and recognized as revenue in UY’S
books. Also, 10% of the receivables factored is withheld by Uy as protection against sales
returns or other adjustments. This amount credited by Uy to the client Retainer account. At
the end of each month, payments are made by Uy to its clients so that the balance in the
Client Retainer account is equal to 10% of unpaid factored receivables. Based on Uy’s bad
debt loss experience, an allowance for bad debts of 5% of all factored receivables is to be
established, Uy makes adjusting entries at the end of each month.
On January 3, 2003, Jannette Company factored its accounts receivable totaling P1,000,000.
By January 31, P800,000 on these receivables had been collected by Uy.
Questions
1. The commission earned of Uy Finance Corporation from Jannette Company’s accounts
receivable factored is:
a. P 150,000
b. P 120,000
c. P 135,000
d. P 90,000
2. The proceeds received by Jannette Company on the accounts factored is:
a. P 810,000
b. P 780,000 c. P 765,000
d. P 750,000
3. How much is the Client Retainer account of Uy Finance Corporation at January 31, 2003
is:
a. P 0
b. P 20,000
c. P 60,000
d. P 80,000
4. How much is the bad debts expense of Uy Finance Corporation at January 31, 2003 is:
a. P 50,000
b. P 40,000
c. P 20,000
d. P 0
Solution
UY FINANCE CORPORATION’S BOOKS
Jan.
3
31
Accounts receivable factored
1,000,000
Commission income (P1 M x 15%)
150,000
Client Retainer (P1 M x 10%)
100,000
Cash
750,000
Cash
800,000
Accounts receivable factored
31
Client Retainer
800,000
80,000
Cash (100,000 – [10% x 200,000])
31
Bad debts expense
80,000
50,000
Allowance for bad debts (P1 M x 5%)
50,000
JANETTEE COMPANY’S BOOKS
Jan. 3
Cash
750,000
Receivable from factor
100,000
Commission
150,000
Accounts receivable
31
1,000,000
Cash
80,000
Receivable from factor
80,000
Answer:
1. A
2. D
3. B
4. A
Problem 16
During your audit of the LEILANI COMPANY for the calendar year 2006, you find the following
accounts:
NOTES RECEIVABLE
Sept. 1
Samson, 12%, due in 3 mos.
36,000
36,000
Nov. 1
Hazel, 15%, due in 6 mos.
90,000
126,000
Nov. 1
Salazar, no interest, due in one
year
75,000
201,000
Nov. 30
Rosa, Co. 12%, due in 13 mos.
15,000
216,000
Dec. 1
Rona, 15%, due in 15 mos.
36,000
252,000
Dec. 2
Anito, President, 18%, due in 3
mos.
18,000
270,000
NOTES RECEIVABLE DISCOUNTED
Sept. 1
Samson
15%
at
36,000
36,000
Nov. 1
Salazar note, discounted at 15%
75,000
111,000
note,
discounted
INTEREST EXPENSE
Sept. 1
Samson note
Nov. 1
Salazar note
310.50
310.50
11,250.00
11,560.50
All notes are trade notes receivable unless otherwise specified. The Samson note was paid
December31, 2006. Interest income is credited only upon receipt of cash.
Questions
1. The accrued interest income at December 31, 2006 is:
a. P 2,748
b. P 3,018
c. P 3,120
d. P 4,200
2. The interest expense at December 31, 2006 is:
a. P 1,875.00
b. P 2,185.50c. P 4,060.50
d. P 11,560.50
3. The Notes Receivable at December 31, 2006 is:
a. P 141,000
b. P 159,000 c. P 216,000
d. P 252,000
4. The Notes Receivable – discounted at December 31, 2006 is:
a. P 63,750
b. P 73,125
c. P 75,000
d. P 111,000
5. How much is the proceeds in the discounting of notes receivable for the year?
a. P 99,439.50
b. P 100,060.50
c. P 111,000.00
d. P 111,310.50
Solution
1.
C
Hazel
90,000 x 15% x 2/12 = P 2,250
Rosa
15,000 x 12% x 1/12 =
150
Rona
36,000 x 15% x 1/12 =
450
Anito
18,000 x 18% x 1/12 =
270
Total accrued interest
2.
B
Samson
Salazar
=P
11,250 x 2/12
Total interest expense
3.
4.
A
Hazel
90,000
Rosa
15,000
Rona
36,000
Total
141,000
=
310.50
1,875.00
= P2,185.50
C
Salazar
5.
P 3,120
75,000
A
Samson
P 36,000 – P 310.50
= P 35,689.50
Salazar
P 75,000 – P11,250
=
Total proceeds
63,750.00
= P 99,439.50
Problem 17
On January 1, 2006, TUQUIB COMPANY sells its equipment with a carrying value of P160,000.
The company receives a non-interest-bearing note due in 3 years with a face amount of
P200,000. There is no established market value for the equipment. The prevailing interest
rate for a note of this type is 12%. The following are the present value factors of 1 at 12%:
Present value of 1 for 3 periods
0.71178
Present value of an ordinary annuity of 1 for 3 periods
2.40183
Questions
1. The gain or loss on the sale of equipment is:
a. P 40,000
b. P
122
c. P 0
d. (P 17,644)
2. The discount on notes receivable is:
a. P 57,644
b. P 40,000
d. P 0
c. P 39,878
3. The entry to record the sale of equipment is:
a. Notes receivable
200,000
c. Notes receivable 200,000
Equipment
200,000
Loss on sale
17,644
Equipment
160,000
Discount on NR
57,644
b. Notes receivable
200,000
d. Notes receivable 200,000
Equipment
160,000
Equipment
160,000
Gain on sale
40,000
Gain on sale
Discount on NR
122
39,878
4. The discount amortization at the end of the second year using the effective-interest
amortization is:
a. P 17,083
b. P 19,133
c. P 21,428
d. P 36,216
5. The entry to record the discount amortization is:
a. Discount on NR
c. Interest income
Interest income
Discount on NR
b. Discount on NR
d. Interest expense
Interest expense
Discount on NR
Solution
1.
D
Sales price – present value of note (P200,000 x 0.71178) 142,356
2.
Book value of equipment
160,000
Loss on sale of equipment
(17,644)
A
Face value of note
200,000
Present value of note
142,356
Discount on notes receivable
3.
57,644
C
Notes receivable
Loss on sale of equipment
200,000
17,644
Equipment
160,000
Discount on notes receivable
4.
57,644
B
Present value of note, 1/1/03
142,356
Add: Interest earned in 2003
(142,356 x 12%)
Present value of note, 1/1/04
17,083
159,439
Add: interest earned in 2004
(159,439 x 12%)
Present value of note, 1/1/05
5.
19,133
178,572
A
Problem 18
On January 2, 2006, a tract of land that originally cost P800,000 was sold by MAYLENE
CORPORATION. The company received a P1,200,000 note as payment. It bears interest rate
of 4% and is payable in 3 annual installments of P400,000 plus interest on the outstanding
balance. The prevailing rate of interest for a note of this type is 10%. The present value
table shows the following present value factors of 1 at 10%:
Present
Present
Present
Present
value
value
value
value
factor of 1 for 3 periods
factor of 1 for 2 periods
factor of 1 for 1 period
of an ordinary annuity of 1 for 3 periods
0.75132
0.82645
0.90909
2.48685
Questions
1. The gain on sale of land on January 2, 2006 is:
a. P 194,740
b. P 276,847
c. P 290,740
d. P 400,000
2. The interest income on the note receivable for the year ended December 31, 2006 using
effective interest method is:
a. P 120,000
b. P 109,074
c. P 107,685
d. P 99,474
3. How much cash will MYLENE CORPORATION received from notes receivable?
a. P 1,076,847
b. P 1,200,000
c. P 1,296,000
d. P 1,476,847
Solution
Amount of cash to be received:
Interest Principal Total
2003
48,000 *
400,000
448,000
2004
32,000 **
400,000
432,000
2005
16,000 ***
400,000
416,000
Total
1,296,000
* 1,200,000 x 4%
** 800,000 x 4%
*** 400,000 x 4%
Cash received
PV Factor
2003
448,000
0.90909
407,272
2004
432,000
0.82645
357,026
2005
416,000
0.75132
312,549
Total
Present value of note
Present Value
1,076,847
1,076,847
Cost of land
800,000
Gain on sale
276,847
Interest income for 2006 – P1,076,847 x 10% = P107,685
Answer:
1. B
2. C
3. C
Problem 19
The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the
following cash and receivable balances:
Cash – Davao Bank
Currency and coins
Petty cash fund
Cash in bond sinking fund
Notes receivable (including discounted with
recourse, P15,500)
Accounts receivable
P 85,600
Less: Allow. for bad debts
(4,150)
Interest receivable
P 45,000
16,000
1,000
15,000
36,500
81,450
525
Current liability reported in the December 31, 2005, balance sheet included:
Obligation on discounted notes receivable
15,500
Transactions during 2006 included the following:
1. Sales on account were P767,000.
2. Cash collected on accounts totaled P576,500, including accounts of P93,000 with cash
discounts of 2%.
3. Notes received in settlement of accounts totaled P82,500.
4. Notes receivable discounted as of December 31, 2005, were paid at maturity with the
exception of one P3,000 note on which the company had to pay the bank P3,090, that
included interest and protest fees. It is expected that recovery will be made on this note
early in 2004.
5. Customer notes of P60,000 were discounted with recourse during the year, proceeds from
their transfer being P58,500. Of this total, P48,000 matured during the year without
notice of protest.
6. Customer accounts of P8,720 were written-off in prior year as worthless.
7. Recoveries of doubtful accounts written-off in prior years were P2,020. (not included in
the collection in number 2)
8. Notes receivable collected during the year totaled P27,000 and interest collected was
P2,450.
9. On December 31, accrued interest on notes receivable was P630.
10. Uncollectible accounts are estimated to be 5% of the December 31, 2006, accounts
receivable balance.
11. Cash of P35,000 was borrowed from Davao Bank, accounts receivable of P50,000 being
pledged on the loan. Collections of P19,500 had been made on these receivables included
in the total given in transaction (2) and this amount was applied on December 31, 2006,
to payment of accrued interest on the loan of P600, and the balance to partial payment of
the loan.
12. Petty cash fund was reimbursed based on the following analysis of expenditure vouchers:
Travel expenses
P 112
Entertainment expenses
78
Postage
93
Office supplies
173
Cash over
6
13. P3,000 cash was added to the bond sinking fund.
14. Currency on hand at December 31, 2006 was P12,000.
15. Total cash payment for all expenses during the year were P468,000. Charge to General
Expense
Based on the information above and some other analysis, answer the following questions:
Questions
1. PERSEVERANCE CORPORATION’s Cash balance at December 31, 2006 is:
a. P 269,430
b. P 265,430
c. P 252,430
d. P 219,930
2. PERSEVERANCE CORPORATION’s Accounts Receivable balance at December 31, 2006 is:
a. P178,8787.00
b. P 178,824.50
c. P176,804.50
d. P174,254.50
3. PERSEVERANCE CORPORATION’s Other Cash Item (Currency and coins & Petty Cash Fund)
at December 31, 2006 is:
a. P 16,000
b. P 13,000
c. P 12,550
d. P 12,000
4. PERSEVERANCE CORPORATION’s Notes Receivable at December 31, 2006 is:
a. P 46,500
b. P 31,000
c. P 30,910
d. P 28,500
5. PERSEVERANCE CORPORATION’s Obligation of Discounted of Note Receivable at
December 31, 2006 is:
a. P 15,500
b. P 12,000
c. P 11,910
d. P 3,500
6. PERSEVERANCE CORPORATION’s Interest Receivable at December 31, 2006 is:
a. P 2,555
b. P 1,155
c. P 630
d. P 525
7. PERSEVERANCE CORPORATION’s Bad debts at December 31, 2006 is:
a. P 16,005.20
b. P 13,875.50
c. P 11,855.50
d. P 11,825.50
8. PERSEVERANCE CORPORATION’s Allowance for bad debts at December 31, 2006 is:
a. P 9,406.50
b. P 9,305.50
c. P 9,252.00
d. P 4,150.00
9. PERSEVERANCE CORPORATION’s Sales balance at December 31, 2006 is:
a. P 767,000
b. P 765,140
c. P 765,102
d. P 757,330
10. PERSEVERANCE CORPORATION’s Interest income balance at December 31, 2006 is:
a. P 3,086
b. P 3,080
c. P 2,561
d. P 2,555
Solution
(1)
Accounts receivable
767,000
Sales
(2)
Cash
767,000
576,500
Sales discounts
1,860
Accounts receivable
(3)
Notes receivable
576,360
82,500
Accounts receivable
(4)
Obligation on discounted note
Notes receivable
Accounts receivable
82,500
12,500
3,090
Cash
Obligation on discounted note
3,090
3,000
Notes receivable
(5)
Cash
3,000
58,500
Interest expense
1,500
Obligation on discounted note
Obligation on discounted note
Allowance for bad debts
48,000
8,720
Accounts receivable
(7)
Accounts receivable
8,720
2,020
Allowance for bad debts
Cash
2,020
2,020
Accounts receivable
(8)
60,000
48,000
Notes receivable
(6)
12,500
Cash
2,020
27,000
Notes receivable
Cash
27,000
2,450
Interest receivable
Interest income
525
1,925
(9)
Interest receivable
630
Interest income
(10)
630
Bad debts
11,855.50
Allowance for bad debts
(11)
Cash
11,855.50
35,000
Notes payable
35,000
Interest expense
600
Notes payable
18,900
Cash
(12)
19,500
Operating expenses
456
Cash
456
Cash
6
Other income
(13)
6
Sinking fund
3,000
Cash
(14)
No entry
(15)
General expenses
3,000
468,000
Cash
468,000
Answer:
1. A
2. C
3. B
4. D
5. B
6. C
7. C
8. B
9. B
10. D
Problem 20
You are engaged in your fifth annual examination of the financial statements of NAVAL
CORPORATION. Your examination is for the year ended December 31, 2006. The client
prepared the following schedule of Trade Notes Receivable and Interest Receivable for you at
December 31, 2006. You have agreed the opening balances to your prior year’s audit
workpapers.
NAVAL CORPORATION
TRADE NOTES RECEIVABLE AND RELATED INTEREST RECEIVABLE
Trade-Notes Receivable
Maker
Date
Terms
Int.
Bal.
2006
2006
Bal.
Rate
12/31/05
debits
credit
12/31/06
Rubin
Co.
04/01/05
1-year
12%
P 60,000
P 60,000
Cardoza
05/01/06
90 days
after date
-
P 30,000
Pancho
07/01/06
60 days
after date
12%
6,000
6,000
Betque
08/03/06
Demand
12%
15,000
15,000
Gabuter
o
10/02/06
60 days
after date
12%
50,000
50,000
-
Noval
11/01/06
90 days
after date
8%
42,000
35,000
7,000
Gan
11/01/06
90 days
after date
12%
32,000
29,375
P
625
32,000
INTEREST RECEIVABLE
Due from
Balance
2006 debit
2006 credit
Balance
12/31/06
Rubin Co.
P 5,400
P 1,800
P 7,200
Pancho
120
P 120
Betque
400
400
Gabutero
1,000
Noval
Gan
Totals
660
560
340
560
___________
640
___________
640
P 5,400
P 4,520
P 7,860
P 2,060
Your examination reveals this information:
1. Interest is computed on a 360-day basis. In computing interest, it is the corporation’s
practice to exclude the first day of the note’s term and to include the due date.
2. The Cardoza’s 90-day non-interest bearing note was discounted on May 15 at 10%, and
the proceeds were credited to the Trade Notes Receivable account. The note was paid at
maturity.
3. Pancho became bankrupt on August 31, and the corporation will recover 75 cents on the
peso. All of Naval Corporation’s notes receivable provide for interest at a rate of 12% on
the maturity value of a dishonored note.
4. Betque, president of Naval Corporation, confirmed that she owed Naval Corporation
P15,000 and that she expected to pay the note within six months. You are satisfied that
the note is collectible.
5. Gabutero’s 60-day note was discounted on November 1 at 8%, and the proceeds were
credited to the Trade Notes Receivable and Interest Receivable accounts. On December
2, Naval Corporation received notice from the bank that GAbutero’s note was not paid at
maturity and that it had been charged against Naval’s checking account by the bank.
Upon receiving the notice from the bank, the bookkeeper recorded the note and the
accrued interest in the Trade Notes Receivable and Interest Receivable account. Gabutero
paid Naval Corporation the full amount due in January 2003.
6. Noval, 90-day note was pledged as collateral for P35,000, 60-day 10% loan from the
Davao National Bank on December 1.
7. On November 1, the corporation received four, P8,000, 90-day notes from Gan. On
December 1, the corporation received payment from Gan for one of the P8,000 notes with
accrued interest. Prepayment of the notes is allowed without penalty. The bookkeeper
credited the Gan’s Accounts Receivable account for the cash received.
Questions
1. At December 31, 2006, the note receivable from Cardoza has a balance of:
a. P 30,000
b. P 29,375
c. P 625
d. P 0
2. The interest income from Cardoza’s note at December 31, 2006 is:
a. P 750
b. P 625
c. P 500
d. P 0
3. At December 31, 2006, the note receivable from Pancho has a balance of:
a. P 6,370.92
b. P 6,366.00
c. P 6,120
d. P 0
4. The interest income from Pancho’s note at December 31, 2006 is:
a. P 370.92
b. P 250.92
c. P 246
d. P 0
5. At December 31, 2006, the note receivable from Betque has a balance of:
a. P 15,350
b. P 15,000
c. P 14,650
d. P 0
6. At December 31, 2006 the note receivable from Gabutero has a balance of:
a. P 150,000
b. P 100,000
c. P 50,000
d. P 0
7. At December 31, 2006 the note receivable from Noval has a balance of:
a. P 42,000
b. P 35,000
c. P 7,000
d. P 0
8. At December 31, 2006 the note receivable from Gan has a balance of:
a. P 32,480
b. P 32,000
c. P 24,000
d. P 23,950
9. The total Note Receivable – Trade at December 31, 2006 is:
a. P 89,000
b. P 81,000
c. P 72,366
d. P 66,000
10. The total Interest Receivable at December 31, 2006 is:
a. P 2,300
b. P 2,060
c. P 1,950
d. P 1,790
Solution
Adjusting Entries as of Dec. 31, 2006
(2)
Cardoza
(a) Interest Expense
625.00
Trade Notes receivable
Maturity Value = Face Value
Discount (30,000 x 10% x 75/360)
625.00
P30,000
625
Proceeds
(3)
Pancho
P29,375
(b) Accounts Receivable
6,370.92
Trade Notes Receivable
Interest Receivable
120.00
Interest Revenue
250.92
Face Value
P6,000.00
Interest (6000 x 12% x60/360)
Maturity value
Total amount due, 12.31.06
Betque
120.00
P6,120.00
Add.’l interest from due date , 8.30.06 to
12.31.06 (6,120 x 12% x 123/360)
(4)
6,000.00
© Notes receivable- Officers
Interest Receivable
250.92
P6,370.92
15,000
350
Interest Revenue
350
Trade Notes Receivable
15,000
Accrued Interest as of 12.31.06
(15,000 x 12% x 150/360) = P750
(5)
Gabutero
OE: Cash
50,660
Notes Receivable
50,000
Interest Receivable
CE: Cash
660
50,660
NR – Discounted
50,000
Interest income
660
(d)
Adj: Notes Receivable
Interest Receivable
50,000
660
Interest income
660
NR – discounted
50,000
-----------------------------------------
-----------
----------
OE: Notes Receivable
Interest Receivable
50,000
1,000
Cash
CE: Accounts Receivable
51,000
51,000
Cash
NR – discounted
51,000
50,000
Notes Receivable
(e)
50,000
Accounts Receivable
51,000
NR – discounted
50,000
Trade Notes Receivable
100,000
Interest Receivable
Face Value
1,000
P50,000
Interest (50,000 x 12% x 60/360)
Maturity Value
1,000
P51,000
Discount (50,000 x 8% x 30/360)
Proceeds
(f)
340
P50,660
Accounts Receivable
510
Interest Revenue
510
(51,000 x 12% x 30/360)
(6)
Noval
(g) Trade Notes Receivable
35,000
Notes Payable- bank
(7)
Gan
(h) Accounts Receivable
35,000
8,080
Trade Notes Receivable
8,000
Interest Revenue
80
(8,000 x 12% x 30/360) = P80
(I)
Interest revenue
Interest Receivable
160
160
(Accrued Interest as of 12.31.06
24,000 x 12% x 60/360) = P480
ANSWER:
1. D
2. D
3. D
4. A
5. B
6. D
7. A
8. C
9. D
10. D
CHAPTER 5 – Audit of Inventory
Exercises - Analysis of Transactions
1. Moneba Company bought merchandise on January 2, 2006 from Lynn Company costing
P15,000; terms, less 20%, 20% down payment, balance 2/10, n/30. Two days after,
P2,000 worth of merchandise was returned due to wrong specification. Moneba Company
paid the account within the discount period. How much Moneba Company paid to Lynn
Company?
a. P 7,600
b. P 7,448
c. P 7,408
d. P 7,360
Answer - P 7,448
Buyer
Purchases
Seller
12,000
Cash
2,400
Accounts Payable
9,600
Accounts payable
2,000
Purchases
Accounts payable
Purch. Disc.
Cash
Accounts Receivable
9,600
Cash
2,400
Sales
Sales
2,000
7,600
7,448
2,000
Accounts Receivable
Cash
152
12,000
Sales Discount
Accounts Receivable
2,000
7,448
152
7,600
2. Merchandise shipped fob destination to customer was made on January 5, 2006 for
P25,000. The customer issued P10,000 12% 30-day note and the balance 2/10, n/30 on
January 10, 2006, the date the goods were received. The customer made a partial
payment on January 15, 2006 for P5,000. Payment was made within the discount period.
How much discount was granted?
a. P 0
b. P 200
c. P 300
d. P 500
Answer - P 300
Buyer
Seller
Jan . 5
No Entry
Jan. 10
Purchases
Jan. 15
Jan. 5
25,000
Jan. 10 Notes Receivable 10,000
Notes payable
10,000
Accounts pay.
15,000
Accounts pay.
5,000
Cash
No Entry
Accounts Receiv. 15,000
Sales
Jan 15
25,000
Cash
5,000
5,000
Accounts receiv.
5,000
Date of Payment:
Accounts pay.
10,000
Cash
Cash
9,700
Purchase discount
9,700
Sales discount
300
300
Accounts reciev.
10,000
Discount : P15,000 x 2% = P300
3. On January 10, 2006, Lao Company sold merchandise on account fob destination to
Febryan Co. for P20,000. Febryan Co. paid the freight cost of P1,500 to be deducted from
its account. How much Febryan Company paid to Lao Company?
a. P 21,500
b. P 20,000
c. P 19,600
d. P 18,500
Answer - P 18,500
Seller
Accounts receivable
Transportation expense
Buyer
18,500
1,500
Sales
Cash
Accounts receivable
Purchases
20,000
Accounts payable
20,000
18,500
Cash
Accounts payable
18,500
18,500
Cash
1,500
18,500
18,500
4. Goods worth P12,000 was shipped on account (2/10, n/30) to Ibuyan Company on January
15, 2006 from Rubenil Company The term of the shipment was fob shipping point.
Rubenil Company paid freight of P950.
On January 12, 2006, P2,500 worth of
merchandise was received by Rubenil Co. from Ibuyan Co. due to wrong specification.
Ibuyan Company made a partial payment of P5,000. How much is the subsequent
collection of Rubenil Company from Ibuyan Company assuming Ibuyan Company paid
within the discount period?
a. P 5,450
b. P 5,260
c. P 4,500
d. P 4,410
Answer- P 5,260
Buyer
Seller
Purchases
12,000
Freight-in
950
Accounts payable
Account payable
12,950
2,500
Purchases
Accounts payable
5,000
5,450
Cash

Cash
950
190
2,500
Accounts receivable
2,500
5,000
Accounts receivable
Cash
5,260
Purchase discount
12,000
Cash
5,000
12,950
Sales
Sales
2,500
Cash
Accounts payable
Accounts receivable
Sales discount
5,000
5,260
190
Accounts receivable
5,450
Discount – P12,000 – P2,500 = P9,500 x 2% = P190
5. Gabutero Company purchased merchandise on account for P10,000 from Lilibeth Company
with term shipping point. The freight cost was P1,500 and was paid by Gabutero Company
Upon the arrival of the carrier, it found out that the merchandise got lost while in transit.
The carrier company accepted the loss as their fault. How much is the subsequent
collection of Lilibeth Company from Gabutero Company?
a. P 11,500
b. P 10,000
c. P 8,500
d. P 0
Answer - P 10,000
Buyer
Seller
Purchases
10,000
Freight-in
1,500
Accounts payable
Sales
10,000
10,000
10,000
Cash
Claims receivable
Accounts receivable
1,500
11,500
Purchases
10,000
Freight-in
1,500
6. Chan Company bought from Casas Company a second-hand machinery for the use of its
plant for P50,000 A 50% down payment was made and balance 2/10, n/30. Freight cost
was paid by Chan Company for P2,000. Casas Company acquired the machinery three
years ago at P60,000 with 10 year life. (Straight-line method is use in computing
Depreciation). Two days after purchase, Casas Company granted the request of Chan
Company for a P5,000 price adjustments because of some defects of the machinery. Cash
paid by Chan Company to Casas Company assuming the account was paid within the
discount period is
a. P 20,400
b. P 20,000
c. P 19,600
d. P 19,000
Answer -
P 19,600
Buyer
Seller
Machinery
50,000
Cash
25,000
Cash
25,000
Accounts recei. – others
25,000
Accounts payable – others
25,000
Accum. depreciation
18,000
Machinery
60,000
Gain on sale
Machinery
8,000
2,000
Cash
2,000
Accounts payable – others
5,000
Machinery
Accounts payable – others
Gain on sale
5,000
20,000
Cash
Accounts recie. – others
Cash
20,000
5,000
5,000
20,000
Accounts recie – others
20,000
If paid within the discount period:
Accounts payable – others
20,000
Cash
Cash
19,600
Machienry
400
19,600
Gain on sale
400
Accounts payable – others
20,000
7. The Ariel Company purchased land and building at lump-sum price of P300,000 from
Cherely Company on January 1, 2006. The land and building was purchased by Cherely
Company 3 year ago at a total cost of P300,000. Based on the appraiser’s computation
and analysis, the cost of the land is twice as much to that of the building. Ariel Company
assume a five-year life of the building with no salvage cost. Two years later, Ariel
Company sold the building at P80,000 to Jaan Company.
Ariel Company will record gain or loss from the sale of the building to Jaan Company by
a.
b.
c.
d.
Gain of P 20,000
Loss of P100,000
Neither gain nor loss
Cannot be determined
Answer -
P 20,000
Buyer
Seller
Land
200,000
Building
100,000
Cash
Cash
Land and building
300,000
300,000
300,000
Sale of Building:
Buyer
Cash
80,000
Building
Accum. depreciation
40,000
Cash
Building
Gain on sale
80,000
80,000
100,000
20,000
Problem 1
Listed below are some items of inventory from Anecito Company that are in question during
the audit. The company stores a substantial portion of the merchandise in a separate
warehouse and transfer damaged goods to a special inventory account.
1. Items in receiving department returned by customer, no
communication received from customer
20,000
2. Items ordered and in receiving department, invoice not yet
received from supplier
50,000
3. Items counted in warehouse by the inventory crew
70,000
4. Invoice received for goods ordered, goods shipped but not received
(Anecito Company pays freight)
5. Items, shipped today, fob destination, invoice mailed to customer
5,000
5,000
6. Items currently used for window displays
10,000
7. Items on counter for sale per inventory count [not in (3)]
90,000
8. Items in shipping department, invoice not mailed to customer
6,000
9. Items in receiving department, refused by Anecito because of
Damage [(not in (3)]
3,000
10. Items shipped today, fob shipping point, invoice mailed to customer
4,000
11. Items included in warehouse count, damaged, not returnable
8,000
12. Items included in warehouse count, specifically crafted and
segregated for shipment to customer in five days per sales
contract, with return privilege.
Question:
18,000
1. If the recorded inventory in the balance sheet is P289,000, the year-end inventory will be
overstated by:
a. P 41,000
b. P 23,000
c. P 18,000
d. P
3,000
2. The following should be included from the inventory, except:
a.
b.
c.
d.
Inventory shipped today, f.o.b. shipping point, invoice mailed to customer.
Inventory counted in warehouse by the inventory crew.
Inventory shipped today, f.o.b. destination, invoice mailed to customer.
Inventory in warehouse count, specifically crafted and segregated for shipment to
customer with return privilege.
3. The inventory per audit at year-end is:
a. P 286,000
b. P 271,000
c. P 266,000
d. P 248,000
Solution
1. P 20,000
2.
50,000
3.
70,000
4.
5,000 (the fact that Anecito pays the freight, the term then is FOB shipping point)
5.
5,000
6.
10,000
7.
90,000
8.
6,000
9.
–
10.
–
11. ( 8,000)
12. 18,000 (this is still included in the inventory since the goods has a return privilege)
P266,000
Answer:
1. b
2. a
3. c
Problem 2
In the event of your audit, you found the following information related to the
inventories on December 31, 2006.
a. An invoice for P90,000, FOB shipping point, was received on December 15, 2006. The
receiving report indicates that the goods were received on December 18, 2006, but across
the face of the report is the notation “Merchandise not of the same quality as ordered,
returned for credit, December 19”. The merchandise was included in the inventory.
b. Included in the physical count were inventories billed to customer FOB shipping point on
December 31, 2006. These inventories had a cost of P28,000 and were billed at P35,000.
The shipment was in loading dock waiting to be picked by the common carrier.
c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on
December 31, 2006, were recorded on a receiving report dated January 2, 2007. The
goods were not included in the physical count, but invoice was included in accounts
payable at December 31, 2006.
d. Merchandise costing P15,000 to the company FOB shipping point on December 26, 2006.
The purchase was recorded, but the merchandise was excluded from the ending inventory
because it was not received until January 4, 2007.
e. The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost
was P10.00 per unit.
The adjusting entries for:
1. Item letter “a” is;
Debit
Credit
a. Cost of sales
90,000
Inventory
90,000
b. Inventory
90,000
Cost of Sales
90,000
c.
Retained earnings
90,000
Inventory
90,000
d.
No adjustment
2. Item letter “b” is:
Debit
Credit
a. Cost of sales
28,000
Inventory
28,000
b. Inventory
28,000
Cost of sales
28,000
c. Cost of sales
d. No adjustment
35,000
Inventory
35,000
3. Item letter “c” is;
Debit
Credit
a. Inventory
50,000
Cost of sales
50,000
b. Cost of sales
50,000
Inventory
50,000
c. Inventory
50,000
Retained earnings
50,000
d. No adjustment
4. Item letter “d” is:
Debit
Credit
a. Cost of sales
15,000
Inventory
15,000
b. Inventory
15,000
Cost of sales
15,000
c. Inventory
15,000
Retained earnings
15,000
d. No adjustment
5. Item letter “d” is:
Debit
Credit
a. Cost of sales
500
Inventory
500
b. Inventory
500
Cost of sales
500
c. Cost of sales
10,000
Inventory
10,000
d. Inventory
10,000
Cost of sales
10,000
Answer 1. a
2. d
3. a
4. b
5. b
Problem 3
You have observed the physical count of DEMI CORPORATION’s inventory taken on December
31, 2006. The following errors were discovered:
a. Goods that cost P7,000 was sold for P8,500 on December 29, 2006. The order was shipped
December 31, 2006 with terms fob destination. The merchandise was not included in the
ending inventory. The sale was not recorded until January 4, 2007, the date when the
customer made payment of the sold goods.
b. On December 29, 2006, DEMI CORPORATION purchased merchandise costing P15,000
from a supplier. The order was shipped December 30, 2006 (terms FOB shipping point)
and was still “in transit” on December 31, 2006. Since the invoice was received on
December 31, the purchase was recorded in 2006. The merchandise was included in the
inventory count.
c. On January 4, 2007, goods that were included in the ending inventory at December 31,
2006, were returned to DEMI CORPORATION because the consignee had not been able to
sell it. The cost of this merchandise was P9,500 with a selling price of P14,500.
d. DEMI CORPORATION failed to make an entry for a purchase on account of P6,500 at the
end of 2005, although it included this merchandise in the inventory count. The purchase
was recorded when payment was made to the supplier in 2006.
e. On January 6, 2007, DEMI CORPORATION received merchandise which had been shipped
to them on December 31, 2006. The terms of the purchase were fob destination. Cost of
the merchandise was P6,400. The purchase was not recorded until payment was made in
January 2007 but the goods were included in the inventory as of December 31, 2006.
f.
Goods with a selling price of P30,000 was shipped to Herald Company, a consignee, on
December 29, 2005. Since this was shipped before the inventory count, the merchandise,
which was billed 20% above cost, was excluded from the inventory count. Sales was not
recorded until the inventory was received on January 5, 2006. Your further investigation
revealed that 50% of these goods were sold in 2006 and the on-hand at December 31,
2006 were not yet reported in 2006 inventory.
Questions: Based on the above information, answer the following:
1. What is the entry to adjust audit finding “a” at December 31, 2006?
a. Accounts Receivable 8,500
c.
Both A and B
Sales
8,500
b. Inventory
7,000
Retained Earnings
d.
7,000
Accounts Receivable
8,500
Retained Earnings 8,500
2. What is the entry to adjust audit finding number “b” at December 31, 2006?
a. Inventory
15,000
c. Both A and B
Retained Earnings
b. Retained Earnings
15,000
Accounts Payable 15,000
15,000
d.
Neither A nor B
3. DEMI CORPORATION should debit what account to adjust audit finding number
“c” at December 31, 2006?
a. Sales
b. Cost of Sales
c. Retained Earnings
d. No adjustment is necessary
4. In audit finding number “d”, choose the correct statement?
a. The company is correct for not making an entry on the P6,500 purchase on account
even though it is already included in the inventory count since no term of shipment is
given.
b. The company should reduced its purchases at December 31, 2006 since the purchases
being paid in 2006 was the purchase for 2005.
c. The company is correct in recording of purchases in year 2006 since this is the time
when the company made payment on such.
d. Inventory should be recorded at December 31, 2005 since the purchases were
recorded on this year.
5. The entry to adjust audit finding number “e” at December 31, 2006 is: (assume
the book is not close)
a.
Retained Earnings 6,400
Inventory
b.
Retained Earnings 6,400
Accounts payable
c. Purchases
6,400
6,400
Accounts Payable
d. Cost of sales 6,400
6,400
Inventory
6,400
6,400
6. The entry to adjust audit finding number “f” at December 31, 2006 is: (assume
the book is close)
a.
Inventory
25,000
c. Cost of sales
25,000
Accounts Receivable 25,000
Sales
25,000
Cost of sales
25,000
Retained Earnings 25,000
Sales
25,000
Accounts
Receivable
25,000
b.
Cost of sales
25,000
d. Retained Earnings
2,500
Sales
15,000
Inventory
12,500
Retained Earnings
25,000
Accounts Receivable
15,000
Accounts Receivable 15,000
Answer
1. b
2. d
3. d
4. b
5. a
6. d
Problem 4
The PRINCE COMPANY’S year-end inventory based on physical count conducted on December
31, 2006, amounted to P885,000.
Your cut-off examination disclosed the following
information”:
1. Included in the physical count were goods billed to customer FOB shipping point on
December 31, 2006. These goods had a cost of P28,000 and were billed at P35,000. The
shipment was on PRINCE’S loading dock waiting to be picked up by the common carrier.
2. Goods were in transit from a vendor to PRINCE on December 31, 2006. The invoice cost
was P50,000 and the goods were shipped FOB Shipping on Dec. 29,2006.
3. Work in process inventory costing P20,000 was sent to an outside processor for plating
on Dec. 30, 2006.
4. Goods returned by customers and held pending inspection in the returned goods area on
Dec. 31, 2006, were not included in the physical count. On January 8, 2007, the goods
costing P26,000 were inspected and returned to inventory. Credit memos totaling
P40,000 were issued.
5. Goods shipped to customer FOB destination on Dec. 26, 2006, were in transit at Dec. 31,
2006 and had a cost of P25,000. Upon notification of receipt by the customer on January
2, 2007, the company issued a sales invoice for P42,000.
6. Goods received from a vendor on Dec. 26, 2006, were included in the physical count.
However the related P60,000 vendor invoice was not included in Accounts Payable as
December 31, 2006, because the Accounts Payable copy of the receiving report was lost.
7. On January 3, 2007, a monthly freight bill in the amount of P4,000 was received. This
was specifically related to merchandise purchased in Dec. 31, 2006. The freight charges
were not included in either the inventory or in accounts payable at Dec. 31, 2006.
Question:
1. Sales at year-end is overstated by:
a. P 75,000
b. P 40,000
c. P 35,000
d. P 33,000
2. Purchases at year-end is understated by:
a. P 110,000
b. P 84,000
c. P 64,000
d. P 60,000
3. Cost of sales at year-end is overstated by:
a. P 46,000
b. P 21,000
c. P 11,000
d. P
4. The inventory per audit at year-end is:
a. P 981,000
b. P 959,000
c. P 1,006,000
d. P 1,010,000
Solution
1. Sales
35,000
Accounts receivable
2. Inventory
50,000
Cost of sales
Purchases
50,000
50,000
Accounts payable
3. Inventory
50,000
20,000
Cost of sales
4. Inventory
35,000
20,000
26,000
7,000
Cost of sales
Sales
26,000
40,000
Accounts receivable
5. Inventory
40,000
25,000
Cost of sales
6. Purchases
25,000
60,000
Accounts payable
7. Inventory
60,000
4,000
Accounts payable
4,000
Answer:
1. a
2. a
3. c
4. d
Problem 5
On January 1, 2007, Arcenith Corporation engaged an independent CPA to perform an audit
for the year ended December 31, 2006. The company uses a periodic inventory system. The
CPA did not observe the inventory count on December 31, 2006, as a result, a special
examination was made of the inventory records.
The financial statements prepared by the company (uncorrected) showed the following:
ending inventory, P72,000; accounts receivable, P60,000; accounts payable, P30,000; sales,
P400,000; net purchases, P160,000, and pretax income P51,000.
The following data were found during the audit:
1. Merchandise received on January 2, 2007, costing P800 was recorded on December 31,
2006. An invoice on hand showed the shipment was made fob supplier’s warehouse on
December 31, 2006. Because the merchandise was not on hand at December 31, 2006,
it was not included in the inventory.
2. Merchandise that cost P18,000 was excluded from the inventory, and the related sale for
P23,000 was recorded. The goods had been segregated in the warehouse for shipment;
there was no contract for sale but a “tentative order by phone”.
3. Merchandise that cost P10,000 was out on consignment for Valentin Distributing Company
and was excluded from the ending inventory. The merchandise was recorded as a sale
P25,000 when shipped to Valentin on December 29, 2006.
4. A sealed packing case containing a product costing P900 was in Arcenith’s shipping room
when the physical inventory was taken. It was included in the inventory because it was
marked “Hold for customer’s shipping instructions.” Investigation revealed that the
customer signed a purchase contract dated December 18, 2006, but that case was shipped
and the customer billed on January 10, 2007. A sale for P1,500 was recorded on
December 31, 2006.
5. A special item, fabricated to order for a customer, was finished and in the shipping room
on December 31, 2006. The customer has inspected it and was satisfied. The customer
was billed in full on that sale in the amount of P5,000. The item was included in inventory
at cost, P1,000 because it was shipped on January 4, 2007.
6. Merchandise costing P15,600 was received on December 28, 2006. The goods were
excluded from inventory, and a purchase was not recorded. The auditor located the
related papers in the hands of the purchasing; they indicated, “On consignment from
Roselyn Company”.
7. Merchandise costing P2,000 was received on January 8, 2007, and the related purchase
invoice recorded January 9. The invoice showed the shipment was made on December
29, 2006, fob destination. The merchandise was excluded from the inventory.
8. Merchandise that cost P6,000 was excluded from the ending inventory and not recorded
as a sale for P7,500 on December 31, 2006. The goods had been specifically segregated.
According to the terms of the contract of sale, ownership will not pass until actual delivery.
9. Merchandise that cost P15,000 was included in the ending inventory. The related purchase
has not been recorded. The goods had been shipped by the vendor fob destination, and
the invoice was received on December 30, 2006. The goods was received on January 5,
2007.
10. Merchandise in transit that cost P7,000 was excluded from inventory because it was not
on hand. The shipment from the vendor was fob shipping point. The purchase was
recorded on December 29, 2006, when the invoice was received.
11. Merchandise in transit that cost P13,000 was excluded from inventory because it had not
arrived. Although the invoice had arrived, the related purchase was not recorded by
December 31, 2006. The merchandise shipped fob shipping point by the vendor.
12. Merchandise that cost P8,000 was included in the ending inventory because it was on
hand. The merchandise had been rejected because of incorrect specifications and was
being held for return to the vendor. The merchandise was recorded as a purchase on
December 26, 2006.
Question:
Based on your analysis and the information above, answer the following:
1. The adjusted balance of inventory at year-end is:
a. P 101,900
b. P 102,000
c. P 102,800
d. P 120,400
2. The adjusted balance of accounts receivable at year-end is:
a. P 10,500
b. P 12,000
c. P 35,000
d. P 37,000
3. The adjusted balance of accounts payable at year-end is:
a. P 43,000
b. P 35,000
c. P 30,000
d. P 22,000
4. The adjusted balance of Sales at year-end is:
a. P 377,000
b. P 352,000
c. P 350,500
d. P 347,000
5. The adjusted balance of Net Purchases at year-end is:
a. P 152,000
b. P 165,000
c. P 173,000
d. P 181,000
6. The adjusted balance of Pre-tax income at year-end is:
a. P 27,300
b. P 29,000
c. P 29,800
d. P 35,800
Solution
Inventory
Acnts. Receivable
Acnts.
end
Unadj. bal.
Sales
Payable
72,000
60,000
30,000
400,000
Net
Pretax
Purchases
ncome
160,000
51,000
Item 1
800
800
Item 2
18,000
18,000
(23,000)
Item 3
(23,000)
(23,000)
10,000
Item 4
10,000
(25,000)
(25,000)
(25,000)
(1,500)
(1,500)
(1,500)
Item 5
(1,000)
Item 6
-
-
-
-
-
-
Item 7
-
-
-
-
-
-
Item 8
6,000
6,000
Item 9
(15,000)
(15,000)
7,000
7,000
Item 10
(1,000)
Item 11
13,000
13,000
13,000
Item 12
13,000
(8,000)
Adjusted
balance
(13,000)
(8,000)
-
-
(8,000)
102,800
10,500
35,000
350,500
(8,000)
8,000
165,000
27,300
Answer:
1. c
2. a
3. b
4. c
5.b
6. a
Problem 6
Marlisa Company’s December 31, 2005 and December 31, 2006 inventory is P35,000 and
P27,000, respectively. The beginning and ending inventories were determined by physical
count of the goods on hand on those dates, and no reconciling items were considered. All
purchases are f.o.b. shipping point. In the course of your examination of the inventory cutoff, both the beginning and ending of each year, you discover the following facts:
Beginning of the year
a. Invoices totaling P3,260 were entered in the voucher register on January, but the goods
were received during December.
b. December invoices totaling P4,100 were entered in the voucher register in December, but
the goods were not received until January.
End of the Year
c. Invoices totaling P7,260 were entered in the voucher register in January but the goods
were received in December.
d. December invoices totaling P3,600 were entered in the voucher register in December, but
the goods were not received until January.
e. Invoices totaling P1,500 were entered in the voucher register in January, and the goods
were received in January, but the invoices were dated December.
Question:
Based on your analysis and the information above, answer the following:
1. The adjusted balance of the Jan. 1, 2006 inventory is:
a. P 35,000
b. P 35,840
c. P 39,100
d. P 59,100
2. How much is the adjusted balance of the Purchases account at December 31, 2006
assuming the amount of Purchases in the trial balance is P5,176,000?
a. P 5,170,566
b. P 5,180,000
c. P 5,181,500
d. P 5,185,200
3. The corrected December 31, 2006 inventory is
a. P 52,100
b. P 50,600
c. P 32,100
d. P 28,500
4. When auditing inventories, an auditor would least likely verify that
a. All inventory owned by the client is on hand at the time of the count.
b. The client has used properly inventory pricing.
c. Damaged goods and obsolete items have been properly accounted for.
d. The financial statement presentation of inventories is appropriate.
Solution
a. Retained earnings
3,260
Purchases
b.
3,260
Beginning inventory
4,100
Retained earnings
c.
Purchases
4,100
7,260
Accounts payable
d.
7,260
Inventory
3,600
Cost of sales
e.
3,600
Inventory
1,500
Cost of sales
1,500
Purchases
1,500
Accounts payable
Answer: 1. c
2. c
1,500
3. c
4. a
Problem 7
During the 2006 audit of JONES Manufacturing Company’s year-end
inventory, you found the following items.

A packing case containing product costing P8,160 was standing in the shipping room when
the physical inventory was taken. It was not included in the inventory because it was
marked “Hold for shipping instructions.” The customer’s order was dated December 18,
but the case was shipped and the customer billed on January 10, 2007.

Merchandise costing P6,250 was received on December 28, 2006, and the invoice was
recorded. The invoice was marked “On Consignment.”

Merchandise received on January 6, 2007 costing P7,200 was entered in the purchase
register on January 7. The invoice showed shipment made FOB shipping point on
December 31, 2006.

A special machine, fabricated to order for a particular customer, was finished and in the
shipping room on December 30. The customer was billed on that date and the machine
was excluded from inventory although it was shipped January 2, 2007. The machine costs
P25,000 and was sold for P45,000.

Merchandise costing P23,500 was received on January 3, 2007, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on December
29, 2006, FOB destination.

Merchandise costing P11,000 was sold on an installment basis on December 15 at
P25,000. The customer took possession of the goods on that date. The merchandise was
included in inventory because JONES still holds legal title. Historical experience suggests
that full payment on the installment sales is received approximately 99% of the time.

Goods costing P15,000 were billed for P20,000 and delivered on December 20. The goods
were included in inventory because the sale was accompanied by a repurchase agreement
requiring JONES to buy back the inventory in February 2007.
Selected account balances before considering the effects of the above items are as follows:
Accounts receivable
Inventory
Accounts payable
P 185,000
114,500
67,200
Sales
942,400
Gross profit
287,990
Net income
84,680
Questions:
1. What is the adjusted accounts receivable balance at the end of the year?
a. P 166,000
b. P 165,000
c. P 150,000
d. P 125,000
2. What is the adjusted inventory balance at the end of 2006?
a. P 118,860
b. P 116,700
c. P 112,610
d. P 104,450
3. What is the adjusted balance of accounts payable at the end of the year?
a. P 68,150
b. P 68,000
c. P 67,200
d. P 65,000
4. The adjusted total sales in 2006 is
a. P 962,400
b. P 925,600
c. P 925,000
d. P 922,400
5. The adjusted Cost of goods sold in 2006 is
a. P 640,040
b. P 650,200
c. P 651,040
d. P 657,250
Solution
1. Inventory
8,160
Cost of Sales
2.
8,160
Accounts payable
6,250
Purchases
6,250
Cost of sales
6,250
Inventory
3.
6,250
Inventory
7,200
Cost of sales
7,200
Purchases
7,200
Accounts payable
4.
No adjustments
5.
No adjustments
6.
Cost of sales
7,200
11,000
Inventory
7.
11,000
Sales
20,000
Accounts receivable
20,000
Answer:
1. b
2. c
3. a
4. d
5. d
Problem 8
CHARMAINE COMPANY is a manufacturer of small tools. The following information
was obtained from the company’s accounting records for the year ended December
31, 2006:
Inventory at December 31, 2006 (based on
physical count in Charmaine’s warehouse at cost
on December 31, 2006)
Accounts payable at December 31, 2006
Net sales (sales less sales returns)
1,870,000
1,415,000
9,693,400
Your audit reveals the following information:

The physical count included tools billed to a customer FOB shipping point on
December 31, 2006. These tools cost P64,000 billed at P78,500. They were in
the shipping area waiting to be picked up by the customer.

Goods shipped FOB shipping point by a vendor were in transit on December
31, 2006.These goods with invoice cost of P93.400 were shipped on December
29, 2006.

Work in process inventory costing P27,000 was sent to a job contractor for
further processing.

Not included in the physical count were goods returned by customers on
December 31, 2006. These goods costing P49,000 were inspected and
returned to inventory on January 7, 2007. Credit memos for P67,800 were
issued to the customers at that date.

In transit to a customer on December 31, 2006, were tools costing P17,740
shipped FOB destination on December 26, 2006. A sales invoice for P29,400
was issued on January 3, 2007, when Charmaine Company was notified by the
customer that the tools had been received.
At exactly 5:00 pm on December 31, 2006, goods costing P31,200 were
received from a vendor. These were recorded on a receiving report dated
January 2, 2007. The related invoice was recorded on December 31, 2006, but
the goods were not included in the physical count.


Included in the physical count were goods received from a vendor on December
27, 2006. However, the related invoice for P36,000 was not recorded because
the accounting department’s copy of the receiving report was lost.

A monthly freight bill for P16,000 was received on January 3, 2007. It
specifically related to merchandise bought in December 2006, one half of which
was still in the inventory at December 31, 2006. The freight was not included
in either the inventory or in accounts payable at December 31, 2006.
Question:
Based on your analysis and the information above, answer the following:
1. The inventory at year-end is:
a. Understated by P170,340
b. Understated by P162,340
2. The accounts payable at year-end is:
c. Understated by P126,340
d. Understated by P82,140
a. Understated by P93,400
b. Understated by P106,200
c. Understated by P137,400
d. Understated by P145,400
3. The amount of sales at year-end is:
a. Overstated by P67,800
b. Overstated by P38,400
c. Overstated by P29,400
d. Correctly stated
4. The adjusted balance of inventory at year-end is:
a. P 1,952,140
b. P 1,996,340
c. P 2,032,340
5
d. P 2,040,340
The adjusted balance of accounts payable at year-end is:
a. P 1,560,400
b. P 1,552,400
c. P 1,521,200
d. P 1,508,400
6. The adjusted balance of sales at year-end is:
a. P 9,722,800
b. P 9,693,400
c. P 9,655,000
d. P 9,625,600
Solution
Adjusting entry:
Cost of sales
64,000
Inventory
64,000
Inventory
93,400
Cost of sales
93,400
Purchases
93,400
Accounts payable
93,400
Inventory
27,000
Cost of sales
27,000
Inventory
49,000
Cost of sales
49,000
Sales
67,800
Accounts receivable
Inventory
67,800
17,740
Cost of sales
17,740
Inventory
31,200
Cost of sales
31,200
Purchases
36,000
Accounts payable
36,000
Inventory
8,000
Accounts payable
8,000
Answer:
1. b
2. c
3. a
4. c
5. b
6. d
Problem 9
The Cruzada Company is a wholesale distributor of automotive replacement parts. Initial
amounts taken from Cruzada’s accounting records are as follows:
Inventory at December 31, 2006 (based on physical count of goods in warehouse on
December 31, 2006); P1,250,000.
Accounts payable at December 31, 2006:
Dacalos Company
2% 10 days, net 30
Dano Company
Net 30
De Lira Company
Net 30
Dela Cruz Company
Net 30
Deza Company
Net 30
Encabo Company
Net 30
Sales in 2006
265,000
210,000
300,000
225,000
-___
P 1,000,000
P 9,000,000
Additional information is as follows:
a. Parts held on consigment from Dano Company to Cruzada Company, the consignee,
amounting to P155,000, were included in the physical count of goods in Cruzada
Company’s warehouse on December 31, 2006 and in accounts payable at December 31,
2006.
b. P22,000 of parts which sere purchased from Deza Company and paid for in December
2006 were sold in the last week of 2006 and appropriately recorded as sales of P28,000.
The parts were included in the physical count of goods in Cruzada’s warehouse on
December 31, 2006, because the parts were on the loading dock waiting to be picked up
by customers.
c. Parts in transit on December 31, 2006, to customers, shipped f.o.b. shipping point, on
December 28, 2006, amounted to P34,000. The customers received the parts on
January 6, 2007. Sales of P40,000 to the customers for the parts were recorded by
Cruzada Company on January 2, 2007.
d. Retailers were holding P210,000 at cost (P250,000 at retail) of goods on consignment
from Cruzada Company, the consignor, at their stores on December 31, 2006.
e. Goods were in transit from Encabo Company to Cruzada Company on December 31,
2006. The cost of goods was P25,000 and they were shipped f.o.b. shipping point on
December 29, 2006.
f.
A quarterly freight bill in the amount of P2,000 specifically relating to merchandise
purchases in December 2006, all of which was still in the inventory at December 31,
2006, was received on January 3, 2007. The freight bill was not included in either the
inventory or in accounts payable at December 31, 2006.
g. All of the purchases from Dacalos Company occurred during the last seven days of the
year. These items have been recorded in accounts payable and accounted for in the
physical inventory at cost before discount. Cruzada’s policy is to pay invoices in time to
take advantage of all cash discounts, adjust inventory accordingly, and record accounts
payable, net of cash discount.
Questions:
1. The adjusted inventory is:
a. P 1,326,700
b. P 1,304,700
c. P 1,276,000
d. P 1,270,700
2. The adjusted accounts payable is:
a. P 864,700
b. P 866,700
c. P
872,000
d. P 1,017,700
3. The adjusted sales is:
a. P 8,960,000
b. P 9,000,000
c. P 9,040,000
d. P 9,100,000
Solution
a. Cost of sales
155,000
Accounts payable
155,000
Inventory
b.
Cost of sales
155,000
Accounts receivable
22,000
40,000
Sales
d.
40,000
Inventory
210,000
Cost of sales
e.
Inventory
210,000
25,000
Accounts payable
f.
Inventory
25,000
2,000
Accounts payable
g.
155,000
22,000
Inventory
c.
Purchases
Accounts payable
Inventory
2,000
5,300
5,300
Answer:
1. b
2. b
3. c
Problem 10
Raffy Corporation reported income before income taxes as follows:
2005
P525,000
2006
630,000
The company uses the periodic inventory system. Ending inventories for 2005 and 2006 were
properly recorded. The following additional information became available following an analysis
of the inventories:
(a) Merchandise with a gross invoice price of P7,500 was shipped FOB shipping point by a
supplier on terms of 2/10, n/30 in 2005 and was recorded as a purchase by Raffy
Corporation in 2005 when the invoice was received: however, the goods were not included
in the ending inventory because they were not received until 2006. The company always
takes advantage of the early payment discounts and accordingly, records its purchases
using the net method.
(b) Merchandise that cost P3,000 was purchased FOB shipping point by Raffy Corporation on
December 31, 2005 and was shipped by the supplier that day. The merchandise was not
included in the 2005 ending inventory and was not recorded as a purchase until 2006.
(c) Merchandise costing P2,850 was shipped FOB shipping point to a customer in 2005 and
not included in the ending inventory for 2005. The sale of P4,260 was recorded in 2006
when the invoice was sent.
(d) Goods being held by Raffy Corporation on consignment from a supplier in the amount of
P4,950 were included in the physical inventory for 2005.
(e) Retailers were holding P6,750 of goods at cost (P9,000 at retail), on consignment from
Raffy, at their stores on December 31, 2005. These goods were not included in the ending
inventory of Raffy Corporation for 2005.
Question:
1. How much is the correct income before taxes for 2005?
a. P 643,410
b. P 616,590
c. P 538,410
d. P 511,590
2. How much is the correct income before taxes for 2006?
a. P 643,410
b. P 616,590
c. P 538,410
d. P 511,590
3. The cost of sales at December 31, 2006 is understated by:
a. P 12,150
b. P 9,750
c. P 9,150
d. P 6,750
4. The Retained earnings – beginning at December 31, 2006 is understated by:
a. P 13,410
b. P 12,150
c. P 10,410
d. P 9,150
5. The beginning inventory (January 1, 2006) of Raffy Corporation is understated by:
a. P 13,410
b. P 12,150
c. P 9,150
d. P 5,400
Solution
a.
Beginning inventory
(COS)
7,350
Retained earnings – beg
b.
Beginning inventory
(COS)
7,350
3,000
Retained earnings – beg
Retained earnings – beg
Purchases (COS)
c.
Sales
3,000
3,000
2006
525,000
630,000
(a)
7,350
( 7,350)
(b)
3,000
( 3,000)
( 3,000)
3,000
(c)
4,260
( 4,260)
(d)
(e)
( 4,950)
6,750
4,950
( 6,750)
Adjusted NI
538,410
616,590
3,000
4,260
Retained earnings – beg
d.
Net income
2005
Retained earnings – beg
4,260
4,950
Beginning inventory (COS)4,950
e.
Beginning inventory
(COS)
6,750
Retained earnings – beg
6,750
Answer:
1. c
2. b
3. c
4. a
5. b
Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:
6. The December 31 inventory was determined by a physical count on December 28 and
based on such count, the inventory was recorded by:
Inventory
1,400,000
Cost of sales
1,400,000
7. The 2006 ledger shows a sales balance of P20,000,000.
8. The company sells a mark-up of 20% based on sales.
9. The company recognizes sales upon passage of title to the customers.
10. All customers are within a four-day delivery area.
The sales register for December, 2006 and January, 2007, showed the following details:
December Register
Invoice No.
FOB Terms
Date Shipped
300
Destination
12/30
P 50,000
301
Shipping point
12/30
62,500
302
Destination
12/23
47,500
303
Destination
12/24
82,500
304
Shipping point
01/02
56,000
Amount
305
Shipping point
12/29
90,000
January Register
Invoice No.
FOB Terms
306
Destination
12/29
67,500
307
Shipping point
12/29
74,500
308
Destination
01/02
140,000
309
Shipping point
01/04
73,000
310
Shipping point
12/27
67,500
Date Shipped
Questions
1. The Sales for December is over/(under) by:
a. P 36,000 under
b. P 36,000 over
Amount
c. P 106,000 under
d. P 106,000 over
2. The Inventory for December is over/(under) by:
a. P 235,600 over
c. P 245,412 under
b. P 181,600 over
d. P 245,412 over
3. The adjusted inventory at December 31, 2006 is:
a. P 1,645,412
b. P 1,218,400
c. P 1,164,400
d. P 1,154,588
4. The adjusted sales at December 31, 2006 is:
a. P 20,106,000
b. P 20,036,000
c. P 19,964,000
d. P 19,894,000
5. How much sales for the month of December 2006 were erroneously recorded in January
2007?
a. P 282,000
b. P 272,500
c. P 198,000
d. P 142,000
6. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. P 228,500
b. P 188,500
c. P 180,500
d. P 106,000
Solution
For SI # 300
Sales
For SI # 307
50,000
Accounts receivable
Accounts receivable
50,000
For SI # 301
Cost of sales
Sales
Cost of sales
50,000
Inventory
74,500
74,500
59,600
Inventory
50,000
59,600
P74,500 x 80%
P62,500 x 80%
For SI # 304
Sales
For SI # 310
56,000
Accounts receivable
67,500
Accounts receivable
56,000
Sales
67,500
For SI # 305
Cost of sales
72,000
Inventory
72,000 (P90,000 x 80%)
Unadjusted Sales
20,000,000
Unadjusted inventory
1,400,000
(1)
(
50,000)
(2)
( 50,000)
(3)
(
56,000)
(4)
( 72,000)
74,500
(6)
( 59,600)
(8)
_________
(5)
(7)
67,500
Adjusted Sales
20,036,000
Adjusted inventory
1,218,400
Sales for the month of December that 2006
were erroneously recorded in January 2007:
Invoice # 307
74,500
Invoice # 310
67,500
Total
142,000
Sales for the month of January 2007
were erroneously recorded in December 2006:
Invoice # 300
50,000
Invoice # 304
56,000
Total
106,000
Answer:
1. a
2. b
3. b
4. b
5. d
7. d
Problem 12
On December 15, 2006, under your observation, your client took a complete physical
inventory and adjusted the financial perpetual inventory control accounts to agree with the
physical inventory.
As of December 31, 2006, you decided to accept the balance of the control account after
examining transactions recorded in that account between December 15 and December 31,
2006. The audit was for the year ended December 31, 2006.
In the course of conducting your examination of the sales cutoffs as of December 15 and
December 31, 2006, you discovered the following items:
Date Inventory
Item
Cost Price
Sales Price
Date Shipped
Date Billed
Control Credited
A
P 60,000
P 78,000
12-13-06
12-17-06
12-17-06
B
77,000
101,400
01-02-07
12-29-06
12-29-06
C
52,000
67,600
12-17-06
12-29-06
12-29-06
D
87,000
113,100
12-14-06
12-16-06
12-16-06
E
49,500
64,500
12-25-06
01-02-07
01-02-07
Question:
Based on the information above and your analysis, answer the following
1. The inventory at year-end is over/(under) by:
a. P 174,500 over
c. P 114,500 over
b. P 174,500 under
d. P 114,500 under
2. The cost of sales at year-end is over/(under) by:
a. P 174,500 over
c. P 114,500 over
b. P 174,500 under
d. P 114,500 under
3. The sales at year-end is over/(under) by:
a. P 36,900 over
c. P 101,400 over
b. P 36,900 under
d. P 101,400 under
4. The accounts receivable at year-end is over/(under) by:
a. P 36,900 over
c. P 101,400 over
b. P 36,900 under
d. P 101,400 under
Solution
AJEs as of December 31, 2002
Item
A
Debit
Inventory
Credit
60,000
Cost of Goods Sold
60,000
This item was not included in the physical inventory and was
credited to the Inventory account on 12.17.06; a physical
inventory cutoff error.
B
Sales
Inventory
Accounts Receivable
Cost of goods sold
This item is a year-end sales cut-off error.
101,400
77,000
101,400
77,000
C
Properly recorded; no AJE needed.
D
Inventory
87,000
Cost of goods sold
87,000
(same as Item A)
E
Accounts Receivable
64,500
Cost of goods sold
49,500
Sales
64,500
Inventory
49,500
This item is a year-end sales cut-off error.
Answer:
1. b
2. a
3. a
4. a
Problem 13
The following information was obtained from the balance sheet of LION INC.:
Cash
Notes receivable
Inventory
Accounts payable
Dec. 31, 2006
P706,600
0
?
?
Dec. 31, 2005
P 200,000
50,000
399,750
150,000
All operating expenses are paid by Lion Inc. with cash and all purchases of inventory
are made on account. Lion, Inc. sells only one product. All sales are cash sales which
are made for P100 per unit. Lion. Inc., purchases 1,500 units of inventory per month
and values its inventory using the periodic FIFO. The unit cost of inventory during
January 2006 was P65.20 and increased P0.20 per month during the year. During
2006, payments to suppliers totaled P943,400 and operating expenses totaled
P440,000. The ending inventory for 2005 was valued at P65.00 per unit.
Question:
Based on the information above and your analysis, answer the following
1. Recorded sale during 2006 is:
a. P 1,840,000
b. P 1,890,000
c. P 2,090,000
2. Number of units sold during 2006 is:
a. 21,400
b. P 20,900
c. 18,900
3. The accounts payable balance at December 31, 2006 is:
a. P 400,000
b. P 250,000
c. P 156,000
4. The January 1, 2006 inventory balance is:
a. P 399,750
b. P 385,900
c. P 380,900
5. The amount of inventory at December 31, 2006 is:
d. P 2,140,000
d. 18,400
d. P 150,000
d. P 355,800
a. P 399,750
b. P 385,900
c. P 380,900
d. P 355,800
Solution
Q1 & Q2
____________________Cash______________________
Beg. bal.200,000
NR collect
Sales
Payment to supplier 943,400
50,000
1,840,000
Ope. expenses 440,000
Ending balance
706,600
Sales (P) – P1,840,000/P100 = P18,400 units
Q3
_______________Accounts Payable_________________
Payment to supplier 943,400
Ending balance
400,000
Beg. bal.
Purchases
Jan.
1,500 x P65.20 = P 97,800
Feb.
1,500 x P65.40 =
98,100
Mar
1,500 x P65.60 =
98,400
Apr
1,500 x P65.80 =
98,700
May
1,500 x P66.00 =
99,000
Jun
1,500 x P66.20 =
99,300
July
1,500 x P66.40 =
99,600
Aug
1,500 x P66.60 =
99,900
Sept
1,500 x P66.80 = 100,200
Oct
1,500 x P67.00 = 100,500
Nov
1,500 x P67.20 = 100,800
Dec
1,500 x P67.40 = 101,100
Total purchases
156,000
1,193,400
P65.20 + P67.40 / 2 = P66.30
x 18,000 units
Purchases
1,193,400
1,193,400
Q4
P399,750 / P65.00 = 6,150 units
Q5
6,150 beg. units + 18,000 purchased units – 18,400 sold units = 5,750 ending
FIFO:
1,500 x P67.40 = P101,100
1,500 x P67.20 =
100,800
1,500 x P67.00 =
100,500
1,250 x P66.80 =
Total
83,500
P 385,900
Problem 14
Kitkat Company operates a wholesale oil products company. Kitkat believes that an employee
and a customer are conspiring to steal gasoline. The employee records sales to the customer
not less than the amount actually placed in the customer’s tank truck. In order to confirm or
refuse these suspicions, Kitkat has collected the following data for the past 10 working days.
Quantity
Cost per
(gallons)
unit (gal)
Total Cost
220,000
P1.45
P 319,000
Purchases
1,560,000
1.45
2,262,000
Goods available for sale
1,780,000
Inventory, September 1
2,581,000
Kitkat had sales of P2,512,000 during this 10-day period. All sales were made at P1.60 per
gallon. A physical inventory indicates that there are 192,000 gallons of gasoline in inventory
at the close of business on September 10.
Questions:
1. How much inventory should be present at the end of the 10-day period (in gallons)?
a. 220,000
b. 210,000
c. 200,000
d. 192,000
c. P 26,100
b. P 0
2. What is the cost of missing inventory?
a. P 304,500
Answer
1
2
b. P 40,600
b
1,780,000 – (2,512,000/1.60) = 210,000 gallons
c
210,000 – 192,000 = 18,000 x P1.45 = P26,100
Problem 15
You were assigned to audit the factory accounts of Modfood Manufacturing Corporation for
the year ended December 31, 2006. The following data were gathered:
Total manufacturing Cost
P 900,000
Cost of Goods Manufactured
800,000
Factory Overhead
75% of direct labor and 25% of total
manufacturing cost
Beginning work-in-process inventory, January 1, was 60% of ending work-in-process
inventory, December 31, 2006.
Manufacturing costs for the year ended December 31, 2006 submitted to you by the factory
accountant was as follows:
Raw Materials Used
P400,000
Direct Labor
275,000
Factory Overhead
225,000
Total
P900,000
Questions:
1. Assuming cost percentage relationships are stated are correct, what will be the adjustment
on manufacturing cost at December 31, 2006?
a. Debit:
Credit
b. Debit:
Credit
c. Debit:
Credit
d. Debit:
Credit
Raw materials used
25,000
Direct labor
25,000
Direct labor
25,000
Raw materials used
Raw materials used
25,000
50,000
Direct labor
50,000
Direct labor
50,000
Raw materials used
50,000
2. How much is the Work-in-process Inventory on December 31, 2006?
a. P 200,000
b. P 225,000
c. P 250,000
d. P 275,000
Solution
1
b
Per books
Per audit
Difference
P400,000
P375,000
P25,000 over
Direct Labor
275,000
300,000
Factory Overhead
225,000
225,000
P900,000
P900,000
Raw Materials Used
Total
1
c
P25,000 under
---
(60% of WIP, end) + 900,000 – WIP,end = 800,000
WIP, end = 100,000/40% = P250,000
Problem 16
Following are portions of the ANTHONY CORPORATION’S SALES and PURCHASES
account for the calendar year 2006: (All sales are mark-up at 30% based on sales
price)
SALES
12/31
Closing Entry
P 1,411,100
P 1,411,100
Sales Register
P 1,230,000
12/25 SI#876
15,000
12/27
877
25,500
12/29
879
55,000
12/31
880
85,600
P 1,411,100
PURCHASES
Purchase Register
P
12/27 RR#545
740,000
12/31 Closing Entry
P
792,500
15,000
12/28
547
7,500
12/29
548
10,000
12/30
549
20,000
P
792,500
_______
P
792,500
You observed the physical inventory of goods in the warehouse on December 31, 2006 and
were satisfied that it was properly taken.
When performing sales and purchases cut-off tests, you found that at December 31,
2006, the last Receiving Report (RR) that had been used was No. 549 and that no
shipments have been made on any Sales Invoices (SI) with number larger than No.
878.
The following information were found:
1.
Included in the warehouse physical inventory at December 31, 2006
were chemicals that had been purchased and received on Receiving Report No.
546 but for which an invoice was not received until 2007. Cost was P14,500.
2. In the warehouse at December 31, 2006, were goods that had been sold and paid for by
the customer but which were not shipped out until 2007. They were all sold on Sales
Invoice No. 876.
3. On the evening of December 31, 2006, there were two shipments on ANTHONY
CORPORATION. First shipment was unloaded on January 3, 2007 and received on
Receiving Report No. 548. The freight was paid by the vendor. The second shipment was
loaded and sealed on December 31, 2006 but was not delivered until January 2, 2007.
This order was sold on Sales Invoice No. 878, P20,000 and freight was paid by the buyer.
4. Temporarily stranded on December 31, 2006, on a railroad sidings were two trucks of
chemicals en route to the Nelson Neil Company. They were sold on Sales Invoice No. 879
and the term were fob destination.
5. En route to ANTHONY CORPORATION on December 31, 2006 was truckload of materials
that was received on Receiving Report No. 550. The material was shipped fob destination.
6. Included in the physical inventory were chemicals exposed to rain while in transit and
deemed unsalable. Their invoice cost was P5,500 and freight charges of P200 had been
paid on the chemicals. This was recorded as purchases on 12/31/02
Questions:
1. The Sales at December 31, 2006 is:
s. Overstated by P 70,000
c. Overstated by P 155,600
b. Overstated by P 55,000
d. Overstated by P 15,000
2. The adjusted Sales at December 31, 2006 is:
a. P 1,396,100
b. P 1,356,100
c. P 1,341,100
d. P 1,255,500
3. The adjusted Purchases at December 31, 2006 is:
a. P 797,000
b. P 796,800
c. P 791,500
4. The Purchases at December 31, 2006 is:
a. Understated by P4,500
c. Overstated by P10,000
b. Overstated by P 1,000
d. Understated by P 4,300
5.The Inventory at December31, 2006 is:
a. Understated by P 8,300
c. Overstated by P12,500
b. Understated by P 14,000
d. Understated by P 12,500
6. The Cost of Sales at December 31, 2006 is:
a. Understated by P 17,000
c. Overstated by P1,200
b. Overstated by P 9,500
d. Understated by P12,500
Solution
1.
Purchases
14,500
Accounts payable
14,500
SI # 546
2.
Sales
15,000
Advances from customers
15,000
SI # 876
3.
Accounts payable
10,000
Purchases
10,000
RR # 548
4.
Inventory
14,000
Cost of sales
14,000
SI#878 - P20,000 x 70%
5.
Sales
55,000
Accounts receivable
55,000
SI # 879
6.
Claims Receivable
Purchases
5,700
5,500
d. P 782,500
Freight-in
7.
200
Cost of sales
5,700
Inventory
8.
5,700
Sales
85,600
Accounts receivable
85,600
SI # 880
Answer:
1. C
2. D
3. C
4. B
5. A
6. B
Problem 17
On April 15, 2007, a fire damaged the office and warehouse of KAREN MAE CORPORATION.
The only accounting record save was the general ledger, from which the trial balance below
was prepared.
KAREN MAE CORPORATION
TRIAL BALANCE
March 31, 2007
Cash
200,000
Accounts receivable
400,000
Inventory, December 31, 2006
750,000
Land
350,000
Building and equipment
1,100,000
Accumulated depreciation
Other Assets
413,000
36,000
Accounts payable
237,000
Other expense accruals
102,000
Capital stock
1,000,000
Retained earnings
520,000
Sales
1,350,000
Purchases
520,000
Operating expenses
266,000
________
3,622,000
3,622,000
_______________________________________________________________
The following data and information have been gathered:
1. The fiscal year of the corporation ends on December 31.
2. An examination of the April bank statement and canceled checks revealed that checks
written during the period April 1-15 totaled P130,000: P57,000 paid to accounts payable
as of March 31, P34,000 for April merchandise shipments, and P39,000 paid for other
expenses. Deposits during the same period amounted to P129,500, which consisted of
receipts on account from customers with the exception of a P9,500 refund from a vendor
for merchandise returned in April.
3. Correspondence with suppliers revealed unrecorded obligations at April 15 of P106,000
for April merchandise shipments, including P23,000 for shipments in transit on that date.
4. Customers acknowledge indebtedness of P360,000 at April 15, 2007. It was also
estimated that customers owed another P80,000 that will never be acknowledge or
recovered. Of the acknowledged indebtedness, P6,000 will probably be uncollectible.
5. The companies insuring the inventory agreed that the corporation’s fire loss claim should
be based on the assumption that the overall gross profit ratio for the past two years was
in effect during the current year. The corporation’s audited financial statements disclosed
this information:
Year Ended December 31
2006
2005
Net Sales
5,300,000
3,900,000
Net purchases
2,800,000
2,350,000
Beginning inventory
500,000
660,000
Ending inventory
750,000
500,000
6. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the
inventory was a total loss.
Questions:
1. Cash balance at April 15, 2007 is:
a. P
70,000
b. P 143,000
c. P 190,000
d. P 199,700
2. Accounts Receivable balance at April 15, 2007 is:
a. P 350,500
b. P 360,000
c. P 400,000
d. P 440,000
c. P 58,000
d. P 93,000
c. P 276,500
d. P 286,000
c. P 1,750,000
d. P 1,790,000
c. P 627,500
d. P 650,500
c. P 721,000
d. P 830,500
c. P 679,500
d. P 830,500
c. P 535,000
d. P 570,000
3. Inventory at April 15, 2007 is:
a. P 0
b. P 35,000
4. Accounts payable at April 15, 2007 is:
a. P 106,000
b. P 180,000
5. Sales as of April 15, 2007 is:
a. P 1,470,000
b. P 1,510,000
6. Net purchases as of April 15, 2007 is:
a. P 544,500
b. P 593,500
7. Cost of Sales as of April 15, 2007 is:
a. P 513,000
b. P 547,000
8. Estimated inventory as of April 15, 2007 is:
a. P 570,000
b. P 575,500
9. Inventory loss at April 15, 2007 is:
a. P 477,000
b. P 512,000
10. The Average Gross Profit for two years (2005 and 2006) is:
a. 45%
b. 55%
c. 42.76%
d. 56.23%
Solution
Computation of sales for the period Jan 1 - April 15, 2007
Sales up to March 31, 2007
Sales for the period April 1-15
P1,350,000
Accounts Receivable, 4.15.07
P440,000
Receipts from customers
120,000
P560,000
Less Accts. Receivable, 3.31.07
400,000
Total sales
1.
160,000
P1,510,000
Computation of the amount of Inventory Fire Loss
Inventory, December 31, 2006
P750,000
Add purchases for the period Jan.1 to April 15
Purchases up to March 31, 2007
P520,000
Payments for April mdse. Shipments
34,000
Unrecorded obligations for April mdse, shipment
106,000
Purchases returns
(9,500)
Merchandise available for sale
P1,400,500
Less cost of goods sold (P1,510,000 sales x 55%)
830,500
Estimated inventory on date of fire
P570,000
Less: Proceeds from sale of salvaged mdse.
P35,000
Shipments in transit
23,000
Inventory fire loss
2005
Net Sales
2006
Total
P3,900,000
P5,300,000
P9,200,000
P660,000
P500,000
P660,000
2,350,000
2,800,000
5,150,000
P3,010,000
P3,300,000
P5,010,000
500,000
750,000
750,000
Cost of goods sold
P2,510,000
P2,550,000
P5,060,000
Gross Profit
P1,390,000
P2,750,000
P4,140,000
Beginning Inventory
Net purchases
Available
Ending Inventory
Gross Profit rate
45%
JOURNAL ENTRIES – APRIL 1-15
57,000
Cash
Purchases
58,000
P512,000
Computation of average GP ratio:
Accounts payable
650,500
57,000
34,000
Cash
34,000
Operating expenses
39,000
Cash
Cash
39,000
129,500
Accounts receivable
120,000
Purchase returns
Accounts receivable
9,500
160,000
Sales
Purchases
160,000
106,000
Accounts payable
Allowance for bad debts
106,000
80,000
Accounts receivable
Operating expenses (bad debts)
80,000
86,000
Allow. for bad debts
86,000
(P80,000 + P6,000)
1.
Cash balance at April 15, 2007 is:
d. P 199,700
2.
Accounts Receivable balance at April 15, 2007 is:
a. P 350,500
3.
Inventory at April 15, 2007 is:
c. P 58,000
4.
Accounts payable at April 15, 2007 is:
d. P 286,000
5.
Sales as of April 15, 2007 is:
b. P1,510,000
6.
Net purchases as of April 15, 2007 is:
d. P 650,500
7.
Cost of Sales as of April 15, 2007 is:
d. P 830,500
8.
Estimated inventory as of April 15, 2007 is:
a. P 570,000
9.
Inventory loss at April 15, 2007 is:
b. P 512,000
10. The Average Gross Profit for two years (2005 and 2006) is:
a. 45%
PROBLEM 18
The following accounts were included in the adjusted trial balance of Jeanina Company as of
December 31, 2006:
Cash
Accounts receivable
Merchandise Inventory
P
240,800
563,500
1,512,500
Accounts payable
1,050,250
Accrued expenses
107,750
During your audit, you noted that Jeanina held its cash book open after year-end. In addition,
your audit reveled the following
1. Receipts for January 2007 of P163,650 were recorded in the December 2006 cash receipts
book. The receipts of P90,025 represents cash sales and P73,625 represents collections
from customers, net of 5% cash discounts.
2. Payments to suppliers made on January 2007 of P93,100, on which discounts of P3,100
were taken, were included in the December 2006 check register.
3. Merchandise inventory is valued at P1,512,500 prior to any adjustments . The following
information has been found relating to certain inventory transactions.
a. Goods valued at P68,750 are on consignment with a customer. These goods are not
included in the P1,512,500 inventory figure.
b. Goods costing P54,375 were received from a vendor on January 4, 2007. The related
invoice was received and recorded on January 6, 2007. The goods were shipped on
December 31, 2006, terms FOB shipping point.
c. Goods costing P159,375 were shipped on December 31, 2006, and were delivered to
the customer on January3, 2007. The terms of the invoice were FOB shipping point.
The goods were included in the 2006 ending inventory even though the sale was
recorded in 2006.
d. A P45,500 shipment of goods to a customer on December 30, terms FOB destination
are not included in the year-end inventory. The goods cost P32,500 and were delivered
to the customer on January 3, 2007. The sale was properly recorded in 2007.
e. The invoice for goods costing P43,750 was received and recorded as a purchase on
December 31, 2006. The related goods, shipped FOB destination were received on
January 4, 2007, and thus were not included in the physical inventory.
f.
Goods valued at P153,200 are on consignment from a vendor. These goods are not
included in the physical inventory.
Questions
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2006.
1. Cash
a. P 240,800
b. P 173,500
c. P 170,250
d. P 167,150
2. Accounts receivable
a. P 727,150
b. P 641,000
c. P 637,125
d. P 563,500
3. Merchandise inventory
a. P 1,520,000
b. P 1,508,750
c. P 1,465,000
d. P 1,252,500
b. P 1,153,975
c. P 1,150,875
d. P 1,143,250
b. P 1,058,275
c. P 1,055,175
d. P 1,000,800
b. 2.01
c. 1.84
d. 1.83
4. Accounts payable
a. P 1,197,725
5. Working capital
a. P 1,158,800
6. Current ratio
a. 2.00
Solution
1. Accounts receivable
77,500
Cash
73,625
Sales discount
Sales
3,875
90,025
Cash
2.
Cash
Purchase discount
90,025
90,000
3,100
Accounts payable
3.a Inventory
93,100
68,750
Cost of sales
3.b Inventory
68,750
54,375
Cost of sales
Purchases
54,375
54,375
Accounts payable
3.c Cost of sales
54,375
159,375
Inventory
159,375
3.d Inventory
32,500
Cost of sales
32,500
3.e Accounts payable
43,750
Purchases
43,750
Answer:
1. d
2. b
3. b
4. b
5. c
6. c
PROBLEM 19
In conducting your audit of Ma. Angela Corporation, a company engaged in import and
wholesale business, for the fiscal year ended June 30, 2006, you determined that its internal
control system was good. Accordingly, you observed the physical inventory at an interim date,
May 31, 2006 instead of at June 30, 2006.
You obtained the following information from the company’s general ledger
Sales for eleven months ended May 31, 2006
P1,344,000
Sales for the fiscal year ended June 30, 2006
1,536,000
Purchases for eleven months ended May 31, 2006
(before audit adjestments0
Purchases for the fiscal year ended June 30, 2006
1,080,000
1,280,000
Inventory, July 1, 2005
140,000
Physical inventory, May 31, 2006
220,000
Your audit disclosed the following additional information.
(1) Shipments costing P12,000 were received in May and included in the physical inventory
but recorded as June purchases.
(2) Deposit of P4,000 made with vendor and charged to purchases in April 2006. Product
was shipped in July 2006.
(3) A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its costs of P16,000.
Questions:
In audit engagements in which interim physical inventories are observed, a frequently used
auditing procedure is to test the reasonableness of the year-end inventory by the application
of gross profit ratios. Based on the above and the result of your audit, you are to provide the
answers to the following:
1. The gross profit ratio for eleven months ended May 31, 2006 is
a. 20%
b. 25%
c. 30%
d. 35%
2. The cost of goods sold during the month of June, 23003 using the gross profit ratio method
is
a. P 132,000
b. P 148,000
c. P 144,000
d. P 160,000
3. The June 30, 2006 inventory using the gross profit method is
a. P 260,000
b. P 264,000
c. P 268,000
Solution
Q1 Beginning inventory
140,000
Purchases – adjusted
1,088,000 (P1,080,000 + P12,000 – P4,000)
TGAS
1,228,000
Ending inventory
220,000
Cost of goods sold
1,008,000
Sales
1,344,000
COS
1,008,000
Gross Profit
336,000
25%
Q2 Sales for the fiscal year ended June 30, 2003
P 1,536,000
Sales for the eleven months ended May 31, 2003
Sales for the month of June 30, 2003
1,344,000
P
Less: Sales of goods at cost
Sales with gross profit
16,000
P
x Cost Rate
Total
Plus: Sale of goods at cost
192,000
176,000
25%
P
132,000
16,000
d. P 340,000
Total Cost of Goods Sold for June 2003
Q3 Ending inventory
Purchases for the month of June
Goods sold at cost
Total
Less: Cost of items sold in June
Gross Profit
P
148,000
P 220,000
200,000 (P1,280,000 – P1,080,000)
( 16,000)
P 404,000
144,000 (P192,000 x 75%)
P 260,000
Problem 20
You are engaged to audit the Abam’z Company and its subsidiary, Yamas Company as of
December 31, 2005. The Abam’z Company manufactures tires with it sells to its subsidiary at
cost plus 30%. During the course of the audit, you discover that the balances of the intercompany accounts are not reconciled. Following is a copy of part of the inter-company ledger
sheets:
Accounts Receivable from Yamas
Date
Reference
Amount
Total Forwarded
P180,000
Date
Reference
Total Forwarded
Amount
P130,000
Dec. 26
SI 903
7,600
Dec.26
CR
10,000
27
SI 904
4,000
29
CR
20,000
28
SI 905
6,200
31
Balance
52,500
29
SI 906
3,700
31
SI 908
11,000
P 212,500
P 212,500
Accounts Payable to Abam’z
Date
Reference
Amount
Total Forwarded
P140,000
Date
Reference
Total Forwarded
Amount
P161,000
Dec. 26
CD
20,000
Dec. 26
VR 1003-902
19,000
31
CD
28,000
28
VR 1004-903
7,600
31
RG 80
4,100
29
VR 1005-904
4,000
31
Balance
16,700
31
VR 1006-907
9,000
31
VR 1010-909
8,200
P 208,800
P 208,800
Legend for references:
SI – Sales register and invoices number
CR – Cash receipts book
CD – Cash disbursements book
VR – Voucher register, receiving report number, and Abam’z invoice number
RG – Returned goods register and debit memo number
A review of the inventory observation working papers discloses the following information:
Observation at Abam’z Company on December 31, 2005:
1. Last shipment prior to the physical inventory was billed on Invoice number 908 dated
December 31, 2005.
2. No returned merchandise was received from Yamas Company during the month of
December 2005.
Observation at Yamas Company on December 31, 2005:
1. The last shipment of merchandise returned to Abam’z in December 2005 was entered on
debit memo number 80 dated December 31, 2005.
2. The last receiving report used in December 2005 was number 1007 dated December 31,
2005 for merchandise billed on Abam’z invoice number 905.
Questions:
1. What is the total unrecorded purchases of Yamas as of December 31, 2005?
a. P 29,900
b. P 20,900
c. P 14,700
d. P 11,000
2. What is the reconciled balance of the inter-company accounts at December 31, 2005?
a. P 7,600
b. P 30,346
c. P 29,400
d. P 37,600
3. Abam’z Company’s inventory at December 31, 2005 should be increased by
a. P 3,154
b. P 4,100
c. P 10,077
d. P 6,923
4. Yamas Company’s inventory at December 31, 2005 should be increased by
a. P 29,400
b. P 4,100
c. P 11,000
d. P 14,700
Solution:
Abam’z Company and Yamas Company
Reconciliation of Inter-Company Accounts
Unadjusted balance
Abam’z
Yamas
52,500
16,700
Abam’z shipments not recorded by Yamas
SI # 905
6,200
SI # 906
3,700
SI # 908
11,000
SI # 907 – not recorded by Abam’z
9,000
SI # 909 – recorded by Yamas although
there is no shipment made by Abam’z
(8,200)
RG # 80 – not yet recorded by Abam’z
(4,100)
Remittance from Yamas not yet recorded by
Abam’z
Adjusted balance
( 28,000)
______
29,400
29,400
Abam’z
Yamas
Inventory Adjustments
December 31, 2005
Items to be added on inventory lists:
Cost of returned goods in transit
(4,100/130%)
3,154
Cost of purchases in transit –
SI # 906
3,700
SI # 908
_____
11,000
Total addition to inventory
3,154
14,700
Adjusting Entry:
Book of Abam’z
Accounts Receivable
Sales
Book of Yamas
9,000
Purchases
9,000
Accounts payable
20,900
20,900
SI # 907
Sales Ret. & Allow.
SI # 905, 906, 908
4,100
Accounts Receivable
Accounts payable 8,200
4,100
Goods in transit from Yamas
Cash
SI # 909
28,000
Accounts Receivable
Cash in transit from Yamas
Purchases
28,000
8,200