Saint Columban College

College of Business Education

Pagadian City

Auditing Problems
Final Examinations

Instructions: A question guided by your heart will yield a better answer than a question guided by your
seatmate. If you don’t have an answer, then close your eyes and pray ♥

PROBLEM NO. 1
In connection with your examination, the Pound Company presented to you the following information
regarding its Cash in Bank account for the month of December, 2005:
a) Balances per bank statements: November 30, P107,800, and December 31, P115,200.

b) Balances of cash in bank account in company’s books: November 30, P82,725, and December
31, P113,400.

c) Total receipts per books were P1,110,950 of which P6,050 was paid in cash to a creditor on
December 24.

d) Total charges in the bank statement during December were P1,094,850.

e) Undeposited receipts were: November 30, P45,300 and December 31, P50,600.

f) Outstanding checks were: November 30, P13,375, and December 31, P9,650, of which a check
for P2,500 was certified by the bank on December 26.

g) NSF checks returned, recorded as reduction of cash receipts, were:

 Returned by bank on December, recorded also in December, P5,200.
 Returned by bank on December but recorded in January, P4,300

h) Collections by bank not recorded by Company were P60,750 in November and P58,200 in
December.

i) Bank service charges not entered in company’s books were: November 30, P3,750 and
December 31, P2,100.

j) A check for P4,750 of Found Company was charged to Pound Company in error.

k) A check drawn for P4,200 was erroneously entered in the books as P2,400.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted cash balance as of November 30, 2005?
a. P107,800 b. P139,725 c. P75,875 d. P137,225
2. How much is the adjusted book receipts for December, 2005?
a. P1,102,350 b. P1,113,600 c. P1,056,950 d. P1,108,400
3. How much is the adjusted book disbursements for December, 2005?
a. P1,084,725 b. P1,078,675 c. P1,089,925 d. P1,084,725
4. How much is the adjusted cash balance as of December 31, 2005?
a. P158,650 b. P153,900 c. P165,200 d. P163,400
5. How much is the cash shortage of December 31, 2005?
a. P1,800 b. P9,500 c. P4,750 d. P0

PROBLEM NO. 2
Your audit senior instructed you to prepare a four column proof of cash receipts and disbursements for
the month of August, 2005.
The bank reconciliation prepared by Franc Company at July 31 is reproduced below: (All book
adjustments were recorded in August).
 Bank balance P52,000 Book balance P40,000
Add:
Proceeds of note
receivable collected by
Add deposit in transit, July 31 900 bank in July 8,000
Deposit made in bank on
July 31 not recorded in
books until August 1,000
Total 52,900 Total 49,000
Less outstanding checks: Less bank service charge 100
No. 436 P200
450 1,800
451 1,400
454 600 4,000 .
Adjusted balance P48,900 Adjusted balance P48,900
Upon inquiry about the client’s August 31 bank reconciliation, you were informed that it has been lost
and that the client is too busy at this time to prepare another. Your senior told you to get the August
bank statement and paid checks and to prepare the August 31 reconciliation so that you may complete
the August proof of cash.
The August bank statement is reproduced below:
Kapuso Bank
Account Name: Franc Company
Date Debits Credits
July 31
August 1 1,800 900
August 6 1,400
August 9 600 10,000
August 12 140 DM 140
August 15 1,000
August 20 700 14,000
August 27 1,440
August 29 100 EC 100 EC
August 31 440 SV
August 31 300 DM
1,820
SV – Service Charges; DM – Debit Memo; EC – Error Corrected; CM – Credit Memo

The paid checks accompanying this bank statement (all clearing in August) were (checks listed in order
of payment by bank).
No. 450 P1,800 No. 455 P1,000 No. 458 P1,440
451 1,400 456 700 459 1,820
454 600
The check register revealed that the last check issued in August was no. 460 for P1,000 and that check
no. 457 was for P2,400.

Cash received for the period August 21 through 31 of P9,400 was deposited in the bank on September
1.

The debit memo on August 12 and August 31 were customer NSF checks returned by the bank. The
check on August 12 was immediately redeposited without entry. The check returned on August 31 was
redeposited by the client in the bank on September 1 without entry.
QUESTIONS:
Based on the application of the necessary audit procedures and appreciation of the above data, you
are to provide the answers to the following:
6. How much is the unadjusted book receipts for August?
a. P25,140 b. P42,400 c. P35,540 d. P43,300
7. How much is the unadjusted book disbursements for August?
a. P8,460 b. P9,740 c. P8,760 d. P8,360
8. How much is the adjusted book receipts for August?
a. P33,640 b. P33,450 c. P34,400 d. P33,400
9. How much is the adjusted book disbursements for August?
a. P9,100 b. P8,900 c. P9,200 d. P9,340
10. How much is the adjusted cash balance as of August 31, 2005?
a. P73,940 b. P73,060 c. P73,400 d. P73,200

Problem 3
Benny Inc. a nonpublic enterprise is negotiating a loan for expansion purposes and the bank requires audited
financial statements. Before closing the accounting records for the year ended December 31, 2019, Bulls
controller prepared the following comparative financial statements for 2019 and 2018:

Statement of Financial Position:

Assets 2019 2018
Cash 275,000 150,000
Trading Securities 78,000 78,000
Accounts Receivable 487,000 392,000
Allowance for D.A. (50,000) (32,000)
Inventories 425,000 307,000
Property and Equipment 310,000 217,000
Accumulated Depreciation (150,000) (121,000)
Total Assets 1,375,000 991,000

Liabilities and Equity

Accounts payable and accrued liabilities 420,000 347,000
Estimated Liability from lawsuit 100,000 0
Share Capital, P10 Par 260,000 260,000
Share Premium 130,000 130,000
Retained Earnings 465,000 254,000
Total Liab and Equity 1,375,000 991,000

Income Statement:
2019 2018
Net Sales 1,580,000 1,250,000
Operating Expenses:
Cost of Sales 755,000 690,000
Selling and Admin. 485,000 365,000
Depreciation 29,000 18,000
Est. Loss from lawsuit 100,000 0
Profit 211,000 177,000

During the course of the audit, the following additional information was obtained:
a. The trading securities were acquired on December 31, 2018. The securities have a fair value of 67,000 at
December 31, 2019
b. In discussion with the company officials, it was determined that the doubtful accounts expense rate based on
net sales should be reduced to 2% from 3%, effective January 1, 2019.
c. As a result of errors in the physical count, inventories were overstated by 12,000 at December 31, 2018 and
by 17,500 at December 31, 2019.
d. On Jan 1, 2018, the cost of equipment purchases for 30,000 was debited to repairs and maintenance. Bulls
depreciates equipment of this type by the straight line method over a five year life with no residual value.
e. On July 1, 2019 fully depreciated equipment purchased for 21,000 was sold as scrap for 2,500. The only entry
bulls made was to debit cash and credit property and equipment for the scrap proceeds. The property and
equipment(net) had a current cost of 250,000 at December 31, 2019)
f. Advertising and promotion expense for the year ended December 31, 2018 includes the P25,000 cost of
printing sales catalogs for a special promotional campaign held in January 2019.
g. Bulls was named a defendant in a lawsuit in October 2019. Bulls counsel is of the opinion that bulls has a
good defense and does not anticipate any impairment of Bulls assets or that any significant liability will be
incurred. Nevertheless, Bull’s management wished to be conservative and therefore established a loss
contingency of 100,000 at December 31, 2019.

Questions:
Based on the above given and the result of your audit, compute the following: (Disregard taxes)
11. Adjusted Retained Earnings as of January 1, 2019
A. 266,000 B. 297,000 C. 285,000 D. 291,000

12. Adjusted Profit for the year ended December 31, 2019
A. 281,800 B. 181,800 C. 287,800 D. 306,800
13. Adjusted Current Assets as of December 31, 2019
A. 1,226,760 B. 1,190,300 C. 1,154,900 D. 1,202,300

14. Adjusted carrying amount of property and equipment as of December 31, 2019
A. 168,500 B. 180,500 C. 178,000 D. 192,500

15. Adjusted shareholder’s equity as of December 31, 2019

A. 962,800 B. 950,800 C. 974,800 D. 862,800

Problem 4

Knicks Corporation asked you to review its records and prepare corrected financial statements. The books of
accounts are in agreement with the following statement of financial position:

Statement of financial position:

Assets
Cash 40,000
AR 80,000
NR 24,000
Inventories 200,000
Total Assets 344,000

Liab and O.E

AP 16,000
NP 32,000
Capital Stock 80,000
Retained Earnings 216,000
Total 344,000

A review of the company’s book indicates that the following errors and omissions had not been corrected
during the applicable years:
2016 2017 2018 2019

Ending Inventory
Overstated 0 56,000 64,000 0
Understated 48,000 0 0 72,000

Prepaid Expenses 7,200 5,600 4,000 4,800

Unearned Income 0 3,200 0 2,400
Accrued expense 1,600 600 800 400
Accrued Income 0 1,000 0 1,200

No Dividends were declared during the year 2016 to 2019 and no adjustments were made to Retained Earnings.
The company’s books reported the following profit:
2016 60,000 2018 52,000
2017 44,000 2019 60,000

Questions: Determine the adjusted amounts of the following:

16. Net income in 2016

A. 99,200 B. 116,800 C. 113,600 D. 17,600

17. Net income (loss) in 2017

A. (62,800) B. (14,800) C. (59,600) D. 145,200

18. Net income (loss) in 2018

A. 60,400 B. 44,800 C. 44,400 D. (11,600)

19. Net income (loss) in 2019

A. (76,000) B. 194,400 C. 195,200 D. 196,000

20. Net income (loss) in 2020

A. 281,600 B. 291,200 C. 292,000 D. 147,200
Problem 5
The Lee buys company had acquired interest in a promising local company, the Silver Tab company. During
your audit of the company’s account for the year 2019, which was a first audit, you obtained the following:

Investment in Silver Tab Company

2017- Jan. 2 30,000 sh @ 35 1,050,000 2019- July 15 50,000 sh @ 40 2,000,0000
2018- July 2 90,000 sh @ 60 5,400,000
2019- Mar. 2 30,000 sh @ 70 2,100,000

Investment in Red Tab Company

2019- Aug 10 10,000

Dividend Income
2019 Jan. 2 120,000
April 1 150,000
August 10 10,000
Dec. 20 100,000

The transactions pertaining to the foregoing for 2019 were as follows:

Jan. 2 Received cash dividend (declared on Dec. 1 2018) of P1 per share
Mar 2 Bought 30,000 shares at P70 per share
April 1 Received cash dividend (Declared on March 1 to shareholders on record as of March 10) of
1P per share
July 15 Sold 50,000 shares at P40 per share
Aug 10 Received an “extra” dividend in shares of one share of Red Tab company for every ten shares of
Silvery tab company. The share dividend had a market value of P3 per share and its book value
on the ledger of Silver tab company was 1P per share.
Dec 20 Received cash dividend of P1 per share, declared December 1, out of Silver Tab Company’s
Reserve for Depletion (Liquidating Dividend)
29 Sold 10,000 Silver tab company shares at P90. Cash was received on January 5, 2020

Questions:
21. Loss on Sale of 50,000 Silver tab shares on July 15:
A. 250,000 B. 850,000 C. 1,300,000 D. 0

22. Gain on Sale of 10,000 Silver tab shares on December 29

A. 330,000 B. 310,000 C. 300,000 D. 0

23. Adjusted Balance of Investment in Silver Tab Co. as of December 31, 2019
A. 5,570,000 B. 5,130,000 C. 5,580,000 D. 5,640,000

24. Dividend Income for the year ended Dec. 31, 2019
A. 180,000 B. 160,000 C. 150,000 D. 280,000

25. Which of the following is the most effective audit procedure for verification of dividends earned on
investment in equity securities?
A. Tracing deposited dividend checks to the cash receipts books
B. Reconciling amount received with published dividend records
C. Comparing the amounts received with preceding year dividends received
D. Recomputing selected extensions and footings of dividend schedules and comparing totals of the general
ledger.
Problem 6
Your Audit of the Norte Corp. disclosed that the company owned the following securities on December 31,
2018:

Trading Securities:
Security Shares Cost Fair Value
Vigan Inc. 9,600 144,000 184,000
Laoag Inc. 16,000 423,000 288,000
Santiago Bonds
10%, 200,000 Face value
interest payable every
Jan 1 and July 1 158,400 163,440

Available for Sale Securities:

Security Shares Cost Fair Value
Candon Products 32,000 1,376,000 1,440,000
Pagudpud Inc. 240,000 6,240,000 5,840,000
Batac. Inc. 80,000 960,000 1,280,000

Held to Maturity:
Amortized Cost Fair Value
Ilocos Bonds 12%, 2,000,000 face value
Interest payable annually every Dec. 31 1,926,000 1,900,000

During 2019, the following transactions occurred:

Jan. 1 Receive interest on Santiago Bonds
Mar 1 Sold 8,000 shares of Laoag Inc. for 152,000
May 15 Sold 3,200 shares of Batac. Inc for 15 per share
July 1 Received interest on the Santiago Bonds
Dec. 31 Received interest on the Ilocos Bonds
31 Transferred the Ilocos bonds to the available for sale portfolio. The bonds were selling at
101 on this date. The bonds were originally purchased at an effective rate of 14%.

The fair values of the shares and bonds on December 31, 2019 are as follows:
Vigan Inc. 22 per share
Laoag Inc. 15 per share
Santiago Bonds P151,200
Candon Products 42 per share
Pagudpud Inc. 28 per share
Batac Inc. 18 per share

Questions:
26. Gain or Loss on sale of 8,000 Laoag, Inc. shares on March 1:
A. 8,000 gain B. 64,000 loss C. 8,000 loss D. 64,000 gain

27. Gain or Loss on sale of 3,200 Batac Inc. shares on May 15

A. 9,600 loss B. 9,600 gain C. 3,200 loss D. 3,200 gain

28. Total interest income for the year 2019?

A. 260,000
B. 252,120
C. 289,640
D. 286,000

29. The amount to be recognized in other comprehensive income on the transfer of Ilocos bonds to AFS?
A. 94,000 B. 64, 360 C. 123,640 D. 0

30. Carrying amount of Trading Securities and AFS as of December 31, 2019
Trading Securities AFS
A. 602,400 9,446,000
B. 482,400 11,524,000
C. 602,400 11,441,600
D. 482,400 11,466,400
Problem 7
The following information pertain to Teal Company’s delivery trucks:
Delivery Equipment
Date Particulars Debit Credit
1/1/17 Trucks 1,2,3,and 4 3,200,000
3/15/18 Replacement of Truck 3 tires 25,000
7/1/18 Truck 5 800,000
7/10/18 Reconditioning of Truck 4
which was damaged in a crash 35,000
9/1/18 Insurance recovery on Truck 4
accident 33,000
10/1/18 Sale of Truck 2 600,000
4/1/19 Truck 6 1,000,000
5/2/19 Repainting of Truck 4 27,000
6/30/19 Truck 7 720,000

Accumulated Depreciation-Delivery Equipment

Date Particulars Debit Credit
12/31/17 Depreciation Expense 300,000
12/31/18 Depreciation Expense 300,000
12/31/19 Depreciation Expense 300,000

a. On July 1, 2018, Truck 3 was traded in for a new truck, Truck 5 costing 850,000; the selling party allowed a
50,000 trade in value for the old truck
b. On April 1, 2019, Truck 6 was purchases for 1,000,000; Truck 1 and cash of 850,000 being given for the new
truck
c. The depreciation rate is 20% by unit basis.
d. Unit cost of truck 1 to 4 is at 800,000 each.

31. How much is the net loss on disposal of trucks in 2018?

A. 510,000 B. 430,000 C. 590,000 D. 230,000

32. What is the loss on trade-in truck 1?

A. 410,000 B. 290,000 C. 250,000 D. 150,000

33. What is the adjusted balance of the Delivery Equipment account as of December 31, 2019?
A. 4,170,0000 B. 2,650,000 C. 3,170,000 D. 3,370,000

34. The 2019 Depreciation Expense is understated by:

A. 372,000 B. 252,000 C. 92,000 D. 292,000

35. Which of the following procedures would least like lead the auditor to detect unrecorded fixed asset of
disposals?
A. Examine insurance policies
B. Review repairs and maintenance expense
C. Review property tax files
D. Scan invoices for fixed asset conditions

Problem 8

On January 1, 2019, Pedro Company sold land that originally cost 400,000 to Buyer Company, as payment
buyer gave Pedro company a 600,000 note. The note bears an interest rate of 4% and is to be repaid in three
annual installments of 200,000(plus interest on outstanding balance). The first payment is due on December 31,
2019. The market price of the land is into reliably determinable. The prevailing rate of interest for notes of this
type is 14% on January 1, 2019 and 15% on December 31, 2019.

Pedro made the following journal entries in relation to the sale of land and the related notes receivable:

January 1, 2019
Notes receivable 600,000
Land 400,000
Gain on Sale of Land 200,000
December 31, 2019
Cash 224,000
Notes Receivable 200,000
Interest Income 24,000

Pedro reported the Notes receivable in its statement of financial position at December 31, 2019 as part of trade
and other receivables.

Questions:
36. The correct gain on sale of land is:
A. 103,105 B. 94,868 C. 120,061 D. 200,000

37. The correct interest income for 2019 is:

A. 72,230 B. 72,809 C. 70,435 D. 24,000

38. Profit for 2019 is overstated by:

A. 50,460 B. 31,130 C. 54,902 D. 0

39. The correct carrying amount of the notes receivables at December 31, 2019 is:
A. 400,000 B. 345,098 C. 368,870 D. 349,540

40. The entity’s working capital at December 31, 2019 is overstated by:
A. 235,765 B. 232,936 C. 182,476 D. 0

Problem 9
The general ledger trial balances of Masha Corporation includes the following balance sheet accounts at
December 31, 2019:

Cash 1,056,000
Accounts Receivable 1,220,000
Inventory 441,000
Trading Securities 200,000
AFS Investments 500,000
Prepaid Insurance 50,000
Deferred Tax Asset 150,000
Bank Overdraft 100,000

Additional information:

Cash
• The sales book was left open up to January 5, 2020 and cash sales totaling 150,000 were considered as Sales
in December.
• Checks of 93,000 in payment of liabilities were prepared before December 31, 2019, recorded in the books but
not mailed or delivered to payees.
• Post-dated checks totaling 78,000 are being held by the Cashier as part of Cash. The company’s experience
shows that post-dated checks are eventually realized
• Customer’s check for 15,000 deposited with but not returned by Bank, “NSF” on December 27, 2019. Return
was recorded in the books
• The cash account includes 400,000 of compensating balance against a short-term bank loan. The
compensating balance is legally restricted as to withdrawal.

Accounts Receivable
The accounts receivable consists of the following:
Trade accounts receivable 650,000
Allowance for uncollectible accounts (20,000)
Claim against shipper for goods lost in transit 30,000
Selling price of unsold goods sent by Masha on
consignment at 130% of cost (included in
Masha’s ending inventory at cost) 260,000
Security Deposit on lease of warehouse used
for storing some inventories 300,000
Total 1,220,000
Inventory
A physical count of inventory at December 31, 2019 revealed that Masha had inventory on hand at that date
with a cost of 441,000. The annual audit identified that the following items were excluded from this amount and
related transactions were not recorded:
• Merchandise of 61,000 is held by Masha on consignment. The consignor is Meta Company.
• Merchandise costing 38,000 was shipped by Masha FOB Destination to a customer on December 31, 2019.
The customer was expected to receive the goods on January 6, 2020.
• Merchandise costing 46,000 was shipped by Masha FOB shipping point to a customer on December 29, 2019.
The customer was scheduled to receive the goods on January 2, 2020.
• Merchandise costing 83,000 shipped by a vendor FOB destination on December on December 31, 2019 was
received by Masha on January 4, 2020
• Merchandise costing 51,000 purchased FOB shipping point was shipped by the supplier on December 31,
2019 and received by Masha on January 5, 2020.

Questions:
Determine the adjusted amounts of the following:
41. Cash
A. 921,000 B. 521,000 C. 584,000 D. 506,000

42. Net accounts receivables

A. 630,000 B. 782,800 C. 767,800 D. 754,000

43. Trade and accounts receivables, net

A. 797,800 B. 812,800 C. 660,000 D. 784,000

44. Inventory
A. 730,000 B. 340,000 C. 451,000 D. 530,000

45. Current Assets

A. 2,361,000 B. 2,498,000 C. 2,485,000 D. 2,513,800

Problem 10
CDO Bank granted a loan to a borrower on January 1, 2016. The interest rate on the loan is 12% payable
annually starting December 31, 2016. The loan matures in Five years on December 31, 2020. The data related to
the loan are:
Principal amount 2,000,000
Direct Original cost 62,744
Origination fee received from borrower 200,000

The borrower paid the interest due on December 31, 2016. However, during 2017 the borrower began to
experience financial difficulties, requiring CDO to reassess the collectability of the loan. As of December 31,
2017, CDO expects that only 1,200,000 of the principal will be recovered. The 1,200,000 principal amount is
expected to be collected in 2 equal installments on December 31, 2019 and December 31, 2021. The prevailing
interest rates for similar type of note as of December 31, 2016 and 2017 are 15% and 16% respectively.

Questions:
46. The interest income to be recognized in 2016 is:
A. 260,784 B. 279,412 C. 298,039 D. 240,000

47. The carrying amount of the loan as of December 31, 2016 is

A. 1,902,516 B. 1,920,783 C. 1,883,528 D. 2,000,000

48. The loan impairment loss to be recognized in 2017 is

A. 1,140,380 B. 1,090,262 C. 1,106,881 D. 1,210,808

49. The interest income to be recognized in 2018 is

A. 114,374 B. 137,539 C. 103,154 D. 124,368

50. The carrying amount of the loan as of December 31, 2019 is:
A. 478,307 B. 461,721 C. 556,704 D. 445, 935