ACC124 – LIA1AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS II BSA 3

THEORIES
1. In auditing accounts payable (AP), an audit practitioner’s procedures most likely will focus primarily on
management’s assertion of
a. Existence or occurrence
b. Presentation and disclosure
c. Completeness
d. Valuation or allocation
e. None of the above

2. An audit practitioner performs a test to determine whether all merchandise or which the client was billed was
received. The population for this test consists of all
a. Merchandise received
b. Canceled checks
c. Receiving reports
d. Vendor’s invoices
e. None of the above

3. The primary audit test to determine if accounts payable (AP) are valued properly is
a. An analytical procedure
b. Confirmation of accounts payable
c. Vouching accounts payable to supporting documentation
d. Verification that accounts payable was reported as a current liability in the balance sheet (BS)

4. Which of the following procedures is least likely to be performed before the BS date?
a. Search for unrecorded liabilities
b. Confirmation of receivables
c. Observation of inventory
d. Testing of internal control over cash

5. Unrecorded liabilities are most likely to be found during the review of which of the ff. documents?
a. Unpaid bills
b. Bills of lading
c. Unmatched sales invoices
d. Shipping records

6. Which of the following procedures relating to the examination of accounts payable (AP) could the auditor
delegate entirely to the client’s employee?
a. Reconcile unpaid invoices to vendor statements
b. Test footings in the accounts payable ledger
c. Mail confirmations for selected account balances
d. Prepare a schedule of accounts payable

7. The auditor is most likely to verify accrued commissions payable in conjunction with the
a. Verification of contingent liabilities
b. Review of post BS date disbursements
c. Examination of trade accounts payable
d. Sales cutoff test

PROBLEM NO. 1 
In the audit of the TooA’s financial statements at December 31, 2021, the chief accountant of the said corporation
provided the following information: 
Notes payable:               
Arising from purchase of goods         304,000
Arising from 5 year-bank loans, on which marketable securities      

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valued at P600,000 have been pledged as security, P400,000 due      

on June 30, 2022; P100,000 due on Dec. 31, 2022       500,000
Arising from advances by officers, due June 30, 2022     50,000
Reserve for general contingencies         400,000
Employees’ income tax withheld         20,000
Advances received from customers on purchase orders     64,000
Containers’ deposit             50,000
Accounts payable arising from purchase of goods,        
net of debit balances of P30,000         170,000
Accounts receivable, net of credit balances P40,000     360,000
Cash dividends payable           80,000
Stock dividends payable           100,000
Dividends in arrears on preferred stock, not yet declared     200,000
Convertible bonds, due January 31, 2023         1,000,000
First mortgage serial bonds, payable in semi-annual installments      
of P50,000, due April 1 and October 1 of each year     2,000,000
Overdraft with Allied Bank           90,000
Cash in bank balance with PNB           390,000
Estimated damages to be paid as a result of unsatisfactory        
performance on a contract           160,000
Estimated expenses on meeting guarantee for service        
requirements on merchandise sold         120,000
Estimated premiums payable           75,000
Deferred revenue             87,000
Accrued interest on bonds payable         360,000
Common stock warrants outstanding         120,000
Common stock options outstanding         210,000
Unused letters of credit           400,000
Deficiency VAT assessment being contested       500,000
Notes receivable discounted           200,000

On March 1, 2022, the P400,000 note payable was replaced by an 18-month note for the same amount. TooA is
considering similar action on the P100,000 note payable due on December 31, 2022. The 2021 financial statements
were issued on March 31, 2022. 

On December 1, 2021, a former employee filed a lawsuit seeking P200,000 for unlawful dismissal. TooA attorneys
believe that the suit is without merit. No court date has been set. 

On January 15, 2022, the BIR assessed TooA an additional income tax of P300,000 for the 2019 tax year. TooA
attorneys and tax accountants have stated that it is likely that the BIR will agree to a P200,000 settlement.

Based on the above and the result of your audit, compute for the following as of December 31, 2021: 
1. Total current liabilities
a. 2,500,000
b. 2,100,000
c. 2,300,000
d. 2,400,000

2. Total noncurrent liabilities

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ACC124 – LIA1AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS II BSA 3
a. 3,300,000
b. 2,900,000
c. 3,000,000
d. 3,400,000

3. Total liabilities
a. 5,200,000
b. 5,000,000
c. 5,400,000
d. 5,800,000

PROBLEM NO. 2 
The following information relates to Cygerg Company’s obligations as of December 31, 2021. For each of the
numbered items, determine the amount if any, that should be reported as current liability in Cygerg’s December 31,
2021 balance sheet. 

1. Accounts payable: 
Accounts payable per general ledger control amounted to P5,440,000, net of P240,000 debit balances in suppliers’
accounts. The unpaid voucher file included the following items that not had been recorded as of December 31,
2021: 
a) A Company – P224,000 merchandise shipped on December 31, 2021, FOB destination; received on January 10,
2022. 
b) B, Inc. – P192,000 merchandise shipped on December 26, 2021, FOB shipping point; received on January 16,
2022. 
c) C Super Services – P144,000 janitorial services for the three-month period ending January 31, 2022. 
d) MERALCO – P67,200 electric bill covering the period December 16, 2021 to January 15, 2022. 

On December 28, 2021, a supplier authorized Cygerg to return goods billed at P160,000 and shipped on
December 20, 2021. The goods were returned by Cygerg on December 28, 2021, but the P160,000 credit memo
was not received until January 6, 2022.
a. 5,923,200
b. 5,712,000
c. 5,601,600
d. 5,841,600

2. Payroll: 
Items related to Cygerg’s payroll as of December 31, 2021 are: 
Accrued salaries and wages P776,000 
Payroll deductions for: 
Income taxes withheld 56,000 
SSS contributions 64,000 
Philhealth contributions 16,000 
Advances to employees 80,000 
a. 776,000
b. 992,000
c. 832,000
d. 912,000

3. Litigation: 
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In May, 2021, Cygerg became involved in a litigation. The suit is being contested, but Cygerg’s lawyer believes it
is possible that Cygerg may be held liable for damages estimated in the range between P2,000,000 and
P3,000,000, and no amount is a better  estimate of potential liability than any other amount. 
a. 0
b. 2,000,000
c. 3,000,000
d. 2,500,000

4. Bonus obligation: 
Cygerg Company’s president gets an annual bonus of 10% of net income after bonus and income tax. Assume the
tax rate of 30% and the correct income before bonus and tax is P9,600,000. (Ignore the effects of other given
items on net income.)
a. 722,600
b. 395,000
c. 2,240,000
d. 628,000

5. Note payable: 
A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on December 31, 2021. The
note is dated October 1, 2020, bears interest at 18%, and is payable in three equal annual installment of P800,000.
The first interest and principal payment was made on October 1, 2021.
a. 800,000
b. 908,000
c. 72,000
d. 872,000

6. Purchase commitment: 
During 2021, Cygerg entered in a noncancellable commitment to purchase 320,000 units  of inventory at fixed
price of P5 per unit, delivery to be made in 2022. On December 31, 2021, the purchase price of this inventory item
had fallen to P4.40 per unit. The goods covered by the purchase contract were delivered on January 28, 2022. 
a. 0
b. 1,600,000
c. 1,408,000
d. 192,000

7. Deferred taxes: 
On December 31, 2021, Cygerg’s deferred income tax account has a 2021 ending credit balance of P772,800,
consisting of the following items: 
Caused by temporary differences in accounting       Deferred tax
For gross profit on installment sales         P376,000 Cr.
For depreciation on property and equipment       576,000 Cr.
For product warranty expense           179,200 Dr.
                  P772,800 Cr.
a. 772,800
b. 952,000
c. 196,800
d. 0

8. Product warranty: 
Cygerg has a one-year product warranty on selected items in its product line. The estimated warranty liability on
sales made during 2020, which was outstanding as of December 31, 2020, amounted to P416,000. The warranty
costs on sales made in 2021 are estimated at P1,504,000. Actual warranty costs incurred during the current 2021
fiscal year are as follows: 
Warranty claims honored on 2020 sales         P 416,000
Warranty claims honored on 2021 sales         992,000
Total warranty claims honored           P1,408,000
a. 0
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b. 1,504,000
c. 96,000
d. 512,000

9. Premiums: 
To increase sales, Cygerg Company inaugurated a promotional campaign on June 30, 2021. Cygerg placed a
coupon redeemable for a premium in each package of product sold. Each premium costs P100. A premium is
offered to customers who send in 5 coupons and a remittance of P30. The distribution cost per premium is P20.
Cygerg estimated that only 60% of the coupons issued will be redeemed. For the six months ended December 31,
2021, the following is available: 
Packages of product sold 160,000 
Premiums purchased 16,000 
Coupons redeemed 64,000 
a. 1,728,000
b. 1,152,000
c. 1,600,000
d. 576,000

10. Due to Six Nine Finance company: 

Cygerg’s accounting records show that as of December 31, 2021, P1,280,000 was due to Six Nine Finance
Company for advances made against P1,600,000 of trade accounts receivable assigned to the finance company
with recourse. 
a. 0
b. 1,600,000
c. 320,000
d. 1,280,000

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