ADAMSON UNIVERSITY

College of Business Administration

Accountancy Department

The home of the CPA Falcons

Audit Problems
(AP)
Preliminary Examination

Theories

1. Which of the following requires an adjustment to the opening balance of retained earnings in the earliest period
of the comparative financial statements presented?
a) A change in the estimated useful life of machinery.
b) A change in the expected residual value of a property.
c) A change from straight line to declining balance depreciation.
d) A change from first-in, first out (FIFO) to weighted average inventory cost flow assumption

2. Which of the following is not a retrospective-type accounting change?

a) Cost recovery method to the percentage of completion method for construction contracts.
b) Weighted average to FIFO for inventory valuation.
c) “Full cost method” to “successful effort method” in the extractive industry.
d) Percent of sales method to aging method in recognizing doubtful accounts.

3. Prospective application of recognizing the effect of a change in an accounting estimate means

a) Recognizing the effect of the change in the accounting estimate in the current and future periods affected
by the change.
b) Applying a new accounting policy to transactions, other events and conditions as if that policy had always
been applied.
c) Correcting the recognition, measurement and disclosure of amounts of elements of financial statements
as if a prior period error had never occurred.
d) Any of the above.

4. A change in accounting estimate is

a) An adjustment of the carrying amount of an asset or liability, or related expense, resulting from
reassessing the expected future benefits and obligations associated with that asset or liability.
b) A change in the specific principles, bases, conventions, rules and practices applied b an entity in preparing
and presenting financial statements.
c) Omission from, and misstatement, in an entity’s financial statements for one or more prior periods arising
from a failure to use, or misuse of, reliable information that was available and could reasonably be
expected to have been obtained and taken into account in preparing those statements.
d) All of the above.

5. On the last day of the fiscal year, the cash disbursement clerk drew a company check from ABC Bank and
deposited the check in the company account XYZ Bank to cover a previous theft of cash. The disbursement has
not been recorded. The auditor will detect this form of kiting by
a) Comparing the detail of cash receipts as shown by the cash receipts records with the detail on the
confirmed duplicate deposit tickets for three days prior to and subsequent to year end.
b) Preparing from the cash disbursement book a summary of bank transfers for one week prior to and
subsequent to year end.
c) Examining the composition of bank deposits in both banks subsequent to year end.
d) Examining paid checks returned with the bank statement of the next accounting period after year end.
 ADAMSON UNIVERSITY
College of Business Administration
Accountancy Department

The home of the CPA Falcons

6. 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 a 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 year-end.
c) Prepare a bank reconciliation as of year-end.
d) Prepare a bank transfer schedule as of year-end.

7. One of the audit procedures in the audit of cash is the counting of cash fund on a surprise basis. One item
included in the cash count is the un-deposited receipt. What is the follow-up audit procedure that the auditor
must do regarding this?
a) Trace to bank validated deposit slip the next working day or banking day.
b) Trace its recording in the accounting books the next working day.
c) Total the amounts from corresponding official receipts and compared to un-deposited receipts counted.
d) Trace if un-deposited receipts are reflected in the next month’s bank statement.

8. Unclaimed wages in the form of pay envelope which are being kept by the cashier must be
a) Included among the accountability of the cashier during the cash count by the auditor whether the pay
envelopes are emptied or not.
b) Included only among the accountability of the cashier during the cash count by the auditor if the pay
envelopes are emptied.
c) Included only among the accountability of the cashier during the cash count by the auditor if the pay
envelopes are intact and sealed.
d) Excluded among the accountability of the cashier during the cash count by the auditor whether the pay
envelopes are emptied or not.

9. 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.

10. Positive accounts receivable confirmations are appropriate when

a) There is reason to believe that a substantial number of accounts may be in dispute.
b) Control risk is low.
c) Accounts receivable consists of many small balances.
d) Confirmations are mailed during an interim period.
 ADAMSON UNIVERSITY
College of Business Administration
Accountancy Department

The home of the CPA Falcons

11. Which of the following procedures could reveal unrecorded sales at the statement of financial position date?
a) Comparing shipping documents with sales records.
b) Applying gross profit percentages to inventory shipped during the period.
c) Tracing payments received after the statement of financial position date to accounts receivable records.
d) Sending accounts receivable confirmations.

12. An auditor is testing sales transactions. One step is to trace a sample of debit entries from the accounts
receivable subsidiary ledger back to the supporting sales invoice. What would the auditor want to establish by
this step?
a) Sales invoice represent bona fide sales.
b) All sales have been recorded.
c) All sales invoices have been properly posted to customer accounts.
d) Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.

13. It is sometimes impracticable or impossible for an auditor to use normal accounts receivable confirmation
procedures. In such situations, the best alternative procedure the auditor might resort to would be
a) Examining subsequent receipts of year-end accounts receivable.
b) Reviewing accounts receivable aging schedules prepared at the statement of financial position date and at
subsequent date.
c) Requesting that management increase the allowance for uncollectible accounts by an amount equal to
some percentage of the balance in those accounts that cannot be confirmed.
d) Confirmation replies receive directly from customers.

14. To determine that sales transactions have been recorded in the proper accounting period, the auditor performs
a cut-off review. Which of the following best describes the overall approach used when performing a cut-off
review?
a) Ascertain that management has included in the representation letter a statement that transactions have
been accounted for in the proper accounting period.
b) Confirms year-end transactions with regular customers.
c) Examine cash receipts in the subsequent period.
d) Analyze transactions occurring within a few days before and after year end.

15. The auditor would like to establish the completeness and accuracy of credit sales entries in the customers’
subsidiary ledger. What is the best audit procedure that would be applicable in this audit objective?
a) Compare entries in the sales journal to entries in the customers’ subsidiary ledgers.
b) Trace entries from the customers’ subsidiary ledger of customers to sales invoice.
c) Compare postings from official receipts to customers’ ledger.
d) Trace entries from the customers’ subsidiary ledgers to official receipts.
 ADAMSON UNIVERSITY
College of Business Administration
Accountancy Department

The home of the CPA Falcons

Straight Problems

Problem 1

Robi Corporation reported profit for the years 2020 and 2021 at P550,000 and P700,000, respectively.
Your audit of the company’s disclosed the need for adjustments as follows:

2020 2021
Overstatement of ending inventories due to error in pricing P 29,000 P 33,000
Omission of depreciation on newly acquired equipment 15,000 15,000
Understatement of commission receivable 22,000 18,000
A purchase of merchandise was not recorded until the following
year, and also was not included in the ending inventory 60,000

Based on the preceding information, determine the following:

1. The adjusted profit for 2021

2. The adjusted profit for 2020
3. Effect of the foregoing errors on total assets at December 31, 2021
4. Effect of the foregoing errors on retained earnings at December 31, 2020

Problem 2

On January 1, 2020, Wayne's Waffle House purchased a freezer for P45,000. The freezer had an
estimated useful life of 10 years and an estimated residual value of P3,000 at the time of purchase. Wayne
spent P10,000 on January 1, 2022, to replace the freezer motor. This replacement increased the freezer's
life by 5 years and the residual value by P2,000.

5. Assuming that straight-line depreciation is used, what will be the depreciation expense for 2022?
Problem 3
Presented below pertains to Amsterdam Corporation on December 31, 2020:

Treasury warrants 300,000

Treasury bills, due on 1/31/2021 (purchased on 1/31/2020) 300,000
Treasury bills, due on 3/31/2021 (purchased on 12/31/2020) 200,000
Postage stamps 1,000
CM from Tokyo Corporation, a vendor, for a purchase return 20,000
BPI Checking account (100,000)
Metrobank Checking account 2,000,000
Postal Money Order 30,000
Traveler’s check 50,000
Postdated check of Donald Tramp, an employee 4,000
Restricted foreign bank account (equivalent to pesos_ 1,000,000
IOU from eldest brother of Jonathan Fabian, the company controller 10,000
Listed stocks held as temporary investments 15,000
Payroll account 500,000
Petty Cash fund (net of expense receipts pf P 6,000) 4,000
 ADAMSON UNIVERSITY
College of Business Administration
Accountancy Department

The home of the CPA Falcons

Additional information:
1. Check of P 200,000 in payment of accounts payable was recorded December 31, 2020 but mailed to
suppliers on January 5, 2021.
2. Check of P 100,000 dated January 5, 2021 in payment of accounts payable was recorded and mailed on
December 31, 2020.
3. Check of P 50,000 dated January 15, 2020 in payment of accounts payable was recorded and mailed
on January 15, 2020. As of the reporting period, the same has not been encashed by the payee and still
outstanding.

6. How much cash and cash equivalents should Amsterdam Corporation report on the December 31,
2020 statement of financial position?

Problem 4

At December 31, 2020, the cash account balance of Roses Corporation is P 924,000 with the following
details:

Traveler’s check 89,600

PMO 3,200
Postage stamps 480
BDO Checking account 88,000
Employee’s IOU 1,600
Savings Accounts in a closed bank 144,000
Currencies and coins on hand 211,120
Petty Cash Fund (gross of expense receipts, P 3,300) 8,000
Credit Memo from suppliers for purchase returns 26,000
Customer’s check dated January 10, 2020 32,000
Customer’s check dated January 16, 2021 120,000
Customer’s check marked NSF on 12/22/2020 200,000

7. What is the correct cash and cash equivalents balance on December 31, 2020?

PROBLEM 5

Presented below is the trial balance of Aloha Company at December 31, 2020 that partly includes the
following:

Petty Cash Fund 140,000

Metro Bank Checking Account 8,000,000
BDO Checking Account (overdraft) (500,000)
BPI 120-day Money Market Placement 2,000,000
PNB Time Deposit 4,000,000

Your audit revealed the following information:

A. Included in the petty cash fund are the following:
 Employee check, P 10,000 dated January 30, 2021
 Unreplenished petty cash vouchers, P 30,000
B. A check for P 200,000 was drawn against Metro Bank Checking account dated and recorded December
28, 2020 but delivered to payee on January 9, 2021.
C. The PNB Time deposit is set aside for land acquisition in early January 2021.
 ADAMSON UNIVERSITY
College of Business Administration
Accountancy Department

The home of the CPA Falcons

8. What should be reported as “cash and cash equivalents” on December 31, 2020?

PROBLEM 6
The cash account of GSP Company includes the following:

On deposit in current account with BPI 830,000

Cash collections not yet deposited to the bank 300,000
A customer’s check returned by the bank for insufficient fund 100,000
A check drawn by the Vice President of the company dated January 15, 2021 50,000
A check drawn by a supplier dated December 28, 2020 for goods returned by 40,000
GSP

A check dated May 31, 2020 drawn by GSP against BPI in payment of
customer duties, since the importation did not materialize, the check was
returned by the customs broker. This check was treated as an outstanding
check in the reconciliation of the BPI account 30,000

Petty Cash Fund of which P 12,000 is in currency; P 4,000 in form of

employees’ IOUs and P 4,000 is supported by approved petty cash vouchers
for expenses all dated prior to closing of the books on December 31, 2020 20,000
Total 1,370,000
Less: Overdraft with BPI secured by a chattel mortgage on the inventories 500,000
Balance per ledger 870,000

9. At what amount will the account “Cash” appear on the December 31, 2020 statement of financial
position?

MC PROBLEM 7
In your year end audit of A. Bonifacio Corporation, the Cashier showed a cash accountability of P 240,000
as at December 31, 2019. The following transaction are summarized for the year 2020:

Disbursements for costs and expenses 15,000,000

Income Tax Payable 200,000
Payment of Notes Payable to BPI 800,000
Proceeds of BDO borrowings – one year 2,000,000
Ordinary Shares Subscribed 18,000,000
Ordinary Shares Subscription Receivable 6,000,000
Acquisition of various property and equipment 9,000,000
Depreciation of property and equipment 600,000
Accounts written off 100,000
Collection from credit sales 11,200,000

10. What is the cashier’s accountability?

 ADAMSON UNIVERSITY
College of Business Administration
Accountancy Department

The home of the CPA Falcons

PROBLEM 8:
Good Day Company presented to you below its adjusted trial balance at December 31, 2019:

Debit Credit
Accounts receivable 2,000,000
Allowance for bad debts 80,000

Additional information:
A. Cash sales of the company represents 10% of gross sales.
B. 90% of the credit sales customers do not take advantage of the 3/10, n/30 terms.
C. It is expected that cash discount of P 12,000 will be taken on accounts receivable outstanding at
December 31, 2020.
D. Sales returns in 2020 amounted to P 800,000. All returns were from charge sales.
E. During 2020, accounts totaling to P 88,000 were written off as uncollectible; bad debt recoveries
during the year amounted to P 6,000.
F. The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding
accounts receivable at year end. The required percentage at December 31, 2020 is 150% of the rate
used on December 31, 2019.

Questions:
Based on the above and the result of your audit, answer the following:

11. The accounts receivable as of December 31, 2020 is

12. The allowance for doubtful accounts as of December 31, 2020 is
13. The net realizable value of accounts receivable as of December 31, 2020 is
14. The doubtful account expense for the year 2020 is

PROBLEM 9:
During your audit of Dreamer Company financial statements, it presented to you the “Receivables” general
ledger account at end of 2020 as shown below:

Trade accounts receivable 775,000

Trade notes receivable 100,000
Installment receivable, normally
due 1 300,000
year to two years
Customer’s credit balance due to
sales returns (30,000)
Advance payments for purchases
of 150,000
merchandise
Customer’s credit balance due to
Advance payments (200,000)
Cash advances to subsidiary 400,000
Claim from insurance entity 15,000
Subscriptions receivables due in
60 300,000
days
Accrued interest receivable 10,000
Total 2,000,000

15. What is the amount to be presented as “Trade and Other Receivables” under current assets of the
statement of financial position at end of 2020?