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AP02 Correction of Errors

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91 views3 pages

AP02 Correction of Errors

Uploaded by

chadcharon100
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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AUDITING AND ASSURANCE – CONCEPTS AND APPLICATIONS 1

AP02: CORRECTION OF ERRORS


PROF. FRANCIS O. MATEOS, CPA

P-1 – STATEMENT OF FINANCIAL POSITION ERRORS (ADAPTED)


Lagundi Company reported net income for the first two (2) years of operation as follows: 2022 –
P2,500,000; and 2023 – P3,000,000.

In an audit of the financial statement for the year ended December 31, 2023, the following errors
are discovered (all errors were made in 2022):
 Land of P100,000 was erroneously debited to investment property account.
 Notes payable of P15,000 was erroneously credited to accounts payable.
 Notes receivable of P10,000 was erroneously debited to accounts receivable.

REQUIRED:
1. Compute the adjusted net income in 2022 and 2023.
2. Compute the adjusted retained earnings as of the years ended December 31, 2022 and
2023.
3. Prepare adjusting entries assuming errors were discovered in (a) 2022, (b) 2023, and (c)
2024.

P-2 – INCOME STATEMENT ERRORS (ADAPTED)


Tado Company reported net income for the first two (2) years of operations as follows: 2022 –
P3,000,000; and 2023 – P4,000,000.

In an audit of the financial statement for the year ended December 31, 2023, the following errors
are discovered:
 Rent income of P30,000 in 2022 was erroneously credited to miscellaneous income.
 Office supplies expense of P25,000 in 2022 was erroneously debited to purchases.
 Interest expense of P20,000 in 2022 was erroneously debited to rent expense.

REQUIRED:
1. Compute the adjusted net income in 2022 and 2023.
2. Compute the adjusted retained earnings as of the years ended December 31, 2022 and
2023.
3. Prepare adjusting entries assuming errors were discovered in (a) 2022, (b) 2023, and (c)
2024.

P-3 – COUNTERBALANCING ERRORS (ADAPTED)


Sabang Company reported net income for a two-year period as follows: 2022 – P240,000; and
2023 – P360,000.

In an audit of the financial statement for the year ended December 31, 2022, the following errors
are discovered:
 The company paid one-year insurance premium of P18,000 effective May 1, 2022. The
entire amount was debited to expense account and no adjustment was made at the end of
2022.
 The company leased a portion of its building for P24,000. The term of the lease is one year
ending June 1, 2023. Collection of rent was credited to rent income account. At the end of
2022, no entry was made to take up the unearned portion of the amount collected.
 Accrued salaries expense of P12,000 was not recorded at the end of 2022.
 Accrued interest receivable of P15,000 was not recorded at the end of 2022.
 Advances to supplier in 2022 were recorded as purchases but the merchandise was
received in the following year, P20,000.
 Advances from customers in 2022 recorded as sales in 2022 but the goods were delivered
in the following year, P50,000.
 On December 31, 2022, the ending inventory was overstated by P25,000.

REQUIRED:
1. Compute the adjusted net income in 2022 and 2023.
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2. Compute the adjusted retained earnings as of the years ended December 31, 2022 and
2023.
3. Give the effect of the errors in the 2022 and working capital.
4. Prepare adjusting entries assuming errors were discovered in (a) 2022, (b) 2023, and (c)
2024.

P-4 – NON-COUNTERBALANCING ERRORS (ADAPTED)


Cebu Company reported net income for a two-year period as follows: 2022 – P6,000,000 and
2023 – P8,000,000.
In an audit of the statement for the year ended December 31, 2022, the following errors are
discovered:
 The company paid one-year insurance premium of P240,000 effective April 1, 2022. The
entire amount was debited to asset account and no adjustment was made at the end of
2022.
 The company leased a portion of its building for P480,000. The term of the lease is one
year ending April 30, 2023. Collection of rent was credited to unearned rent income
account. At the end of 2022, no entry was made to take up the earned portion of the
amount collected.
 Depreciation expense in 2022 was understated by P12,000.
 Depreciation expense in 2023 was overstated by P14,000.
 Doubtful accounts expense of P11,000 was not recorded in 2022.

REQUIRED:
1. Compute the adjusted net income in 2022 and 2023.
2. Compute the adjusted retained earnings as of the years ended December 31, 2022 and
2023.
3. Give the effect of the errors in the 2022 and working capital.
4. Prepare adjusting entries assuming errors were discovered in (a) 2022, (b) 2023, and (c)
2024.

P-5 – COMPREHENSIVE PROBLEM (ADAPTED)


You were engaged by Sabang Company to audit its financial statements for the first time. In
examining the books, you found out that certain adjustments had been overlooked at the end of
2022 and 2023. You also discovered that other items had been improperly recorded. These
omissions and other failures for each year are summarized below:

December 31, 2022 December 31, 2023


Prepaid insurance P 192,000 P 153,900
Interest receivable 129,600 106,500
Salaries payable 436,800 390,000
Advances from customers 235,200 280,500
(collections from customers had
been recorded as sales but
should have been recognized as
advances from customers
because goods were not shipped
until the following year)
Machinery (capital expenditures 282,000 261,000
had been recorded as repairs but
should have been charged to
Machinery; the depreciation rate
is 10% per year, but depreciation
in the year of expenditure is to be
recognized at 5%)

REQUIRED: Determine the following based on the above.


1. The net effect of the errors on the 2022 net income.
2. The net effect of the errors on the 2023 net income.
3. The net effect of the errors on the balance of the company’s retained earnings at
December 31, 2022.
4. The net effect of the errors on the balance of the company’s retained earnings at
December 31, 2023.

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5. The net effect of the errors on the company’s working capital at December 31, 2022.
6. The net effect of the errors on the company’s working capital at December 31, 2023.

****END OF DISCUSSION****
***MATS 😊***

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