wrwftAuditing Problemswatitiw1. Draftwqbejk income statement of Raffles Inc. is as follows:

SalesP700,000

Cost of sales

Opening inventory60,000

Purchases430,000

Closing inventory90,000400,000

Gross profit300,000

Expenses200,000

ProfitP100,000

wwefjbewtrwtHow much is the correct profit after the following fdgdf?(1) Closing inventory includes goods costing P20,000 which are expecthrtjhtyjtyed to realize at P19,000.(2) A customer has taken legal action for damages of hgzzzzzzzzzzzzzzzzzzzzzzjP50,000 against Raffles. The lawyer of Raffles has advised the customer that he has a 25% chance of succeskj.(3) After the balance sheet date, a vehicle was damaged in an accident. The carrying amount of the vehicle was P6,000. It was not insured.(4) Raffles has sued one of its competitors for P60,000. The chance of Raffles winning the case is 75%. The outcome will be known in three months.A.P159,000

B.P103,000

C.P99,000

D.P49,000

Solution: C is correctUnadjusted profitP100,000

(1) Write down of inventory to its NRV (20,000 19,000)(1,000)

(2) Loss not probable no adjustment-

(3) Non-adjusting event after the balance sheet date - no adjustment-

(4) Gain not virtuallycertain no adjustment-

Adjusted profitP99,000

2. Zod Company reports the following information as of December 31:

Sales revenueP800,000

Cost of goods sold600,000

Operating expenses90,000

Unrealized gain on available-for-sale securities30,000

How much should the company report as total comprehensive income?

A.P80,000

B.P110,000

C.P140,000

D.P200,000

Solution: C is correctSales revenueP800,000

Less: Cost of goods sold600,000

Less: Operating expenses90,000

Amount taken to P&LP110,000

Amount taken to OCI30,000

Total comprehensive incomeP140,000

3. You are assigned to the audit of Canon Company who spent P12,000,000 during the current year developing its new software package. Of this amount, P4,000,000 was spent before it was at the application development stage and the package was only to be used internally. The package was completed during the year and is expected to have a four year useful life. Canon Company has a policy of taking a full-year's amortization in the first year. After the development stage, P50,000 was spent on training employees to use the program. What amount should Canon Company report as an expense for the current year?

A.P2,012,500

B.P2,050,000

C.P6,012,500

D.P6,050,000

Solution: D is correctAmount spent before the development stageP4,000,000

Amount spent on training employees 50,000

Amortization of the software package(12M 4M) / 4 years2,000,000

Total expense to be recognizedP6,050,000

4. You were assigned to audit the factory accounts of Ministops Corporation for the year ended December 31, 2012. The following data were gathered: Manufacturing cost totalled P900,000. Cost of goods manufactured was P800,000 of which factory overhead was 75% of direct labor. Overhead was 25% of total manufacturing cost. Beginning work-in process inventory was 60% of ending work-in-process inventory. Manufacturing costs for the year ended December 31, 2012 submitted to you by the factory accountant were as follows:

Raw materials usedP400,000

Direct labor275,000

Factory overhead225,000

TotalP900,000

Assume cost percentage relationships as stated were correct. Which of the following adjusting journal entries is correct?

A.Raw materials usedP25,000Direct laborP25,000B.Direct laborP25,000Raw materials usedP25,000C.Raw materials usedP50,000Direct laborP50,000D.Direct laborP50,000Raw materials usedP50,000

Solution: B is correctFactory overhead (75% of direct labor)P225,000

Divided by 75%75%

Direct labor, per recomputation300,000

Direct labor, unadjusted 275,000

Adjustment to direct laborP25,000

5. On June 1, 2008, Psy Corporation purchased as a long term investment 6,000 of the P1,000 face value, 8% bonds of Lyre Corporation. Psy Corporation has the positive intention and ability to hold these bonds to maturity. The bonds were purchased to yield 10% interest. Interest is payable semi-annually on December 1 and June 1. The bonds mature on June 1, 2014. On November 1, 2009, Psy Corporation sold the bonds for a total consideration of P5,887,500. Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places) - the purchase price of the bonds on June 1, 2008 is

A.P5,467,992

B.P5,467,992

C.P5,545,104

D.P5,436,894

Solution: A is correct

PV of the principal(0.5568 x 6,000,000)P3,340,800

PV of the interest(8.8633 x 6,000,000 x 4%)2,127,192

P5,467,992

6. The Tiger Corporation included the following in its unadjusted trial balance as of December 31, 2012:

Inventory, 12/31/11P19,450,000

Purchases127,850,000

Additional information: The inventory at December 31, 2012 was counted at a cost of P8.5 million. This includes P500,000 of slow moving inventory that is expected to be sold for P300,000. Sales include P8 million for goods sold in December 2012 for cash to Beer Finance Company. The cost of these goods was P6 million. Beer Finance Company has the option to require Tiger to repurchase these goods within one month of year-end at their original selling price plus a facilitating fee of P250,000. The Companys accounting policy is to present cost of writing down inventory to NRV as part of cost of sales.The cost of sales for the year ended December 31, 2012 isA.P138,800,000

B.P133,000,000

C.P132,800,000

D.P139.000.000

Solution: B is correctAmount in thousands:Inventory, beginningP19,450

Add: Purchases127,850

Less: Inventory, ending8,500

Cost of sales, unadjusted138,800

Add: to adjust to net realizable value the items in ending inventory200

Less: Item sold under repurchase agreement6,000

Cost of sales, adjustedP133,000

7. Inventory per count on December 31, 2012 as reported by WS Company was at P560,000. The amount does not include the following items:A. Merchandise costing P27,500 received on January 3, 2013, and purchase invoice recorded on January 5, 2013. Shipment was made on December 25, 2012,terms FOB destination.B. Merchandise costing P20,000 was physically segregated in the warehouse and was set aside for shipmentto a customer (shipment scheduled on January 2, 2013). This will be invoiced to the customer by then at P28,000.C. Merchandise received on January 7, 2013, costing P17,000 was entered in the purchases journal on January 8, 2013. Invoice shipment was made FOB shipping point on December 30, 2012.

What is the adjusted balance of inventories to be presented in the 2012 statement of financial position?A.P597,000

B.P580,000

C.P578,000

D.P587,500

Solution: A is correctUnadjusted inventory balanceP560,000

Item (a) Goods received January 2013, under FOB Destination, thus item is correctly excluded-

Item (b) Goods still in warehouse but were not included in the count20,000

Item (c) Goods received January 2013, under FOB shipping point. Items shipped December 30, 201217,000

Adjusted inventory balanceP597,000

8. Bohol Company leased office premises to Jill Company for a 5-year term starting January 2, 2013. Under the terms of the lease, rent for the first year is P200,000 and rent for years 2 through 5 is P300,000 annually. As an inducement to enter the lease, Bohol Company waives the first six month payments. Jill Company likewise paid a P70,000 security deposit of which 80% is refundable at the end of the lease term. Furthermore, contingent rent equal to 2% of sales in excess of P12,000,000 shall be paid by Jill Company. Bohol Company incurred initial direct cost of P40,000 while JL Company paid P30,000 in costs in relation to the lease. In 2013, Jill Company reported sales of P13,000,000.

Rental expense to be included in Jill Companys 2013 income statement isA.288,800

B.268,800

C.302,200

D.315,000

Solution: A is correctTotal rental payments for five years(P200,000/2) + (P300,000 x 4)P1,300,000

Divided by total years5 years

Annual rental expense (fixed)P260,000

Contingent rent [(P13M P12M) x 2%]20,000

Direct cost incurred(30,000 / 5)6,000

Non-refundable portion of security deposit(P70,000 x 20%) / 52,800

Total rental expenseP288,800

The following information applies to the next two questions:Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client for late December 2010 and early January 2011: Bank Account OneBank Account TwoDisbursing DateReceiving Date(Month/Day)(Month/Day)Per BankPer BooksPer BankPer Books1.12/3112/3012/3112/302.1/212/3012/3112/313.1/312/311/21/24.1/312/311/212/31

9.

Based on the schedule of interbank transfers above, which of the cash transfers indicates an error in cash cutoff at December 31, 2010?a.1b.2c.3d.4

Answer: C

10.

Based on the schedule of interbank transfers above, which of the cash transfers would appear as a deposit in transit on the December 31, 2010 bank reconciliation?a.1b.2c.3d.4

Answer: D

Auditing Theory

1. Which of the following are the three principal methods in sample selection are specifically identified in PSA 530?A. Statistical sampling, attribute sampling and haphazard samplingB. Random number selection, systematic selection and haphazard selectionC. Sequential sampling, discovery sampling and statistical samplingD. Sequential sampling, discovery sampling and random number selection

Answer: B(PSA 530, Audit Sampling)

2. Which of the following is an appropriate consideration in auditors selection of sample size?A. The auditor may select a voided or cancelled document in a sample. If the document has been properly voided, treat the item as deviation.B. If the auditor encounters missing documents and he is unable to determine whether control has been properly performed, replace the document with another sample item.C. The auditor may select a voided or cancelled document in a sample. If the document has been properly voided, replace the document with another sample itemD. If the auditor encounters missing documents and he is unable to determine whether control has been properly performed, treat the item as deviation and replace the document with another sample item.

Answer: C(PSA 530, Audit Sampling)

The auditor may select a voided or cancelled document in a sample. If the document has been properly voided, the document must be replaced with another sample item. If the auditor encounters missing documents and he is unable to determine whether control has been properly performed, the auditor must treat the item as deviation.

3. Fraudulent financial reporting involves intentional misstatements or omissions of amount or disclosures in the financial statements to deceive financial statement users. Which of the following acts appropriately involves fraudulent financial statements?

I. Manipulations, falsification or alteration of records or documentsII. Lapping of accounts receivableIII. Recording of transactions without substanceIV. Stealing entitys assets such as cash, marketable securities and inventoryV. Intentional application of accounting policies

compared to the approved price list.A. D is incorrect. The director should have required the purchase order to be compared to the approved price list before approving it. Otherwise, the purchase price may exceed the approved price.

4. Which of the following fraudulent entries is most likely to be made to conceal the theft of an asset?A. Debit expenses, and credit the assetB. Debit the asset, and credit another asset accountC. Debit revenue, and credit the assetD. Debit another asset account, and credit the asset

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