URDANETA CITY UNIVERSITY

COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTANCY

SPECIAL REVIEW – AUDIT PROBLEMS
Erlinda G. Bialno
CASH TO ACCRUAL
Problem 1: SALES and PURCHASES
Taylor Swift Co. is engaged in a small export business. The company maintains limited records. Most
of the company’s transactions are summarized in a cash journal; non-cash transactions are recorded by
making memo entries. The following are abstracted from the company’s records:
Accounts receivable, increase 1,480,000
Notes receivable, decrease 800,000
Accounts payable, decrease 600,000
Notes payable - trade, increase 800,000
Notes payable - bank, increase 1,200,000
Sales return (P200,000 was refunded) 320,000
Sales discounts 80,000
Purchase returns (P120,000 was refunded) 320,000
Purchase discounts 140,000
Accounts written off 240,000
Recovery of accounts written-off 72,000
Cash sales 1,200,000
Cash purchases 1,000,000
Cash received from account customers 6,000,000
Cash payment to trade creditors 4,800,000

1. What is the correct sales on account? (A)P4,752,000 (B)P6,432,000 (C)P7,048,000 (D)P7,248,000

2. What is the total gross sales? (A)P8,448,000 (B)P8,248,000 (C)P7,632,000 (D)P5,952,000
3. What is the total net sales? (A) P5,552,000 (B)P7,232,000 (C)P7,848,000 (D)P8,048,000
4. What is correct purchase on account? (A)P5,460,000 (B)P5,340,000 (C)P4,260,000 (D)P4,140,000
5. What is the gross purchases? (A)P5,140,000 (B)P5,260,000 (C)P5,752,000 (D)P6,340,000
6. What is the net purchases? (A)P5,880,000 (B)P5,292,000 (C)P5,000,000 (D)P4,900,000

PROBLEM 2: OTHER INCOME

Under the accrual basis, rental income of BURGUNDY Company for the current year is P600,000.
Additional information regarding rental income is as follows:
Unearned rental income, January 1 100,000
Unearned rental income, December 31 150,000
Accrued rental income, January 1 60,000
Accrued rental income, December 31 80,000

Required: How much cash was received from rental in the current year?

PROBLEM 3: OTHER EXPENSES

PEACH Company’s salaried employees are paid biweekly. Advances made to employees are paid back
by payroll deductions.

Information relating to salaries follows:

12/31/14 12/31/15
Employee advances 240,000 360,000
Accrued Salaries Payable 400,000
Salaries expense during the year 4,200,000
Salaries paid during the year
(gross) 3,900,000

Required: In the December 31, 2015 statement of financial position, what amount should be reported
as accrued salaries payable?
 URDANETA CITY UNIVERSITY
COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTANCY
SPECIAL REVIEW – AUDIT PROBLEMS
PROBLEM 4: SINGLE ENTRY
An analysis of the records of a proprietor disclosed the following changes for 2016:
Cash 450,000 increase
Accounts receivable 300,000 decrease
Merchandise inventory 200,000 increase
Accounts payable 100,000 increase
Prepaid expenses 20,000 increase
Accrued expenses 40,000 increase
Unearned rental income 30,000 decrease

During 2016, the proprietor borrowed P500,000 in notes from the bank and paid off notes of
P300,000 and interest of P50,000. Interest of P30,000 is accrued on December 31, 2016. There
was no accrued interest payable on December 31, 2015.

In the current year, the proprietor transferred financial assets to the business and these were sold
for P500,000 to finance the purchase of merchandise. The proprietor made withdrawals in 2016 of
P100,000. What was the net loss for the current year?

A. P500,000 B. P100,000 C. P470,000 D. P370,000

ERROR CORRECTION
PROBLEM 5: COMPREHENSIVE
You were assigned to audit the income statement of Black Sabbath Company. For the year ended
January 1 to December 31 for the year 2013, 2014 and 2015. The entity reported net income as follows:
2013 - ₱ 1,500,000; 2014 - ₱ 2,000,000 and 2015 - ₱ 2,800,000

During your audit the following transactions were noted:

a. Accounts receivable instead of Notes Receivable was debited in 2015 for ₱20,000
b. Purchases account was debited in 2015 instead of office supplies. Office Supplies were at hand on
year end - ₱5,000
c. The physical inventory on December 31, 2013 was overstated - ₱ 10,000
d. The physical inventory on December 31, 2014 was understated ₱ 15,000
e. Advances to supplier were recorded as purchases but the merchandise was received in the
subsequent year
2013 ₱30,000
2014 40,000
f. Advances from customers recorded as sales but the goods were delivered in the following year
2013 ₱ 25,000
2014 50,000
g. Insurance premium for three years paid in 2010 was charged entirely to expense in 2013 - P15,000
h. Salaries accrued not recorded
2013 ₱ 30,000
2014 60,000
i. Rent for two years received in 2014 was entirely credited to income ₱ 10,000
j. Unrecorded accrued interest receivable
2014 ₱ 10,000
2015 25,000
k. Improvements amounting to ₱100,000 on building had been charged to expense on January 1,2014.
Improvements have a life of 5 years.
l. On January 1, 2014, an equipment costing ₱ 40,000 was sold for ₱ 20,000. At the date of sale, the
equipment had an accumulated depreciation of ₱ 25,000. The cash received was recorded as other
income in 2014.
 URDANETA CITY UNIVERSITY
COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTANCY
SPECIAL REVIEW – AUDIT PROBLEMS

Required: What is the correct Net Income for 2013, 2014 and 2015?

AUDIT OF CASH AND CASH EQUIVALENTS

PROBLEM 6: CASH AND CASH EQUIVALENTS
You are tasked to audit DNL Industries for the calendar year ending December 31, 2013. The cash and
cash equivalents account in the ledger of DNL Industries had a balance of P 9,864,540 at December
31, 2013. An examination of the account however, disclosed the following:

Current account at Unionbank 2,000,000

Current account at BPI (200,000)
Savings account at BDO 500,000
Time Deposit at BDO – maturity Dec. 31, 2015 1,000,000
Checking account at Chinabank 200,000
Payroll account 400,000
Foreign bank account-restricted (in peso equivalent) 1,000,000
Savings account at Asiabank 1,000,000 Note A
Treasury warrants 200,000
Treasury note, due November 31, 2014 400,000
Change fund 10,000
Credit memo from a vendor for a purchase return 20,000 Note B
Traveller’s check 50,000
Customer's check returned by the bank marked "DAIF" 15,000
Customer's check dated January 2, 2014 12,560
Money order 30,000
Petty cash fund 10,000 Note C
Treasury note, due February 28, 2014 200,000 Note D
Treasury bills, due January 1, 2014 300,000 Note E
Cash Sinking Fund 200,000
Preferred redemption fund 800,000
IOU from controller 4,000
Mutual Fund in Metrobank (at Carrying Amount) 1,256,980 Note F
Unit Investment Trust Fund (UITF) in BPI at Market Value 456,000 Note G
Audit Notes:
a. Asiabank was closed two years ago. The company expects to recover only P0.60 for every peso
depositied.
b. Correctly credited to Purchase Returns and Allowances.
c. This amount includes unreplenished vouchers totalling P 7,000 as of December 31, 2013.
d. This is a two-year treasury note acquired on December 31, 2013.
e. This is a 180 – day treasury bill acquired on July 1, 2013.
f. This represents a fixed peso bond fund earning 2% per quarter. The minimum holding period is 180
days. Fund was established January 1, 2013.
g. This has no holding period.

PROBLEM 7: CASH AND CASH EQUIVALENTS

In connection with your audit of the financial statements of MPI Company for the year ended December
31, 2013, you gathered the following information.
1. The company maintains its current account with Water Bank. The bank statement of December 31,
2013 showed a balance of P638,340.

Your audit of the company’s account with Water Bank disclosed the following:
a. A check of P22,500 received from a customer whose account is current had been deposited and
then returned by the bank on December 28, 2013. No entry was made for the return of this
check. The customer replaced the check on January 15, 2014.
b. A check for P5,720 was cleared by the bank as P7,520. The bank made the correction on
January 2, 2014.
c. A check for P3,500 representing payment of an employee advance was received and deposited
on December 27, 2013, but was not recorded until January 3, 2014.
 URDANETA CITY UNIVERSITY
COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTANCY
SPECIAL REVIEW – AUDIT PROBLEMS
d. Postdated checks totaling P67,300 were included in the deposits in transit. These represent
collections of current accounts receivable from customers. The checks were actually deposited
on January 5, 2014.
e. Various debit memos for drafts purchased for payment of importation of equipment totaling
P230,000 were not yet recorded. These purchases were previously set up as accounts payable.
Said equipment arrived in December 2013.
f. Interest earned on the bank balance for the 4th quarter of 2013, amounting to P1,950 was not
recorded.
g. Bank service charges totaling P1,250 were not recorded.
h. Deposit in transit and outstanding checks at December 31, 2013 totaled P136,250 and
P276,370, respectively.

2. Various expenses from the company’s imprest petty cash fund dated December 2013 totaled
P16,250, while those dated January 2014 amounted to P5,903. Another disbursement from the
fund dated December 2013 was a cash advance to an employee amounting to P3,500. A
replenishment of the petty cash fund was made on January 8, 2014. The petty cash used in January
represents forwarded balance from December 31 petty cash fund.

3. The company’s trial balance on December 31, 2013 includes the following accounts:
Cash in bank - Water Bank 748,320
Cash in bank - Land Bank (restricted account for plant expansion,
expected to be disbursed in 2014) 700,000
Petty cash fund 30,000

Time deposit, placed December 20, 2013 and due March 20, 2014) 1,000,000
Money market placement - Earth Bank 4,000,000

REQUIRED:
1. What is the adjusted petty cash fund balance on December 31, 2013?
2. The petty cash shortage on December 31,2013?
3. What is the adjusted Cash in Bank – Water Bank balance on December 31, 2013?
4. What is the adjusted balance of “Cash and Cash Equivalents” in the December 31, 2013
statement of financial position?

PROBLEM 8: CASH BALANCES

You were able to gather the following from the December 31, 2013 trial balance of FPH Corporation in
connection with your audit of the company:
Cash on hand 500,000
Petty cash fund 10,000
BPI current account 1,000,000
Security Bank current account No. 1 1,080,000
Security Bank current account No. 2 (80,000)
PNB savings account 1,200,000
PNB time deposit 500,000

Cash on hand includes the following items:

a. Customer’s check for P 40,000 returned by bank on December 26, 2013 due to insufficient fund
but subsequently redeposited and cleared by the bank on January 8, 2014.
b. Customer’s check for P 20,000 dated January 2, 2014, received on December 29, 2013.
c. Postal money orders received from customers, P 30,000.

The petty cash fund consisted of the following items as of December 31, 2013.
Currency and coins P 2,000
Employees' vales (IOU) 1,600
Currency in an envelope marked "collected for charity" 1,200
Unreplished petty cash vouchers 1,300
 URDANETA CITY UNIVERSITY
COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTANCY
SPECIAL REVIEW – AUDIT PROBLEMS

Check drawn by FPH Corporation, payable to petty cash custodian 4,000

Total P 10,100

Included among the checks drawn by FPH Corporation against the BPI current account and recorded in
December 2013 are the following:
1. Check written and dated December 29, 2013 and delivered to payee on January 2, 2014,
P80,000.
2. Check written on December 27, 2013, dated January 2014 delivered to payee on December 29,
2013, P 40,000.

The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of the
deposit balance. These checks were still outstanding at December 31, 2013.

The saving account deposit in PNB has been set aside by the board of directors for acquisition of new
equipment. This account is expected to be disbursed in the next three months from the balance sheet
date.

REQUIRED: Based on your audit, determine the adjusted balances of the following:
1. Cash on hand
2. Petty cash fund
3. Cash and cash equivalents

AUDIT OF RECEIVABLE
PROBLEM 9: SALES CUT-OFF
CHANCHANITO AUTO ACCESORRIES sells new parts to auto dealers. The company policy requires
that pre-numbered shipping documents be issued each sale. At the time of pickup or shipment, the
shipping clerk writes the date on the shipping document. The last shipment made in the year ended
December 31, 2012 was recorded on document 3167. Shipments are billed in the order that the
billing clerk receives the shipping documents.

For late December 2012 and early January 2013, shipping documents are billed on sales invoices as
follows:
Shipping Doc no Sales Invoice no Shipping Doc no Sales Invoice no
3163 5332 3168 5328
3164 5326 3169 5329
3165 5327 3170 5333
3166 5330 3171 5335
3167 5331 3172 5334

The December 2012 and January 2013 sales journals have the following information included:
SALES JOURNAL-DECEMBER
Day of Month Sales Invoice No Amount of sale
30 5326 P 72,611
30 5329 191,430
31 5327 41,983
31 5328 62,022
31 5330 4,774

SALES JOURNAL-JANUARY
Day of Month Sales Invoice No Amount of sale
1 5332 P264,131
1 5331 10,639
1 5333 85,206
2 5335 125,050
2 5334 64,658
 URDANETA CITY UNIVERSITY
COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTANCY
SPECIAL REVIEW – AUDIT PROBLEMS
Required:
1. What is the net overstatement (understatement) of the company’s sales for the year ended
December 31, 2012?
2. What is the adjusting journal entry for the above transactions.

PROBLEM 10: AUDIT OF ACCOUNTS RECEIVABLE – CONFIRMATION REPLIES

To substantiate the existence of accounts receivable balances as of December 31, 2014 of COA
Company, you have decided to send confirmation requests to customers. Below is a summary of the
confirmation requests to customers. Below is a summary of the confirmation requests to customers and
replies from them together with the exceptions and audit findings. Gross profit on sales is 20%. The
company is using the perpetual inventory system.
Balance
Custome
per Customer's Comments Audit Findings
r
books

P30,000 was returned on 1/2/15. Correct Returned goods were received

Asus 50,000 balance is P20,000. 1/5/15

Your CM representing price adjustment The CM was taken up by COA in

Apple 10,000 dated 12/29/14 cancels this. 2015.

You have overpriced us by P50. Correct

HP 48,000 price should be P100. The complaint is valid
Term is shipping point. Shipped in
Acer 37,500 We received the goods only on 1/5/15. 2014.
COA credited accounts payable for
Samsun Balance was offset by our December P45,000 to record purchases.
g 45,000 shipment of raw materials Samsung is a supplier.

Based on the above and the result of your audit, answer the following:
1. Compute for the adjustment to accounts receivable. Indicate whether it’s an increase or decrease.

PROBLEM 11: AUDIT OF NOTES RECEIVABLE

Crazy Company reported the following long-term receivable account balances as of December 31, 2012:

Note Receivable from sale of division P 6,750,000

Note Receivable from officer 1,800,000

Transactions during 2013 and other information relating to the company’s long-term receivables were
as follows:
1. The P6,750,000 note is dated April 30, 2012, bears interest at 9% and represents the balance
of the consideration received from the sale of the company’s food division to Insane Co. Principal
payments of P2,250,000 plus interests are to be received every April 30 starting 2013. The first
principal and interest payment was made on April 30, 2013. Collection of the note is reasonably
assured.

2. The P1,800,000 note receivable is dated December 31, 2012 bearing interest at 8% and is due
on December 31, 2015. The note is due from Joseph Guapo Mendoza, the company president.
Interest payments are due annually every December 31. Interest for the year was paid by the
company president.

3. On April 1, 2013, the company sold an equipment to Dear Co for a P600,000 noninterest bearing
note due on April 1, 2015. There was no established exchange price for the equipment and the
note had no ready market value. The prevailing interest rate of interest for a note of this type
was 12%. The present value of 1 for two periods at 12% is 0.797. The equipment had a
carrying value of P120,000 at January 1, 2013 and the depreciation for the year should have
been P24,000. The collection of the note receivable is reasonable assured.
 URDANETA CITY UNIVERSITY
COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTANCY
SPECIAL REVIEW – AUDIT PROBLEMS
4. On July 1, 2013, the company sold a parcel of land to Jimmy Co for P600,000 under an
installment sale contract. Jimmy made a P180,000 down payment on July 1, 2013 and signed
a 4-year 11% note for the balance. The equal annual payments of principal and interest on the
note will be P135,375 payable starting on July 1, 2014, through July 1, 2017. The land could
have been sold at an established cash price of P600,000 with a cost of P450,000. The collection
on the note is reasonably assured.

REQUIRED:
Determine the following:
1. Total long-term receivables as of December 31, 2013.
2. Total current portion of long-term receivables as of December 31, 2013.
3. Accrued interest receivable at December 31, 2013.

PROBLEM 12: DISCOUNTING AND DISHONORED NOTES RECEIVABLE

On January 16, Sapphire Company accepted a P600,000, 9%, 90-day note from a customer. On
February 10, the note was discounted at 12%
Required:
1. Compute the cash proceeds from discounting and the notes receivable balance assuming:
a. The note was discounted on a without recourse basis.
b. The note was discounted with recourse and treat the discounting as a conditional sale.
c. The note was discounted with recourse and treat the discounting as a secured borrowing.
2. Assume that on April 16, the maturity date of the note, the maker of the note receivable which is
discounted defaulted from payment and the bank charged Sapphire Company for the maturity
value of the note plus a P5,000 protest fee. How much will be debited to accounts receivable on
April 16?

AUDIT OF INVENTORIES
PROBLEM 13: Presented below is a list of items that may or may not be reported as inventory in a
company’s December 31 statement of financial position:
Goods out on consignment at another company's store ₱800,000
Goods sold on installment basis 100,000
Goods purchased FOB shipping point that are in transit at December 31 120,000
Goods purchased FOB destination that are in transit at December 31 200,000
Goods sold to another company, for which our company has signed an agreement
to repurchase at a set price that covers all costs related to the inventory 300,000
Goods sold where large returns are predictable 280,000
Goods sold FOB shipping point that are in transit 120,000
Freight charges on goods purchased 80,000
Factory labor costs incurred on goods still unsold 50,000
Interest cost incurred for inventories that are routinely manufactured 40,000
Costs incurred to advertise goods held for resale 20,000
Materials on hand not yet placed into production 350,000
Office supplies 10,000
Raw materials on which the company has started production, but which are not
completely processed 280,000
Factory supplies 20,000
Goods held on consignment from another company 450,000
Costs identified with units completed but not yet sold 260,000
Goods sold FOB destination that are in transit at December 31 40,000
Temporary investment in stocks and bonds that will be resold in the near future 500,000

How much of these items would typically be reported as inventory in the financial statements?

PROBLEM 14: NRM Company, a manufacturer of cell phones, provided the following information from
its accounting records for the year ended December 31, 2013.
Inventory at December 31, 2013 (based on physical count P1,252,000
 URDANETA CITY UNIVERSITY
COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTANCY
SPECIAL REVIEW – AUDIT PROBLEMS
Accounts Payable 1,125,000
Net Sales 3,150,000
Additional information:
a. Included in the physical count were phones billed to a customer FOB shipping point on December
31, 2013. These phones had a cost of P23,250 and were billed at P30,000. The shipment was
in the company’s shipping area waiting to be picked up by the customer.
b. Goods were in transit from a vendor to the company on December 31, 2013. The invoice cost
was P53,250, and the goods were shipped FOB shipping point on December 29, 2013.
c. Work in process inventory costing P22,500 was sent to an outside processor for plating on
December 30, 2013.
d. Phones returned by customers and held pending inspection in the returned goods area on
December 31, 2013 were not included in the physical count on January 10, 2014, the phones
costing P24,000 were inspected and returned to the inventory. Credit memos totaling P35,250
were issued to the customers on the same date.
e. Phones shipped to a customer FOB destination on December 26, 2013, were in transit at
December 31, 2013, and had a cost of P15,750. Upon notification of receipt by the customer on
January 5, 2014, the company issued sales invoice of P31,500.
f. Goods with an invoice cost of P20,250, received from a vendor at 5:00 pm on December 30,
2013, the last day of business for the year, were recorded on a receiving report dated January
, 2013. The goods had been excluded in the physical count, but the invoice was included in
accounts payable at December 31, 2013.
g. Goods received from a vendor on December 27, 2013, were included in the physical count.
However, the related 42,000 vendor invoice was not included in accounts payable at December
31, 2013, because the accounts payable copy of the receiving report was lost.
h. On January 5, 2014, a monthly freight bill in the amount of P4,500 was received. The bill
specifically related to merchandise purchased in December 2013, one-half of which was still in
the inventory at December 31, 2013. The freight charges were not included in either the
inventory or in the accounts payable as of December 31, 2013.

From the preceding information, compute the December 31, 2013 adjusted balances of Inventory,
Accounts Payable, and Net Sales.

PROBLEM 15: You are engaged to audit NUO Company for the fiscal year ended June 30 and have
observed the taking of the physical inventory of the company on that date. All merchandise received
up to and including June 28 have been included in the physical count. The following invoices are for
merchandise purchases and entered in the voucher register for June and July.

Invoice no. Amount F.O.B. Date of invoice Merchandise received

June Register
501 P 5,000 Destination June 20 July 5
502 1,000 Shipping point June 20 June 29
503 4,000 Shipping point June 27 July 4
504 2,000 Shipping point July 3 July 8
505 10,000 Destination June 22 June 30
July Register
506 11,000 Destination May 31 June 30
507 8,000 Destination June 30 June 30
508 9,000 Shipping point June 26 June 28
509 7,000 Shipping point July 2 June 29
510 6,000 Shipping point June 25 July 5
511 3,000 Destination July 7 June 30

No perpetual inventory records are kept and the physical inventory is to be used as a basis for the
financial statements.

1. Compute for the adjusted amounts of the purchases and inventory as of June 30 if the
unadjusted balance of purchases is P450,000 and inventory is P70,000.
2. Prepare adjusting entry/entries as of June 30 to correct the purchases account.
 URDANETA CITY UNIVERSITY
COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTANCY
SPECIAL REVIEW – AUDIT PROBLEMS

PROBLEM 16
The records of Darleen Company report the following data for the month of April.
Cost Retail
Beginning inventory, beg 300,000 465,000
Purchases 520,000 930,000
Freight in 20,400
Purchase returns 20,000 30,000
Purchase discounts 14,000
Departmental Transfer in costs 120,000 180,000
Departmental Transfer out costs 160,000 280,000
Freight out 12,000
Mark ups 150,000
Mark up cancellation 10,500
Markdown 90,300
Markdown cancellation 20,800
Sales 920,000
Sales Returns 35,000
Sales Discounts 12,000
Employee Discounts 25,000
Losses due to shrinkage 8,000

REQUIRED: Based on your audit, complete the table below.

Conservative
Average FIFO
Complete the table (lower of cost and NRV)
Cost Ratio
Estimated Inventory-retail
Estimated Inventory-cost
Cost of Sales