Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION

NORTHERN CPA REVIEW

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4 Floor Pelizloy Centrum, Lower Session Road, Baguio City, Philippines
Mobile Numbers: SMART 09294891758 & GLOBE 09272128204
E-mail: ncpar@yahoo.com
DARRELL JOE ASUNCION, CPA, MBA

AUDITING PROBLEMS
FINAL PRE-BOARD EXAMINATION

INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. MARK THE
LETTER OF YOUR CHOICE WITH A VERTICAL LINE ON THE ANSWER SHEET PROVIDED.
STRICTLY NO ERASURES ARE ALLOWED.

PROBLEM NO. 1
Erik Spoelstra, an investor in Heat Co., asked you for advice on the
property of Heat’ financial reporting for two of its investments. Assume
that Heat does not elect the fair value option for reporting its financial
assets and liabilities. You obtained the following information related to
the investments from Heat’ December 31, 2009 financial statements.
 20% ownership interest in James Co., represented by 200,000 ordinary
shares purchased on January 2, 2009, for P600,000.
 20% ownership interest in Wade Co., represented by 20,000 ordinary
shares purchased on January 2, 2009 for P300,000
 On January 2, 209, the carrying values of the acquired shares of both
investments equaled their purchased price.
 James reported earnings of P400,000 for the year ended December 31,
2009, and declared and paid dividends of P100,000 during 2009.
 Wade reported earnings of P350,000 for the year ended December 31,
2009, and declared and paid dividends of P60,000 during 2009.
 On December 31, 2009, James’s and Wade’s ordinary shares were trading
over-the-counter at P20 and P20 per share, respectively.
 The investment in James is accounted for using the equity method.
 The investment in Wade is accounted for as available-for-sale
securities.

You recalculated the amounts reported in Heat’ December 31, 2009 financial
statements, an determined that they were not correct. Stressing that the
information available in the financial statements was limited, you advised
Spoelstra that, assuming Heat property applied generally accepted
accounting principles, Heat may have appropriately use two different
methods to account for its investments in James and Wade, even though the
investments represent equal ownership interests.

QUESTIONS:

Based on the foregoing information, determine the following amounts on

Heat’s financial statements as of and for the year ended December 31, 2009.

1. Carrying amount of James investment

a. P660,000 c. P860,000
b. P600,000 d. P800,000

2. Carrying amount of Wade investment

a. P358,000 c. P458,000
b. P300,000 d. P400,000

3. Income on income statement from James investment

a. P60,000 c. P 20,000
b. P80,000 d. P200,000

4. Income on income statement from Wade investment

a. P58,000 c. P 12,000
b. P70,000 d. P100,000

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5 Batch – PB03
Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION
5. Other comprehensive income on investment in
James Wade
a. P 0 P 0
b. P 0 P100,000
c. P200,000 P100,000
d. P140,000 P 42,000

PROBLEM NO. 2
You are auditing the financial statements of BOSCH CORP. The company’s
accountant provided you with the following comparative statements of income
and accumulated profits for the years 2006 and 2007:
2007 2006
Sales 4,500,000 6,000,000
Cost of goods sold (2,800,000) (2,400,000)
Gross income 3,200,000 2,100,000
Operating expenses ( 1, 500,000) (1,800,000)
Net profit 1, 700,000 300,000

Accumulated profits, beg 1, 150,000 1, 000,000

Net profit 1, 700,000 300,000
Dividends paid (500,000) (150,000)
Accumulated profits, end 2, 350,000 1, 150,000
Audit notes:
a. The ending inventory for 2006 was understated by P100,000.

b. The company decided to change its method of depreciation from the double
declining balance method to the straight line. The depreciable assets had
a 10 year useful life and is fifty percent depreciated as at the end of
2006. The salvage value of the said assets was estimated to be P50,000.
Expenses in the income statements included a P350,000 depreciation
expense computed based on double declining balance method.

c. On August 31, 2006, the company started the construction of a building it

plans to use as a second factory. As of the current balance sheet date,
the construction is yet to be finished. Total accumulated costs incurred
on the construction and recorded in its Construction-in-progress account,
amounted to P1,250,000, which included a P25,000 capitalized borrowing
cost in 2006, finance costs in accordance with PAS 23. During the current
year, the company decided to change method of accounting for borrowing
costs to follow the benchmark treatment. Actual borrowing cost in 2007
amounted to P75,000 it charged to current operations.

Answer the following questions based on the above information:

6. What is the correct net income in 2006?

a. 400,000 b. 300,000 c. 275,000 d. 200,000

7. What is the correct net income in 2007?

a. 1,715,000 b. 1,685,000 c. 1,675,000 d. 1,610,000

8. What is the adjusted accumulated profits balance at the beginning of

2007?
a.1,025,000 b. 1,075,000 c. 1,225,000 d. 1,275,000

9. What is the adjusted accumulated profits balance at the end of 2007?

a.2,335,000 b.2,385,000 c.2,835,000 d.2,885,000

10. What is the necessary adjusting entry a result of the change described
in item c?
a. No adjustment necessary
b. Interest expense 25,000
Retained earnings 25,000
c. Interest expense 25,000
Construction in progress 25,000
d. Retained earnings 25,000
Construction in progress 25,000

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5 Batch – PB03
Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION
PROBLEM NO. 3
Cavaliers Co. is in the process of preparing its financial statements for
the year ended December 31, 2009.
The following items represents various transaction that occurred during
2009.
A. On June 30, 2009, after paying the semiannual interest due and recording
amortization of bond discount. Cavaliers redeemed its fifteen-year, 8%
P1,000,000 par bonds at 102. The bonds, which had a carrying amount of
P940,000 on January 1, 2009,had originally been issued to yield 10%.
Cavaliers use the effective interest method of amortization, and had paid
interest and recorded amortization on June 30.
B. As of January 1, 2009, Cavaliers decided to change the method of
computing depreciation on its sole piece of equipment from the sum-of-
the-years digits method to the straight-line method. The equipment,
acquired in January 2006 for P520,000, had an estimated life of five
years and a salvage value of P20,000
C. In October 2009, Cavaliers paid P375,000 to a former employee to settle a
lawsuit out of court. The lawsuit had been filed in 2008, and at December
31, 2008, Cavaliers recorded a liability from the lawsuit based on legal
counsel’s estimate that the loss from the lawsuit would be between
P200,000 and P400,000. Cavaliers appropriately applied PAS 37 in
recording the liability at December 31, 2008
D. In November 2009, Cavaliers purchased two marketable securities, LeBron
and Mau, which it bought and held principally to sell in the near term by
February 28, 2010. Relevant data is as follows:

Fair Value

Cost 12/31/09 2/28/10

LeBron P125,000 P145,000 P155,000

Mo 235,000 205,000 230,000

E. During 2009, Cavaliers received P1,000,000 form its insurance company to

cover losses suffered during a hurricane, This was the first hurricane
ever to strike in Cavaliers area. The hurricane destroyed a warehouse
with a carrying amount of P470,000, containing equipment with a carrying
amount of P250,000 and inventory with a carrying amount of P535,000 and a
fair value of P600,000.

QUESTIONS:

11.The amount of loss on redemption of the bonds is

a. P73,000 c. P80,000
b. P87,000 d. P66,000

12.The amount of the depreciation expense for 2009 is

a. P100,000 c. P50,000
b. P60,000 d. P42,000

13.The amount of gain or loss from settlement of the lawsuit is

a. P175,000 loss c. P25,000 gain
b. P75,000 loss d. Nil

14.The amount of holding gain or loss at Decmeber 30, 2009 is

a. P10,000 c. P25,000 loss
b. P10,000 gain d. P25,000 gain

15.The amount of gain or loss from hurricane is

a. P320,000 loss c. P255,000 gain
b. P255,000 loss d. Nil

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5 Batch – PB03
Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION
PROBLEM NO. 4
The bookkeeper for TAY, NAY CPA NA A Co prepared the following statement of
financial position on December 31, 2008:

TAY, NAY CPA NA A Co

STATEMENT OF FINANCIAL POSITION
December 31, 2008

ASSETS
Current Assets 575,045
Investments and funds 12,000
Property, plant, and equipment 803,200
Intangible assets 80,355
Other Assets 98,000
Total Assets 1,568,600

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities 162,000
Noncurrent Liabilities 562,000
Total Liabilities 724,000
Shareholders’ equity 844,600
Total Liabilities and Shareholders’ equity 1,568,600

Upon inquiry you learn the following additional facts:

1. Current assets included Cash, P184,920 which included P101,920
earmarked for the purchase of various equipment expected to take place
with the next three months; Merchandise inventory at cost amount to
P75,125 (The inventories were set to have an estimated selling price
of P90,000 after an estimated cost to sell at 20% of the sales price);
Note receivable (13% due June 1, 2011, P100,000; and, Investment (held
for control), P215,000.
2. Investments and funds include prepaid insurance (applicable to
the first six months of P2009), P12,000.
3. Property, plant and equipment includes land , P167,000; land held
for undetermined future use, P146,000; Building P375,000; furniture
and fixtures, P114,600.
4. Intangible assets include accounts receivable of P84,480 less an
allowance for doubtful accounts of P4,125.
5. Other assets consists of Machinery held for disposal as per Board
resolution number 112, P98,000.
6. Current liabilities include accounts payable P23,595; interest
payable, P8,405; and a note payable (12% due May 1, 2011), P130,000.
7. Long-term Liabilities include serial 10% debenture bonds,
P500,000 (P50,000 installments are payable annually from April 1,
2009, through April 1, 2013); advances pertain to goods that TAY, NAY
CPA NA A Co will ship in 2009) P12,000; retained earnings appropriated
for bond treatment, P50,000.
8. Shareholders’ equity consists of ordinary shares (P10 par, 5,000
shares authorized, 4,000 shares issued and outstanding); Paid-in
capital in excess of par, P430,000; Unappropriated retained earnings,
P295,000; and, Reserve for depreciation-building, P45,000 and Reserve
for depreciation-furniture and fixtures, P34,600.

Answer the following:

16. How much is the correct current assets as of December 31, 2008?
a. 247,355 c. 335,880
b. 250,480 d. 348,480

17. What is the total Property, plant and equipment as of December 31, 2008?
a. 577,000 c. 724,0000
b. 655,000 d. 822,000

18. What is the correct current liabilities as of December 31, 2008?

a. 82,000 c. 94,000
b. 85,595 d. 224,000

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5 Batch – PB03
Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION
19.What is the correct retained earnings as of December 31, 2008?
a. 291,875 c. 341,875
b. 295,000 d. 345,000

20. What is the correct total shareholders’ equity as of December 31, 2008?
a. 815,000 c. 765,000
b. 811,875 d. 761,875

PROBLEM NO. 5
The following data were taken from your current working papers in connection
with your audit of the Hydrogen company’s financial statements for the year
ended December 31, 2009.
Cash account consist of the following items:
Petty cash fund P 25,000
Security Bank checking account (37,500)
Allied Bank current account 344,250
Total per GL P 331,751

a. The count of the cashier’s accountability on January 2,2010, revealed

total bills and coins of P9,000. Unreplenished vouchers for various
expenses totaled P16,000, of which P3,000 pertains to January 2010.
b. On December 29, 2009, a check for P87,500 was drawn against Security
Bank current account resulting in bank overdraft of P37,500. The check
was picked up by the supplier on January 3, 2010.
c. Bank reconciliation statement prepared by the cashier for the Allied
Bank account follows:
Bank balance P310,500

Add: Deposit in transit 61,250

Bank service charges 1,250 62,500

Total 373,000

Less: Outstanding checks

Check No. Amount

214 P 2,500*

219 20,750

225 6,000

228 8,500 37,750

Book Balance P344,250

*Check certified by the bank in December 2009.

All reconciling items were traced to the bank statement. Further

investigation indicated that the deposits in transit include a customer’s
post dated check amounting to P40,000. The check represents a collection
form account customer for sales made in the middle of October 2009.

QUESTIONS:
Based on the application of the necessary audit procedures and appreciation
of the above data, you are to provide the answers to the following:

21.How much is the adjusted balance of petty cash fund as of December

31, 2009?
a. P12,000 c. P13,000
b. P9,000 d. P16,000

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5 Batch – PB03
Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION
22.How much is the adjusted Allied Bank current account as of December
31, 2009?
a. P336,500 c. P305,500
b. P296,500 d. P 330,250

23.How much is the cash shortage as of December 31, 2009

a. P46,5000 c. P6,500
b. P9,000 d. P 0

24.How much is the adjusted cash as of December 31, 2009?

a. P355,500 c. P398,500
b. P367,500 d. P358,500

25.An auditor suspects that a clients cashiers is misappropriating

cash receipts for personal use by lapping customer checks received
in the mall. In attempting to uncover this embezzlement scheme, the
auditor most likely would compare the
a. Dates checks are deposited per bank statement with dates remittance
credits are recorded.
b. Daily cash summaries with the sums of the cash receipts journal
entries .
c. Individual bank deposit slips with the details of the monthly bank
statements.
d. Dates uncollectible accounts are authorized to be written off with the
dates the write-offs are actually recorded.

PROBLEM NO.6

You were able to obtain the following from the accountant of SUDIPEN
Company related to the company’s liabilities as of December 31, 2006:
Current liabilities:
Accounts payable 7,000,000
Notes payable-bank 12,000,000
Accrued expenses 4,000,000
Rent Payable ?
Noncurrent liabilities:
Mortgage payable 4,000,000
Note payable-due in
2008 3,000,000

The following additional information pertains to these liabilities:

a. The company intends to refinance P9,000,000 of the P12,000,000
bank note payable on a long-term basis.
Although the entire P12,000,000 is due on June 30, 2007, the bank has
informally agreed to extend the maturity date for P6,000,000 to June 30,
2008, if necessary.
On January 31, 2007, the company issues common stock for P9,000,000, net
of issue costs and underwriting fees of P500,000.
The company uses the entire proceeds of the sale of common stock to
retire part of the current note payable.

b. The mortgage payable is due on March 31, 2012. The financing agreement
contains a covenant that requires SUDIPEN to maintain current assets at
least equal to 200% of its current liabilities. As of December 31, 2006,
SUDIPEN has a total current asset of only P10,000,000. On February 10,
2007, before SUDIPEN’s financial statements are authorized for issue,
SUDIPEN obtained a period of grace from BAUANG Bank until January 31,
2008, having convinced the bank that the company’s normal 3 to 1 ratio of
current assets to current liabilities will be reestablished during 2007.
c. As of January 1, 2000, SUDIPEN Company leased a building for ten
years. The leased building was used as a retail store. The agreement
between SUDIPEN Company and the lessor of the building was as follows:
The annual rent was to be based on sales. On sales up to P15 million per
year, the lease rate was 3 percent. On sales in excess of P15 million per
year, the rate was 2 percent. However, during the first five years of the

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5 Batch – PB03
Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION
lease, the annual rental was to be a minimum of P400,000 per year, after
which the minimum was to be increased by 12 ½ percent.
The lease provided that if any one year the rent based on sales did not
equal the minimum annual rental, the minimum would be payable, but the
amount paid solely as a result of such minimum could be applied in
reduction of the next year’s rent to the extent that the next year’s rent
exceeded the minimum for that year. Sales by years were as follows:
2000 9,500,000 2004 12,500,000
2001 13,000,000 2005 14,600,000
2002 13,750,000 2006 17,500,000
2003 15,750,000
Rent due for each year is payable on or before January 10 of the following
year.

d. All the interest has been paid as of December 31, 2006.

QUESTIONS:

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

26.The portion of the Note Payable-bank to be reported under current

liabilities as of December 31, 2006 is
a. 3,000,000 c. 12,000,000
b. 9,000,000 d. 0

27.Under the terms of the lease, the amount of rent payable for the year
2005 is
a.413,000 b. 292,000 c.400,000 d. 450,000

28.Under the terms of the lease, the amount of rent payable for the year
2006 is
a.400,000 b. 463,000 c.488,000 d. 450,000

29.Total current liabilities as of December 31, 2006 is

a.23,450,000 c. 23,400,000
b.27,463,000 d. 27,488,000

30.Total noncurrent liabilities as of December 31, 2006 is

a.7,000,000 c. 3,000,000
b.4,000,000 d. 0

PROBLEM NO. 7
You are engaged in the audit of KAYA Co., a new client, at December 31,
2009. You review the following accounts in the general ledger:

Accounts receivable
Beg. Balance, 1/1/09 200,000 2,636,000 Balance end
Sales in 2009 4,000,000 1,484,000 Collections
120,000 Estimated uncollectible

Loan receivable
Loan granted to a customer, 1/1/09 4,000,000 3,600,000 Balance end
400,000 Collections in 2009

Total

Direct origination income

Direct orig. fees paid 11,520 300,000 Direct orig. fees received 1/1/09
Balance end 288,480

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Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION
Total

Additional information:
A. The beginning balance of the accounts receivable on January 1, 2009
was net of the allowance for doubtful accounts in 2008 amounting to
P20,000.

One of the credits in the accounts receivable was made as a result of

cash collections. When receivables were collected, the bookkeeper
credited- Accounts receivable for the cash collected. Collections of
P700,000 accounts receivable did not avail of the cash discount while the
rest took advantage of the 2% cash discount. The other credit was an
adjustment for estimated uncollectible in 2009. During 2009, KAYA Co
recorded credit sales of P4,000,000 and interim provision for doubtful
accounts at 3% of credit sales. You have agreed that this provision for
bad debts is correct. During the year, accounts of P30,000 were
subsequently recovered. This amount was credited to miscellaneous income.

B. On January 1, 2009, KAYA Co in the amount of P4,000,000. The interest

rate on the loan is 10% payable annually starting December 31, 2009. The
loan matures in 5 years. KAYA Co incurred and paid P11,520 of direct
origination cost was debited to direct origination income. KAYA Co
charged P300,000 nonrefundable origination fees which was credited to
direct origination income.

QUESTIONS:
Based on the above data, answer the following: (Round off present value
factors to four decimal places)

31.Which one of the following is the correct adjusting entry for the
accounts receivable at the end of 2009?
a. Accounts receivable 20,000
Retained earnings 20,000
b. Sales discount 16,000
Accounts receivable 16,000
c. Bad debts expense 100,000
Allowance for bad debts 100,000
d. Miscellaneous income 20,000
Allowance for bad debts 20,000

32.Which one of the following is the correct adjusting entry for the loan
receivable at the end of 2009?
a. Direct origination income 11,520
Loan receivable 11,520
b. Loan receivable 300,000
Direct origination income 300,000
c. Loan receivable 400,000
Interest income 400,000
d. Unearned interest income 470,000
Interest income 470,000

33.The adjusted net realizable value of the accounts receivable in 2009 is

a. 2,720,000b. 2,750,000 c. 2,520,000 d. 2,550,000

34.The adjusted interest income in 2009 is

a. 400,000 b. 470,000 c. 513,235 d. 445,382

35.The carrying amount of the loan receivable at the end of 2009 is

a. 3,756,902 b. 3,807,731 c. 4,390,195 d. 4,070,000

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5 Batch – PB03
 Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION
PROBLEM NO. 8
On January 1, 2011, the Stockholders’ Equity section of TOM Company’s balance sheet revealed the following
information:
P5 Convertible Preference shares (P40 par
value; 50,000 shares
authorized, 20,000 shares issued and
outstanding) P 800,000
Ordinary shares (P5 par value; 200,000 shares
authorized;
120,000 shares issued and outstanding)
600,000
Additional paid-in capital
3,000,000
Retained earnings
_4,500,000
Total Stockholders’ Equity
P8,900,000

In addition, the following information is known:

a. On February 2, 2011, 15,000 ordinary shares were acquired by the company
for P33 per share.
b. On September 30, 2011, 5,000 preference shares were converted to ordinary
shares. One preference share is convertible into one ordinary share. At
the time of conversion, the ordinary shares had a market value of P42 per
share.
c. On December 21, 2011, the company received a stock subscription for
10,000 ordinary shares at a subscription price of P33 per share. The
subscription contract required a cash down payment equal to 60% of the
subscription price, with the balance due on February 1, 2012.
d. On February 1, 2012, 8,500 ordinary shares were issued according to
subscription contract. Because of default by a subscriber, 1500 shares
were not issued. All payments made by the subscriber were forfeited in
favor of the Company.
e. On April 15, 2012, 10,000 shares held in treasury were reissued at P50
per share.
f. On May 16, 2012, a special dividend of preference shares was distributed
to ordinary stockholders. One hundred ordinary shares entitled a
shareholder to one preference share. The market price of preference
shares was P40 per share at that time.
g. Cash dividends are declared for preference and ordinary shares on October
31 and April 30 of each year. Semi annual cash dividends for ordinary
shares are P.50 per share.
h. Net income for 2011 was P660,000 and for 2012, P890,000.

REQUIRED:

36. What is the balance of the Ordinary Shares account at December 31,
2012?
a.675,000 b. 600,000 c. 625,000 d. 667,500

37. What is the balance of the additional paid-in capital account at

December 31, 2012?
a. 3,612,700 b. 3,654,700 c. 3,625,000 d. 3,437,700

38. How much is the total cash dividends declared in 2011?

a.287,500 b. 92,500 c. 195,000 d. 107,500

39. How much is the total cash dividends declared in 2012?

a.78,212.50 b. 206,712.50 c. 207,612.50 d. 193,212.50

40. What is the total retained earnings at December 31, 2012?

a. 5,648,287.50 b. 5,596,887.50 c. 4,965,000 d. 5,794,300.50

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5 Batch – PB03
Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION
PROBLEM NO. 9
At December 31, 2008, Arnold Company’s noncurrent operating asset
accounts had the following balances:

Land P 175,000
Buildings 1,500,000
Machinery and equipment 1,125,000
Automobiles 172,000
Leasehold improvements 216,000
Land improvements 0

Transaction for 2009 included the following:

Jan. 6 A plant facility consisting of the land and building was
acquired from Jesco Corp. in exchange for 25,000 ordinary shares of Arnold.
On this date, Arnold’s share had a market price of P50 a share. Current
assessed values of land and building for property tax purposes are P187,5000
and P562,500, respectively.

March 25 New parking lots, streets and sidewalks at the acquired plant
facility were completed at a total cost P192,000.

July 1 Machinery and equipment were purchased at an invoice cost of

P325,000, which excluded P39,000 of input tax. Additional cost of P10,000
for delivery and P50,000 for installation were incurred.
August 30 Arnold purchased a new automobile for P22,500.

November 4 Arnold purchased for P350,000 a tract of land as a potential

future building site.

December 20 A machine with a cost of P17,000 and a remaining book value

of P2,975 at date of disposition was scrapped without cash recovery.

QUESTION:
Based on the above and result of your audit calculate the balance of the
following as of December 31, 2009.
41. Land
a. P487,500 c. P837,500
b. P362,500 d. 862,500

42. Buildings
a. P2,062,500 c. P2,562,500
b. P2,437,500 d. P2,629,500

43. Machinery and equipment

a. P1,510,500 c. P1,493,000
b. P1,507,025 d. P1,454,000

44. Property , plant and equipment

a. P4,520,500 c. P5,034,525
b. P5,370,500 d. P5,202,500

45. When auditing prepaid insurance, an auditor discovers that the

original insurance policy on plant equipment is not available for
inspection. The policy’s absence most likely indicates the
possibility of an (an)
a. Insurance premium due but not recorded.
b. Deficiency in the coinsurance provision.
c. Lien on the plant equipment.
d. Understatement of insurance expense.

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5 Batch – PB03
Northern CPAR: Auditing Problems – FINAL PRE-BOARD EXAMINATION
PROBLEM NO. 10
You are engaged in the audit of SAN GABRIEL Co., a new client. The SAN
GABRIEL Company is on a calendar year basis. The following data were found
during your audit:
a) Goods in transit shipped FOB destination by a supplier, in the amount of
P10,000, had been excluded from the inventory, and further testing
revealed that the purchase had been recorded.
b) Goods costing P5,000 had been received, included in inventory, and
recorded as a purchase. However, upon your inspection the goods were
found to be defective and would be immediately returned.
c) Materials costing P25,000 and billed on December 30 at a selling price of
P32,000, had been segregated in the warehouse for inventory as a signed
purchase order had been received from the customer. Terms, FOB
destination.
d) Goods costing P7,000 was out on consignment with AGOO, Inc. Since the
monthly statement from AGOO, Inc. listed those materials as on hand, the
items had been excluded from the final inventory and invoiced on December
31 at P8,000.
e) The sale of P15,000 worth of materials and costing P12,000 had been
shipped FOB point of shipment on December 31. However, this inventory
was found to be included in the final inventory.

Further inspection of the client’s records revealed the following December

31, 2006 balances: Inventory, P110,000; Accounts receivable, P58,000;
Accounts payable, P69,000; Sales P505,000; Purchases; P320,000; Net income,
P90,200.

QUESTIONS:

Based on the above and the result of your audit, determine the balances of
the following:

46. The adjusted balance of inventory, December 31, 2006

a.125,000 c. 130,000
b.137,000 d. 150,000

47. The adjusted balance of accounts receivable, December 31, 2006

a.58,000 c. 18,000
b.32,000 d. 8,000

48. The adjusted balance of accounts payable, December 31, 2006

a.79,000 c. 59,000
b.69,000 d. 54,000

49. The adjusted balance of Sales, December 31, 2006

a.473,000 c. 505,000
b.481,000 d. 465,000

50. The adjusted balance of Net income, December 31, 2006

a.90,200 c. 97,200
b.80,200 d. 81,200

---- End of Examination ----

“Have you shown yourself discouraged in the day of distress? Your

power will be scanty”.- Proverbs 24:10

11
th
NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5 Batch – PB03