Tarlac State University COLLEGE OF BUSINESS AND ACCOUNTANCY Accountancy Department SY 2012-2013 MID-TERM EXAMS IN ACCOUNTING INTEGRATION (Topic:

Audit of Assets) MULTIPLE CHOICE PART I. THEORIES (1 POINT EACH) 1. Which of the following internal control procedures will most likely prevent the concealment of a cash shortage resulting from improper write-off of a trade account receivable? a. Write-offs must be supported by an aging schedule showing that only receivables overdue for several months have been written off. b. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected. c. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. d. Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers. To gain assurance that all inventory items in a clients inventory listing schedule are valid, an auditor most likely would trace a. inventory tags noted during the auditors observation to items listed in the inventory listing schedule. b. inventory tags noted during the auditors observation to items listed in the receiving reports and vendor invoices. c. items listed in the inventory listing schedule to inventory tags and the auditors recorded count sheet. d. items listed in the receiving reports and vendors invoices to the inventory listing schedule. While performing an audit of cash, an auditor begins to suspect check kiting. Which of the following is the best evidence that the auditor could obtain concerning whether kiting is taking place? a. Documentary evidence obtained by vouching credits on the latest bank statement to supporting documents. b. Documentary evidence obtained by vouching entries in the cash account to supporting documents. c. Oral evidence obtained by discussion with controller personnel. d. Evidence obtained by preparing a schedule of interbank transfers. The cashier of Milady Jewelries covered a shortage in the cash working fund with cash obtained at December 31 from a bank by cashing but not recording a check drawn on the company out-of-town bank. How would you as an auditor discover the manipulation? a. By confirming all December 31 bank balances. b. By counting the cash working fund at the close of business on December 31. c. By investigating items returned with the bank cut-off statements of the succeeding month. d. By preparing independent bank reconciliations as of December 31. 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 invoices. What would the auditor intend to establish by this step? a. Sales invoices represent bona fide sales. b. Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices. c. All sales invoices have been recorded. d. All sales invoices have been properly posted to customer accounts. Tracing bills of lading to sales invoices provides evidence that a. shipments to customers were recorded as sales. c. recorded sales were shipped. b. shipments to customers were invoiced. d. invoiced sales were shipped.

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In determining validity of accounts receivable, which of the following would the auditor consider most reliable? a. Direct telephone communication between auditor and debtor. b. Documentary evidence that supports the accounts receivable balance. c. Confirmation replies received directly from customers. d. Credits to accounts receivable from the cash receipts book after the close of business at year end. Which of the following procedures would an auditor most likely rely on to verify managements assertion of completeness? a. Confirm a sample of recorded receivables by direct communication with the debtors. b. Observe the clients distribution of payroll checks. c. Compare a sample of shipping documents to related sales invoices. d. Review standard bank confirmations for indications of kiting. A client erroneously recorded a large purchase twice. Which of the following internal accounting control measures would be most likely to detect this error in a timely and efficient manner? a. footing the purchases journal. b. reconciling vendors monthly statements with subsidiary payable ledger accounts. c. tracing totals from the purchases journal to the ledger accounts. d. sending written quarterly confirmations to all vendors. The audit procedure of analyzing the repairs and maintenance accounts is designed primarily to provide evidence in support of the audit proposition that all a. expenditures for fixed assets have been recorded in the proper period. b. capital expenditures have been properly authorized. c. noncapitalizable expenditures have been properly expensed. d. expenditures for fixed assets have been capitalized. A client maintains two bank accounts. One of the accounts, Bank A has an overdraft of P100,000. The other account, Bank B, has a positive balance of P50,000. To conceal the overdraft from the auditor, the client may decide to a. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the receipt but not the disbursement and list the receipt as a deposit in transit. Record the disbursement at the beginning of the following year. b. Draw a check for at least P100,000 on Bank B for deposit in Bank A. Record the receipt but not the disbursement and list the receipt as a deposit in transit. Record the disbursement at the beginning of the following year. c. Draw a check for P100,000 on Bank B for deposit in Bank A. Record the disbursement but not the receipt. List the disbursement as an outstanding check, but do not list the receipt as a deposit in transit. Record the receipt at the beginning of the following year. d. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the disbursement but not the receipt and list the disbursement as an outstanding check. Record the receipt at the beginning of the following year. What sequence of steps does an auditor undertake when identifying control activities that are potentially reliable in assessing control risk below the maximum? a. Consider the errors or frauds that might occur, determine control activities, identify control objectives, and design tests of controls. b. Determine control activities, design tests of controls, consider the errors or frauds that might occur, and identify control objectives. c. Identify control objective, consider the errors or frauds that might occur, determine control activities, and design tests of controls. d. Design tests of controls, determine control activities, consider the errors or frauds that might occur, and identify control objectives. Which of the following control activities could prevent or detect payment of goods not received? a. Counting goods when received. b. Matching the purchase order, receiving report, and vendors invoice.

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c. Comparing goods received with goods requisitioned. d. Verifying vouchers for accuracy and approval. How can an auditor test to determine whether Receiving department procedures are applied properly? a. Observe receiving procedures on a surprise basis. c. Review procedures manuals. b. Interview Receiving department personnel. d. Test a sample of receiving documents. Which of the following control procedures would most likely be used to maintain accurate perpetual inventory records? a. Independent matching of purchase orders, receiving reports and vendors invoices. b. Independent storeroom count of goods received. c. Periodic independent reconciliation of control and subsidiary records. d. Periodic independent comparison of records with goods on hand. In a manufacturing company, which one of the following audit procedures would give the least assurance of the valuation of inventory at the audit date? a. Obtaining confirmation of inventories pledged under loan agreements. b. Testing the computation of standard overhead rates. c. Examining paid vendors invoices. d. Reviewing direct labor rates. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain evidence that a. No goods held on consignment for customers are included in the inventory balance. b. No goods observed during the physical count are sold. c. All goods owned at year end are included in the inventory balance. d. All goods purchased before yearend are received before the physical inventory count.

18. An audit procedure that provides evidence about proper valuation of trading securities arising from shortterm investment of excess cash is a. recalculation of investment carrying value by applying the equity method. b. comparison of carrying value with current market quotations. c. confirmation of securities held by broker. d. calculation of premium or discount amortization. 19. Of the following, which is the most efficient audit procedure for testing accrued interest earned on bond investment? a. Vouching the receipt and deposit of interest checks. b. Tracing interest declarations to an independent record book. c. Re-computing interest earned. d. Confirming interest rate with the issuer of the bonds. 20. The audit client has just acquired another company by purchasing all its assets. As a result of the purchase, goodwill has been recorded on the clients books. Which of the following comparisons would be the most appropriate audit test for the amount of recorded goodwill? a. The purchase price and the fair market value of assets purchased. b. The purchase price and the book value of assets purchased. c. The figure for goodwill specified in the contract for purchase. d. Earnings in excess of 15% of net assets for the past five years. 21. Property acquisitions that are misclassified as maintenance expense would most likely be detected by internal control procedures that provide for a. review and approval of the monthly depreciation entry by the plant supervisor. b. investigation of variances within a formal budgeting system. c. examination by the internal auditor of vendor invoices and canceled checks for property acquisitions. d. segregation of duties of employees in the accounts payable department. 22. An auditor is verifying the existence of newly acquired fixed assets recorded in the accounting records. Which of the following is the best evidence to help achieve this objective?

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a. Oral evidence obtained by discussions with operating management. b. Documentary support obtained by vouching entries to subsidiary records and invoices. c. Documentary support obtained by reviewing titles and tax returns. d. Physical examination of a sample of newly recorded fixed assets. To test the accuracy of the current years depreciation charges, an auditor should rely most heavily on a. comparison of depreciation schedule detail with schedules supporting the income tax return. b. re-computation of depreciation for a sample of plant assets. c. tracing of totals from the depreciation schedule to properly approved journal entries and ledger postings. d. vouching of the current years fixed asset acquisitions. In auditing intangible assets, an auditor most likely would review or recomputed amortization and determine whether the amortization period is reasonable in support of managements financial statement assertion of a. valuation. c. completeness. b. existence. d. rights and obligations. Examining documentation of the purchase of intangible assets is consistent with the auditors objective of validating the managements assertion of a. valuation. c. completeness. b. existence. d. rights and obligations. When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policys absence most likey indicates the possibility of a(n) a. insurance premium due but not recorded. c. lien on the plant equipment. b. deficiency in the coinsurance provision. d. understatement of insurance expense. While observing a clients annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the clien ts perpetual records. This situation could be the result of the clients failure to record a. purchase discounts. c. sales. b. purchase returns. d. sales returns. Which of the following auditing procedures most likely would provide assurance about a manufacturing entitys inventory valuation? a. Testing the entitys computation of standard overhead rates. b. Obtaining confirmation of inventories pledged under loan agreements. c. Reviewing shipping and receiving cut-off procedures for inventories. d. Tracing test counts to the entitys inventory listing. Which of the following auditing procedures would the auditor not apply to a cutoff bank statement? a. Trace year-end outstanding checks and deposits in transit to the cutoff bank statement. b. Reconcile the bank account as of the end of the cutoff period. c. Compare dates, payees and endorsements on returned checks with the cash disbursements record. d. Determine that the year-end deposit in transit was credited by the bank on the first working day of the following accounting period.

30. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high, an auditor would probably a. increase the extent of test of controls of the inventory cycle. b. request the client to schedule the physical inventory at the end of the year. c. insist that the client perform physical counts on inventories several times during the year. d. apply gross profit tests to ascertain the reasonableness of physical counts. PART II. PROBLEMS (2 POINTS EACH) Items 31 to 35 relate to Ganda Corp. as follows: The following data were found during your audit: Goods in transit shipped FOB shipping point on Dec. 28 by a supplier in the amount of P100,000 had been excluded from the inventory, and further testing revealed that the purchase had been recorded.

Goods costing P30,000 had been received, included in inventory, & recorded as purchase. However, upon your inspection, the goods were found to be defective and would be immediately returned. Materials costing P170,000 and billed on Dec. 30 at a selling price of P264,000 had been segregated in the warehouse for shipment to a customer. The materials had been excluded from inventory as a signed purchase order had been received from the customer. Terms, FOB destination. Goods costing P70,000 was out on consignment with Gundara, Inc. Since the monthly statement from Gundara listed those materials as on hand, the items had been excluded from the final inventory and invoiced on Dec. 31 at P80,000. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of shipment on Dec. 31. However, this inventory was found to be included in the final inventory. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at Dec. 31, and were not included in the inventory. A review of the customers purchase order set forth terms as FOB destination. The sale had not been recorded. Your client has an invoice from a supplier, terms FOB shipping point, but the goods had not arrived as yet. However, these materials costing P134,000 had been included in the inventory count, but no entry had been made for their purchase. Merchandise costing P200,000 had been recorded as a purchase but not included in inventory. Terms of sale are FOB shipping point according to the suppliers warehouse which arrived by Dec. 31. Further inspection of the clients records revealed the following Dec. 31 balances: Inven tory, P1,350,000; Accounts receivable, P630,000; Accounts payable, P690,000; Sales, P6,032,000; Purchases, P3,150,000; and, Net income, P727,000. Based on the preceding information, determine the adjusted balances of the following: 31. Inventory a. 700,000 b. 934,000 c. 1,900,000 d. 1,840,000 32. Accounts Receivable a. 406,000 b. 380,000 c. 446,000 d. 286,000 33. Purchases a. 3,354,000 b. 3,150,000 c. 3,254,000 d. 3,120,000 34. Sales a. 5,848,000 b. 6,376,000 c. 5,688,000 d. 5,768,000 35. Net Income a. 709,000 b. 569,000 c. 829,000 d. 769,000 36. Your client was organized on 01/15/12 and started operation soon thereafter. The cashier who acted also as the bookkeeper had kept the accounting records very haphazardly. The manager suspects him of defalcation and engaged you to audit his account to find out the extent of the fraud, if there is any. On Nov. 15, when you started the examination of the accounts, you find the cash on hand to be P25,700. From inquiry at the bank, it was ascertained that the balance of the companys bank deposit in current account on the same date was P131,640. Verification revealed that the check issued for P9,260 is not yet paid by the bank. The company sells at 40% above cost. Your examination of the available records disclosed the following: Capital stock issued at par for cash, P1,600,000; Real estate purchased and paid in full, P1,000,000; Mortgage liability secured by real estate, P400,000; Furniture and fixtures (gross) bought on which there is still balance unpaid of P30,000, P145,000; Outstanding notes due to bank, P160,000; Total amount owed to creditors on open account, P231,420; Total sales, P1,615,040; Total amount still due from customers, P426,900; Inventory of merchandise on Nov. 15, at cost, P469,600, and; Expenses paid excluding purchases, P303,780. As a result of your audit, as of 11/15/12, collections from sales should be a. 1,153,600 b. 1,188,140 c. 1,615,040 d. 2,041,940 37. (Refer to Item 36 above.) Payments for purchases should be a. 1,854,620 b. 1,391,780 c. 1,207,204 d. 922,180 38. (Refer to Item 36 above.) Cash disbursements should be a. 2,340,960 b. 2,625,984 c. 2,810,560 d. 3,273,400 39. (Refer to Item 36 above.) Unadjusted cash balance should be a. 74,740 b. 537,580 c. 722,156 d. 1,007,180

40. (Refer to Item 36 above.) Cash shortage should be a. 0 b. 389,500 c. 574,076 d. 859,100 41. On 01/01/10, your client loaned P3,000,000 to a borrower. The terms of the loan were payment in full on 01/01/15, plus annual interest payments at 11%. The interest payment was made as scheduled on 01/01/11. However, due to financial setbacks, the borrower was unable to make its 2012 interest payment. Your client accrued the interest at 12/31/11, but did not continue to accrue interest. Your client considers the loan impaired and projects the following cash flows from the loan as of 12/31/2012 and 2013. Amount Projected as of 12/31/2012 12/31/2013 200,000 n/a 400,000 600,000 800,000 1,200,000 1,200,000 1,000,000 400,000 0

Date of Cashflow 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017

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Based on your audit findings, loan impairment for the year 2012 should be a. 882,380 b. 1,212,380 c. 1,542,380 d. 1,549,500 (Refer to Item 41) Interest income for year 2013 assuming the P200,000 was collected on 12/31/13 as scheduled should be a. 66,000 b. 195,855 c. 200,000 d. 232,938 (Refer to Item 41) Allowance for loan impairment as of 12/31/13 should be a. 554,340 b. 649,442 c. 752,640 d. 776,900 (Refer to Item 41) Interest income for year 2014 assuming the P600,000 was collected on 12/31/14 as scheduled should be a. 222,541 b. 225,210 c. 236,561 d. 247,023 (Refer to Item 41) Carrying amount of loan receivable as of 12/31/14 should be a. 1,645,641 b. 1,672,570 c. 1,892,683 d. 2,150,558

46. During your examination of the 2013 financial statements of the Narnia Company you find that the company does not provide allowance for doubtful accounts ever since it started operations in 2009. The companys practice is to directly write-off as expense doubtful accounts and credit recoveries to income. The companys contracts are generally for two years. Upon your recommendation, the company agreed to change its accounts for 2013 to give effect to doubtful treatment on the allowance basis. The allowance is to be based on a percentage of sales which is derived from the experience of prior years. Statistics for 2009 to 2013 are shown as follows: Year of Sale 2009 2010 2011 2012 2013 Charge Sales 2,400,000 6,000,000 7,200,000 7,800,000 6,600,000 Accounts Written Off & Year of Sale: 2009 13,200 2010 36,000 24,000 2011 12,000 96,000 31,200 2012 28,800 108,000 36,000 2013 64,800 120,000 33,600 Recoveries & Year of Sale: 2009 2010 2,400 2011 9,600 2012 12,000

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2013 14,400 Accounts receivable at Dec. 31, 2013 from 2005 sales was P360,000 and from 2006 sales was P3,240,000. The average percentage of net doubtful accounts to charge sales that should be used in setting up the 2006 allowance is a. 2.50% b. 2.05% c. 1.90% d. 1.77% (Refer to item 46) How much is the doubtful accounts expense for 2006? a. 131,400 b. 218,400 c. 165,000 d. 175,200 (Refer to item 46) The doubtful accounts expense for 2006 is over(under)stated by a. 223,800 b. 53,400 c. (131,400) d. (165,000) (Refer to item 46) The net realizable value of accounts receivable as of Dec. 31, 2006 is a. 3,415,200 b. 3,474,600 c. 3,326,400 d. 3,240,000 (Refer to item 46) The adjusting journal entry necessary to set up the allowance for doubtful accounts as of Dec. 31, 2006 will include a debit to retained earnings of a. 223,800 b. 184,800 c. 165,000 d. 0

51. Black Corporation owns 300,000 of White Inc.s 1,000,000 shares issued and outstanding purchased on Jan. 2, 2012 at P20 per share. Whites net assets had a book value on the said da te at P16,000,000. The excess of acquisition cost over book value of net assets acquired was attributed to the total understatement of Whites identifiable asset without definite useful life and Whites depreciable asset with a 5 year average useful life at P800,000 and P1,200,000, respectively. The balance of the excess was attributed to Whites unidentifiable asst. White Inc. declared P800,000 cash dividends by the end of 2012 and reported a total comprehensive income amounting to P2,000,000 which is net of unrealized holding loss from its investment at fair value through other comprehensive income amounting to P500,000. How much from the acquisition cost on Jan. 2011, is attributed to unidentifiable asset? a. 600,000 b. 1,200,000 c. 2,000,000 d. 4,000,000 52. (Refer to Item 51) How much investment income should be reported in Black Corp.s profit or loss? a. 678,000 b. 750,000 c. 600,000 d. 528,000 53. (Refer to Item 51) What is the carrying value of the Investment in White Inc. as of Dec. 31, 2012? a. 6,528,000 b. 6,288,000 c. 6,678,000 d. 6,438,000 54. (Refer to Item 51) Assuming that White Inc. issued additional 200,000 shares at P30 per shares to other stockholders early in Jan. 2013, what shall be the total gain or loss on dilution to be recognized in the 2013 profit or loss? a. 25,000 b. 427,000 c. 452,000 d. none 55. (Refer to Item 51) Assuming that Black Corp. sold 120,000 of its investment in White Inc. at P30 per share early in Jan. 2013, how much is the total gain on cessation that should be recognized in the 2013 profit or loss? a. 1,627,200 b. 1,024,800 c. 2,562,000 d. 2,712,000 56. Harris Corp. acquired P2,000,000 face value bonds on March 31, 2013. The 10 year, 10% bonds which are dated January 1, 2007 pay annual interest every December 31 and were acquired by the company with the intention of generating income on a short term basis from the fluctuations of the value of the securities. The prevailing rate of interest of similar security on the same date is at 12%. The company paid for brokers fees and commissions amounting to P100,000. Interests collected at year-end were credited to the appropriate interest income account. Moreover, the prevailing interest at year-end was at 14%. How much is the unrealized holding gain in profit and loss for 2013? a. 114,237 b. 121,494 c. 64,237 d. 0 57. (Refer to Item 56) How much is the investment account balance as of Dec. 31, 2013? a. 1,814,269 b. 1,830,309 c. 1,887,887 d. 1,903,927 58. (Refer to Item 56) What is the correct interest income for 2013? a. 144,638 b. 150,000 c. 169,066 d. 180,000 59. (Refer to Item 56) How much is the total cash paid to acquire the bonds? a. 2,100,000 b. 2,028,506 c. 1,928,506 d. 1,914,269 60. (Refer to Item 56) How much is the investment account balance upon initial recognition? a. 1,773,497 b. 1,791,630 c. 1,853,779 d. 1,878,506

61. You have been asked by your client to verify the accountability of the cashier-bookkeeper, who was allowed to take a vacation leave a few days ago. The bank reconciliation statements prepared by the cashier-bookkeeper are presented below: NOVEMBER 30, 2012 Balance per bank statement Cash on hand Total Outstanding checks: No. 2520 2521 2522 Erroneous bank charge Erroneous bank credit Book balance DECEMBER 31, 2012 Balance per bank statement Cash on hand Total Outstanding checks: No. 2674 2675 2676 Erroneous bank charge Erroneous bank credit Book balance

P 21,500 500 22,000 P 2,000 1,400 1,900

(3,300) 2,000 ( 500) P 20,200

P 135,000 6,300 141,300 P 31,000 10,300 5,000

(41,300) 3,000 ( 600) P 102,400

The Cash in Bank account in the general ledger shows the following debits and credits during December: Cash in Bank 20,200 Dec 4,500 5,000 20,000 30,000 9,000 70,000 48,500 198,200

Dec 01 02 07 12 17 23 27 31

Balance Received from customers Received from customers Received from customers Received from customers Received from customers Received from customers Received from customers Total

01 05 14 24 28

Checks issued Checks issued Checks issued Checks issued Checks issued

2,000 5,200 31,000 46,000 7,600

31 Balance

102,400 198,200

The following summarized transactions were taken from the bank statement for the month of Dec. 2012: Balance, Dec. 1, 2012 16,500 Total deposits 173,700 The total deposits per bank statement include: Collection of notes receivable 5,000 Correction of Nov. erroneous bank charge 2,000 Dec. 10 deposits of Lava, inc. credited in error to client 600 Total checks 62,500 The total checks per bank statement include: Correction of Nov. erroneous bank credit 500

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Dec. check of Nile Co. charged in error to client 3,000 Cash on hand per count in the morning of Jan. 2, 2013 amounted to P6,300. Before leaving the company for a one-week vacation, your client had left several signed blank checks that the cashier-bookkeeper had cashed for his personal use. What is the adjusted cash balance on Nov. 30, 2012? a. 16,500 b. 13,200 c. 20,200 d. 14,500 (Refer to Item 61) The amount of unaccounted receipts is a. 11,000 b. 13,200 c. 9,000 d. 15,100 (Refer to Item 61) The amount of unrecorded/unsupported disbursements in Dec. is a. 15,100 b. 10,900 c. 7,000 d. 5,000 (Refer to Item 61) What is the total cash shortage as of Dec. 31, 2012? a. 26,000 b. 15,100 c. 33,000 d. 111,400 (Refer to Item 61) What is the adjusted cash balance on Dec. 31, 2012? a. 102,400 b. 125,000 c. 87,400 d. 1,878,506

66. On Dec. 31, 2009, Karlo subjected to impairment test a piece of equipment. Data pertinent to the equipment as of Dec. 31, 2009 as follows: Original cost Adjusted Accumulated depreciation Selling price Estimated cost to make the sale Value in use Remaining useful life Method of depreciation 2,400,000 600,000 1,400,000 200,000 1,100,000 6 years Straight-line

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On Dec. 31, 2011, the asset is found to have a recoverable amount of P1,300,000. How much loss on impairment is recognized in 2009? a. 400,000 b. 500,000 c. 600,000 d. 700,000 (Refer to Item 66) How much is the depreciation expense recognized in 2010? a. 200,000 b. 216,667 c. 300,000 d. 333,333 (Refer to Item 66) How much gain on recovery is recognized in 2011? a. 500,000 b. 400,000 c. 300,000 d. 200,000 (Refer to Item 66) How much is the depreciation expense recognized in 2012 under the cost model? a. 325,000 b. 300,000 c. 250,000 d. 200,000 (Refer to Item 66) How much is the depreciation expense recognized in 2012 under the revaluation model? a. 200,000 b. 250,000 c. 300 ,000 d. 325,000

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