Audit problem with actual errors.

Enumerate and present your audit notes and analysis for each and every problem.
At least 8 audit findings per problem.

Audit findings (please be specific on describing the error and on presenting your justification)
e.g
a. There is an understatement in the presentation of cash receipts because..
B. Incorrect footing of the accounts receivable balance due to .
C. The inventory was understated for the year December 31, 20xx because it was not
included in the count. But, it should be included because it was shipped FOB shipping
point.
D. Etc.
DO NOT EXPLAIN THE PROBLEM, JUSTIFY YOUR AUDIT FINDINGS!!!












PROBLEM 1
You are examining the financial statements of Softnyx Corporation for 2008. The companys accountant
provided you the following unadjusted trial balance.
Softnyx Corporation
Unadjusted Trial Balance
December 31, 2010
Debit Credit Adjustments Audited Balances
Cash 1,442,500 (126,000) (1,316, 500)
Marketable
Securities
1, 200,000 1, 200,000
Accounts
Receivable
1,300, 000 (51,000) 1, 249,000
Other Receivables 25,000 25,000
Inventories 1,400,000 1,400,000
Prepayments 120,000 (60,000) 60,000
Land 1,800,000 (180,000) 1,620,000
Building(20 years
life, no salvage
value)
2,300,000 200,000 2,500,000
Accumulated
Depreciation-
Building
525,000 (525,000)
Machineries and
Equipment (10
years, no salvage
value)
2,200,000 2,200,000
Accumulated
Depreciation-
Machineries and
equipment
1,100,000 1,100,000
Goodwill 250,000 (250,000)
Investment and
funds
100,000 100,000
Other Assets
Accounts Payables 900,000 (16,000) (916,000)
Other Payables 360,000 140,000 (220,000)
Long term Debt 2,000,000 2,000,000
Share Capital 2,500,000 (100,000) (2,600,000)
Share premium 1, 250,000 (40,000) (1,290,000)
Accumulated
profits, beg
2,492,000 370,000 (2,122,500)
Sales 3,000,000 86,500 (2,913,000)
Service Revenue (160,000) (160,000)
Cost of sales 950,000 950,000
Commission 300,00 30,000 330,000
Expense
Advertising
Expense
150,000 2,000 152,000
Delivery Expense 45,000 45,000
Office Salaries
Expense
450,000 (30,000) 420,000
Supplies Expense 195,000 75,000 270,000
Legal and
Professional
Expense
50,000 (12,000) 38,000
Other Income 75,000 16,500 (58,500)
Other Charges 50,000 (20,000) 30,000
Adjusted Balances 14,202,500 14,202,500 13,905,500

In the course of your examination you discover several errors. Prepare the necessary adjusting Journal
entries ignoring income tax effects and determine the correct balances of the clients balance sheet and
income statement accounts.
1. On December 29, 2010, the company issued checks to creditors totalling P20, 000. These checks
were released on January 4, 2011.
2. A customers deposit of P10, 000 for goods to be delivered in January 2011 was deducted from
Accounts Receivable.
3. A P15, 000 collection of Accounts Receivable on December 31, 2010 was not recorded until
January 14, 2011.
4. A check for P25, 000 from a customer to apply his account was erroneously credited to Accounts
Payable when received on December 24, 2010.
5. The building under lease was renovated at a cost of P200, 00 on December 30, 2010. This was
recorded by a debit to land.
6. Softnyx Corporation issued 1,000 shares of P100 par value capital stock for P120, 000 on January
14, 2010. The proceeds were credited to Retained Earning Account.
7. Trade accounts receivable includes P25, 000 advances to officers due in six months.
8. A customers check for P12, 000 deposited with but returned by the bank NSF on December 27,
2010. The return was not recorded in the books.
9. On December 31, 2010, goodwill estimated by the Board of Directors at P250, 000 was set up by
a credit to Retained Earnings.
10. Credit Balances in customers account amounting P10, 000 was presented as a net from
accounts receivable with debit balances.
11. A P15, 000 collections from Glenn Corporation was correctly recorded in the general ledger but
was erroneously credited to the subsidiary ledger account of Glenda Company.
12. The cash account at December 31, 2010 includes P100, 000 set aside by the Board of Directors
for the purchase of a computer.
13. A check for P10, 000 from a customer to apply to his account was received on December 30,
2010 but was not recorded until January 4, 2011.
14. A stale check of P12, 000 which has been outstanding for more than six months was included in
the list of outstanding checks. This was in prepayment of accounts payable.
15. Softnyx Corporation maintains current accounts in two banks: PNB and DBP. A transfer of fund
from DBP to PNB amounting to P30, 000 was not recorded as of year end.
16. A check was cleared by the bank as P12, 000 but was recorded by the bookkeeper as P21, 000.
This was in payment of Accounts Payable.
17. An examination of cash transactions revealed that Cash Voucher Number 341 for P5, 000 dated
December 28, 2010 for advertising expenses was debited to Other Changes.
18. In 2010, salesmens commission of P30, 000 was erroneously debited to office salaries.
19. Cash expenditures for advertising expenses in the amount of 12, 000 was erroneously charged
to legal expenses.
20. Interest collection from a Note Receivable amounting to P3, 500 which was received on
December 30, 2010 was deposited and recorded on the same date by a credit to Sales.
21. Advertising expenses for 2010 includes P15, 000 cost of printing sales brochures for a special
promotional campaign which will start in January 2011.
22. On December 3, 2010, cash of P8, 000 collected on account from a customer and deposited in
the bank in the next day, was recorded on the books as a credit to sales.
23. Other income includes gain on sale of treasury stock in the amount of P20, 000.
24. The sales book was left upon up to January 4, 2011. January 2011 cash sales of P75, 000 were
recorded as sales on December 2010.
25. Unrecorded bank charges for December 2010 amounted to P5, 000.
26. Attorneys fees and Brokers Commissions amounting to P20, 000 applicable to the purchase of
land was recorded in the books as other charges on December 30, 2010.
27. On October 24, 2010, the staff-in-charge bought office supplies worth P120, 000 and included
the same in the prepaid expenses. No adjustment was made at year end. As of December 31,
2010, unused office supplies amount to P45, 000.
28. Softnyx Corporation also offered maintenance contracts on an annual basis. Cash receipts from
such contracts amounted to P360, 000 were credited to Other Payables-Unearned Service
Contract. Of the total amount, P120, 000 is effective from May 1, 2010 to May 1, 2011, and the
balance is effective from September 1, 2010 to September 1, 2011. No adjustment was made at
year end.

SOLUTION:
ENTRY MADE CORRECT ENTRY ADJUSTED JOURNAL ENTRY
1.
Accounts Payable 20,000
Cash 20,000

No Entry

Cash 20,000
Accounts Payable 20,000
2.
Cash 10,000
Accounts Payable 10,000

Cash 10,000
Other Payable 10,000

Accounts Receivable 10,000
Other Payable 10,000
3.
No Entry

Cash 15,000
Accounts

Cash 15,000
Accounts
Receivable 15,000 Receivable 15,000
4.
Cash 25,000
Accounts Payable 25,000

Cash 25,000
Accounts Receivable 25,000

Accounts Payable 25,000
Accounts
Receivable 25,000
5.
Land 200,000
Cash 200,000

Building 200,000
Cash
200,000

Building 200,000
Land 200,000

6.
Cash 120,000
Retained Earnings 120,000

Cash 120,000
Capital Stock
(Ordinary Share) 100,000
Share premium 20,000

Cash 120,000
Capital Stock
(Ordinary Share) 100,000
Share premium 20,000
7.
Accounts Receivable 25,000
Cash 25,000

Other Receivable 25,000
Cash 25,000

Other Receivable 25,000
Accounts Receivable 25,000

8.
No Entry

Accounts Receivable 12,000
Cash 12,000

Accounts Receivable 12,000
Cash 12,000
9.
Goodwill 250,000
Retained Earnings 250,000

No Entry

Retained Earnings 250,000
Goodwill 250,000

10.
Cash 10,000
Accounts Receivable 10,000

Cash 10,000
Other Payable 10,000


Accounts Receivable 10,000
Other Payable 10,000

11.
Cash 15,000
Accounts Receivable
-Glenda 15,000


Cash 15,000
Accounts Receivable
-Glenda 15,000


Accounts Receivable
-Glenda 15,000
Accounts Receivable
-Glenda 15,000

12.
No Entry

Investment
and Funds 100,000
Cash 100,000

Investment
and Funds 100,000
Cash 100,000
13.
No Entry

Cash 10,000
Accounts Receivable 10,000

Cash 10,000
Accounts Receivable 10,000
14.
Prepayment:
Accounts Payable 12,000
Cash 12,000



Other Receivable 12,000
Cash 12,000



Cash 12,000
Accounts Payable 12,000

Stale Check:
No Entry

Cash 12,000
Other Receivable 12,000
15.
No Entry

Cash-PNB 30,000
Cash-DBP 30,000

Cash-PNB 30,000
Cash-DBP 30,000
16.
Accounts Payable 21,000
Cash 21,000

Accounts Payable 12,000
Cash 12,000

Cash 9,000
Accounts Payable 9,000
17.
Other Charges 5,000
Cash 5,000

Advertising Expense 5,000
Cash 5,000

Advertising Expense 5,000
Other Charges 5,000

18.
Office Salaries 30,000
Cash 30,000

Commission Expense 30,000
Cash 30,000

Commission Expense 30,000
Office Salaries 30,000

19.
Legal expense 12,000
Cash 12,000

Advertising Expense 12,000
Cash 12,000

Advertising Expense 12,000
Legal expense 12,000


20.
Cash 3,500
Sales 3,500

Cash 3,500
Other Income 3,500

Sales 3,500
Other Income 3,500
21.
Advertising Expense 15,000
Cash 15,000

Prepayments 15,000
Cash 15,000

Prepayments 15,000
Advertising Expense 15,000


22.
Cash 8,000
Sales 8,000

Cash 8,000
Accounts Receivable 8,000

Sales 8,000
Accounts Receivable 8,000
23.
Cash 20,000
Other Income 20,000

Cash 20,000
Share Premium
-Treasury Share 20,000

Other Income 20,000
Share Premium
-Treasury Share 20,000
24.
Cash 75,000
Sales 75,000

No Entry

Sales 75,000
Cash 75,000

25.
No Entry

Other Charges 5,000
Cash 5,000

Other Charges 5,000
Cash 5,000
26. Other Charges 20,000
Cash 20,000
Land 20,000
Cash 20,000
Land 20,000
Other Charges 20,000
27. Acquisition:
Prepayments 120,000
Cash 120,000
Adjustment:
No Entry
Prepayments 120,000
Cash 120,000

Supplies Expense 75,000
Prepayments 75,000
Prepayments 120,000
Cash 120,000

Supplies Expense 75,000
Prepayments 75,000
28.
Cash 360,000
Other Payable 360,000
No Entry

Cash 360,000
Other Payable 360,000
Other Payable 160,000
Service Revenue 160,000

Cash 360,000
Other Payable 360,000
Other Payable 160,000
Service Revenue 160,000


AUDIT FINDINGS:





































































PROBLEM 2
Clippers Corporation asked you to review its records and prepare corrected financial
statements. The books of accounts are in agreement with the following balance sheet:
Clippers Corporation
Balance Sheet
December 31, 2012
Assets
Cash P40, 000
Accounts Receivable 80,000
Notes Receivable 24,000
Inventories 200,000
Total Assets P344, 000

Liabilities and Owners Equity
Accounts Payable P16, 000
Notes Payable 32, 000
Capital Stock 80, 000
Retained Earnings 216,000
Total liabilities and owners equity P344, 000

A review of the companys books indicates that the following errors had not been corrected during the
applicable years:

2009 2010 2011 2012
Ending inventory-
overstated

P -

P56, 000

P 64,000

P-
Ending inventory-
understated

48,000

-

-

72,000
Prepaid Expense 7,200 5,600 4,000 4,800
Unearned Income - 3,200 - 2,400
Accrued Expense 1,600 600 800 400
Accrued Income - 1,000 - 1,200

No dividends were declared during the years 2009 to 2012 and no adjustments were made to retained
earnings. The companys books reported the following net income:
2009 P60, 000 2011 P52, 000
2010 44,000 2012 60,000


REQUIRED:
Based on the above and the results of your audit, determine the adjusted amounts of the
following: (Disregard tax implications)
1. Net income in 2009
2. Net income (loss) in 2010
3. Net income (loss) in 2011
4. Net income (loss) in 2012
5. Retained earnings as of December 31, 2012
SOLUTION:
2009 2010 2011 2012
Net income-
unadjusted

60,000

44,000

52,000

60,000
Ending Inventory-
overstated
2010
2011


(56,000)


56,000
(64,000)



64,000
Ending inventory-
understated
2009
2012


48,000


(48,000)



72,000
Prepaid
Insurance-
outrightly
expensed
2009
2010
2011
2012




7,200




(7,200)
5,600





(5,600)
4,000






(4,000)
4,800
Unearned
Income
2011
2012

(3,200)

3,200


(2,400)
Accrued Income
2010
2012

1,000

(1,000)


1,200
Accrued Expense
2009
2010
2011
2012

(1,600)

1,600
(600)


600
(800)



800
400
Net Income (Net
Loss) Adjustment

P113,600

P(62,800)

P 44,400

P 196,000

Retained earnings, unadjusted P 21, 600
Current Errors:
Inventory end, understated 72,000
Prepaid Insurance 4, 800
Unearned Income (2, 400)
Accrued Income 1,200
Accrued expense (4,000)
Retained earnings- Adjusted- 12/31/12 P291, 200

AUDIT FINDINGS:



















PROBLEM 3
An entity reported net income as follows:
2010 1, 500, 000
2011 2, 000, 000
2012 2, 800, 000
During your audit the following transactions were noted
1. Accounts receivable instead of notes receivable was debited in 2012 20,000
2. Purchases account was debited in 2012 instead of office supplies 5,000
3. The physical inventory on December 31, 2010 was overstated 10,000
4. The physical inventory on December 31, 2011 was understated 15, 000
5. Advances to supplier were recorded as purchases but the merchandise was received in the
subsequent year
2010 30,000
2011 40,000
6. Advances from customers recorded as sales but the goods were delivered in the following year
2010 25, 000
2011 50,000
7. Insurance premium for three years paid in 2010 was charge entirely to expense in
2010 15000
8. Salaries accrued not recorded
2010 25, 000
2011 60,000
9. Rent for two years received in 2011 was entirely credited to income
10,000
10. Unrecorded accrued interest receivable
2011 10,000
2012 25,000
11. Improvements on building had been charged to expense on January 1, 2011. Improvements
have a life of 5 years. 100,000
12. On January 1, 2011, an equipment costing P40, 000 was sold for P20, 000. At the date of sale,
the equipment had an accumulated depreciation of P25, 000. The cash received was recorded as
other income in 2011.

REQUIRED:
What is the correct Net Income for 2010, 2011, and 2012?

SOLUTION
2010 2011 2012
Unadjusted Net Income
1, 500,000

2,000,000

2,800,000
1. 1. No effect
2. 2. No effect
3. 3. 2010 inventory
overstated
(10,000)

10,000
4. 2011 inventory
understated
15, 000 (15, 000)
5. Advances recorded
as purchase
2010
2011



30,000



(30,000)
40,000




(40,000)
6. Advances
recorded as sales
2010
2011



(25,000)



25,000
(50,000)




50,000
7. Insurance
premium for 3
years charged
to expense in
2010




10,000




(5,000)




(5,000)
8. Salaries not
recorded
2010
2011


(30,000)


30,000
(60,000)



60,000
9. Rent income for 2
years recorded as
income in 2011



5,000



(5,000)
10. Improvements
debited to expense
Depreciation
(100, 000/5)





100, 000
(20,000)



(20,000)
11. Interest
receivable unrecorded
2011
2012



10,000



(10,000)
25,000
12. Overstatement
of other income

(15,000)

CORRECTED NET
INCOME
1, 475, 000 2, 045, 000 2, 850, 000

AUDIT FINDINGS:




















































PROBLEM 4
Before the accounts of Goey Corporation are closed for the annual fiscal period ended December 31,
2012, an examination of the company records by the auditor discovered the following facts:
1. Store supplies inventories had been overlooked in adjusting the accounts in the current and
previous years. Store supplies on hand were; 2010 P450; 2011 P9, 000. Store supplies on hand at
the end of 2012 are 14, 500.
2. Accrued sales commissions due to salesmen had been overlooked in adjusting the accounts.
Accrued amounts were: 2010, P6, 750; 2011, P7, 300. Accrued commissions at the end of 2012
are P9, 700.
3. Checks totalling P6, 500 issued to former employees in 2010 are still outstanding. Present
whereabouts of such employees are unknown, and it is doubtful whether the checks will be
presented for payment.
4. Raw materials, costing P8, 000, received on December 31, 2011, had been included in the
physical inventory taken on that date; however, the purchase was recorded when the invoice
was received on January 4, 2012.
5. On March 2011, the company received a 25% ordinary share dividend on 100 ordinary shares of
Brooks, Inc. acquired in 2010 at P150. The shares received as share dividend were sold for cash
in April 2011, at 170 each and a revenue account credited for the full proceeds.
6. Office equipment purchased January 2, 2011 at a cost of P22, 000, having an estimated salvage
value of P2, 000 and an estimated useful life of 5 years, now is estimated to have a total life of
10 years from January 1, 2011; the estimated salvage value remains unchanged, straight line
method of depreciation is used.
7. Interest deducted in advance on notes payable amounts to P5, 000. The Interest expense
account has a debit balance of P 7, 500. The company failed to record interest deducted in
advance at the end of 2010, P3, 000; and at the end of 2011, P3, 100. All original entries were
made to the Interest Expense Account.
8. Merchandise in transit, December 31, 2012, FOB Shipping Point of P 15, 000 was not included in
the inventory as of December 31, 2012, but was recorded in the purchase account in 2012.
9. Merchandise costing P 6, 000 was included in the inventory as of December 31, 2011 but was
not entered in the purchase account until January 10, 2012.

REQUIRED:
A. Prepare all correcting and adjusting entries called for by the given information. Disregard
effects of corrections on Income Tax.
B. What is the total adjustment to the Retained Earnings Account?



SOLUTION:
ENTRY MADE CORRECTING ENTRY ADJUSTED JOURNAL ENTRY
1. 1.
2. 2010
No Entry



2011
No Entry

No Entry



2012
No Entry

No Entry


Supplies 450
Supplies Expense 450



Supplies 450
Supplies Expense 450
Supplies 9,000
Supplies Expense 9,000



Supplies 9,000
Supplies Expense 9,000
Supplies 14,500
Supplies Expense 14,500





Supplies 450
Supplies Expense 450



Retained Earnings 450
Supplies 450
Supplies Expense 9,000
Retained Earnings 9,000



Supplies 9,000
Supplies Expense 9,000
Supplies 14,500
Supplies Expense 14,500

2. Salaries expense 2,400
Retained earnings 7,300
Accrued Salaries
Payable 9,700
3.
Salaries Expense/
Advances from
Employees 6,500
Cash 6, 500


Salaries Expense 6,500
Miscellaneous
Income 6,500

Cash 6,500
Miscellaneous
Income 6,500
4.
2011
No Entry

2012
Purchases 8,000
Cash 8,000


Purchases 8,000
Accounts Payable 8,000

Accounts Payable 8,000
Cash 8,000


Retained Earnings 8,000
Accounts Payable 8,000

Accounts Payable 8,000
Cash 8,000
6.
2011
Depreciation Expense 4,000
Accumulated
Depreciation 4,000
2012
Depreciation Expense 4,000


Depreciation Expense 4,000
Accumulated
Depreciation 4,000

Depreciation Expense 4,000


Depreciation Expense 4,000
Accumulated
Depreciation 4,000

Depreciation Expense 4,000
Accumulated
Depreciation 4,000

Depreciation Expense 1,778
Accumulated
Depreciation 1,778

2013
Depreciation Expense 1,500
Accumulated
Depreciation 1,500


Accumulated
Depreciation 4,000

Depreciation Expense 1,778
Accumulated
Depreciation 1,778


Depreciation Expense 1,500
Accumulated
Depreciation 1,500

Accumulated
Depreciation 4,000

Depreciation Expense 1,778
Accumulated
Depreciation 1,778


Depreciation Expense 1,500
Accumulated
Depreciation 1,500

7.
2010
No entry

2011
No Entry

No Entry

2012
No Entry

No Entry


Prepaid Interest 3,000
Interest Expense 3,000

Interest Expense 3,000
Prepaid Interest 3,000
Prepaid Interest 3,100
Interest Expense 3,100

Interest Expense 3,100
Prepaid Interest 3,100
Prepaid Interest 5,000
Interest Expense 5,000



Prepaid Interest 3,000
Retained Earnings 3,000

Retained Earnings 3,000
Retained Earnings 3,000
Prepaid Interest 3,100
Retained Earnings 3,100

Interest Expense 3,100
Prepaid Interest 3,100
Prepaid Interest 5,000
Interest Expense 5,000


8. Inventory 15,000
Cost of Sales 15,000
9.
2011
No Entry

2012
Purchases 6,000
Cash 6,000


Purchases 6,000
Accounts Payable 6,000

Accounts Payable 6,000
Cash 6,000


Retained Earnings 6,000
Accounts Payable 6,000

Accounts Payable 6,000
Purchases 6,000

ADJUSTED RETAINED EARNINGS:
(9,000)--------1
7, 300----------2
8,000-----------4
3,000-----------5
(3,100)---------7
6,000-----------9
P12, 200 (balance adjusted)

AUDIT FINDINGS:
















































PROBLEM 5
PATRIOT Co.s net income for 2009, 2010, and 2011 were P100, 000, P145, 000 and P185, 000;
respectively. The following items were not handled properly.
a. Rent of P6, 500 for 2012 was received from a lessee on December 23, 2011, and recorded as
outright income in 2011.
b. Salaries payable at the end of the following years were omitted;
December 31, 2008 2,500
December 31, 2009 5, 500
December 31, 2010 7, 500
December 31, 2011 4, 700
c. The following unused office supplies were omitted in the accounting records:
December 31, 2008 3,500
December 31, 2009 6,500
December 31, 2010 3, 700
December 31, 2011 7,100
d. On January 1, 2009, the company completed major repairs on the companys machinery and
equipment totalling P220, 000, which was expensed outright. The said equipment is 5 years old
as of January 1, 2009. As of December 31, 2011, the equipment had an original cost of P500, 00
and a carrying value of P 250, 000.

REQUIRED:
1. The correct 2011 depreciation expense is?
2. The correct 2009 net income is?
3. The correct 2010 net income is?
4. The correct 2011 net income is?
5. The effect of the above errors on the 2011 beginning retained earnings is?
6. The effect of the above errors on 2011 working capital is?
7. The effect of the 2009 errors on 2011 working capital is?
8. The effect of the 2010 errors on 2011 net income is?

SOLUTION:
1. Correct 2011 depreciation expense
Depreciation expense-Unadjusted (500, 000/16 years) 31, 250
Additional Depreciation (220, 000/11 years) 20,000
2011 Correct Depreciation Expense P51, 250

2009 2010 2011 Retained
Earnings
Beginning
2011
Working
Capital 2011
Net income P 100, 000 P 145, 000 P185, 000
Rent Income
received on
2011


(6, 500)


(6, 500)
Salaries
Payable- not
recorded
2008
2009
2010
2011



2,500
(5,500)




5, 500
(7, 500)





7, 500
(4,700)






(7, 500)







(4, 700)
Unused
Supplies
2008
2009
2010
2011


(3, 500)
6, 500



(6, 500)
3, 700




(3, 700)
7, 100




(3, 700)





7, 100
Repairs-
expensed-
should be
capitalized



220,000



220,000

Depreciation-
Additional

(20,000)

(20,000)

(20,000)

(20,000)

Net Income
Adjusted
Effect on
2011-
Retained
Earnings,
beginning and
Working
Capital

100,000
(2)

120, 200
(3)

164, 700
(4)








196, 200
(5)








4, 100
(6)








6. Accrued Salaries Payable
2008 CB on 2009 2,500
2009 error (5, 500)
Overstatement of Accrued Salaries Payable (3, 000)
Unused Office Supplies
2008 effect on 2009-CB (3, 500)
2009 error 6, 500
Understatement of Unused office Supplies 3,000
Total effect of 2009 errors on 2011 Working Capital 0

7. Effect of 2010 errors on 2011 Net Income
2010 Accrued Salaries Payable (7, 500)
2011 Unused Office Supplies 3,700
Total effect of 2010 errors on 2011 Net Income 3, 800

AUDIT FINDINGS:












PROBLEM 6
You were engaged by PUFFER INC. to audit its financial statements for the first time. In examining the
companys books, you discovered that certain adjustments had been overlooked at the end of 2011 and
2012. Moreover, you also discovered that other items had been erroneously recorded. The said
omissions and other failures for each year are noted below:
2011 2012
Prepaid Insurance 256, 000 205,000
Accrued Salaries and Wages 582, 400 520,000
Accrued Interest Income 172, 800 142, 000
Advances from Customers 313, 600 374, 000
Capital Expenditures charged as repairs expense 376,000 348, 000

Audit notes:
a. Collections from customers had been recorded as sales but should have been recognized as
advances from customers because goods were not shipped until the following year.
b. Capital expenditures had been recorded as repairs but should have been charged to the
Machinery Account; the depreciation rate is 10% per year, but depreciation in the year of
expenditure is to be recognized at 5%.

REQUIRED:
a. The total effect of the errors on the 2012 net income.
b. The total effect of the errors on the companys working capital as of December 31, 2012.
c. If remained unadjusted, the effect of the errors to the companys December 31, 2012
Accumulated Profits.

SOLUTION:
2011 2012 Working Capital-
2012
Retained Earnings-
2012
Prepaid Insurance
2011
2012

256,000

(256,000)
205,200


205,200


205,200
Accrued Salaries
and Wages
2011
2012

(582, 400)

582,400
(520,000)


(520,000)


(520,000)
Accrued Interest
Income
2011
2012


172, 800


(172,800)
142,000



142,000



142,000
Advances from
Customers
2011
2012


(313, 600)


313,600
(374,000)



(374,000)



(374,000)
Capital
Expenditures
2011
2012


376,000



348,000


376,000
348,000
Depreciation
Expense
2011(376,000X5%)
2012(376,000x10%)



(18,800)



(37,600)
(17, 400)


(18,800)
(37,600)
(17, 400)
Total effects of
errors
(110,000)
overstated
212,400
understated
546,800
overstatement
103,400
understated

AUDIT FINDINGS:












PROBLEM 7
Net income for IBM Co, for the year 2011 and 2012 is shown below. An audit disclosed the following
information:
2011 2012
Net Income P24, 650 P31, 250
a. Inventory understatement at year-end 2,500
b. Typewriter purchased at year-end
Charged to expense (10 year life) 4,000
c. Merchandise purchased not recorded as
Liability but included in the inventory 5,000
d. Unearned rent taken up as income 1,800
e. Unrecorded accrued taxes 3,000

REQUIRED:
1. The correct net income for 2011.
2. The correct net income for 2012.
3. The effect on the above errors to the 2012 beginning retained earnings.
4. The effect of the above errors to the 2012 working capital.
5. The effect of the 2011 errors to 2012 net income.

SOLUTION:
Net Income 2012
2011 2012 Working
Capital
Retained
Earnings,
Beginning
2011 Errors
Net Income
Net Income 24, 650 31, 250
a.
Ending
Inventory-
understated



2,500



2,500



-



(2,500)
b.
Purchase of
typewriter
Depreciation-
10 years


4,000


-

(400)


-

-


4,000

-


-

400
c.
Unrecorded
merchandise


(5,000)


5,000


5,000


(5,000)


(5,000)
d.
Unearned
rent


(1,800)


(1,800)


-


1,800
e.
Unrecorded
accrued taxes


(3,000)


(3,000)


-


3,000
Total P23,650 P33,550 P2,700 P(1,000) P(2,300)

AUDIT FINDINGS:


















PROBLEM 8
Vayne Companys December 31, year end financial statements contained the following errors:
December 21, 2011 December 31, 2012
Ending Inventory 2,000 understated 1, 800 overstated
Depreciation Expense 400 understated
Insurance premium of P1, 500 was paid in 2011 covering the years 2011, 2012 and 2013 and charged to
insurance expense. In addition, on December 31, 2012, a fully depreciated machinery was sold for 3,200
cash, but the sale was not recorded until 2012. There were no other errors during 2011 and 2012 and no
corrections have been made for any errors. Ignore income tax considerations.
REQUIRED:
A. Total effect of the errors on the 2012 net income.
B. The total effect of the errors on the amount of Vaynes working capital at December 31, 2012.
C. The total effect of the errors on the balance of Vaynes retained earnings at December 31, 2012.

SOLUTION:
Net Income 2012
2011 2012 Working Capital Retained Earnings
2011 error ending
inventory-
understated


2,000


(2,000)

2012 error ending
inventory-
overstated


(1,800)


(1,800)


(1,800)
2011 Depreciation
Expense-
understated


(400)


(400)
Insurance expense 1,000 (500)
Prepaid Insurance (500) (500)
Gain on sale 3,200 3,200 3,200
Total effect 20,000
understated
(1,100)
overstated
1,900
understated
1,500
understated

AUDIT FINDINGS:



























PROBLEM 9
FEG Corporation is negotiating a loan for expansion. Its book s had never been audited and the bank
requested an audit. FEG then prepared the following comparative financial statements for the years
ended December 31, 2011 and 2010:
FEG Corporation
BALANCE SHEET
As of December 31
2011 2010
Assets
Current Assets
Cash 163,000 82,000
Accounts Receivable 392,000 296,000
Allowance for uncollectible accounts (37,000) (18,000)
Marketable securities, at cost 78,000 78,000
Merchandise Inventory 207,000 202,000
Total Current Assets 803,000 640,000

Fixed Assets
Property, plant and equipment 167,000 169,500
Accumulated Depreciation (121,600) (104,600)
Total Fixed Assets 45,400 63,100
Total Assets 848,400 703,100

Liabilities and Shareholders Equity
Liabilities
Accounts Payable 121,400 196,100

Shareholders Equity
Ordinary Shares (P10 par value, 50,000
Shares authorized, 20,000 shares issued and
Outstanding) 260,000 260,000
Retained Earnings 467,000 247,000
Total Shareholders Equity 727,000 507,000
Total Liabilities and Shareholders Equity 848,400 703,100


FEG Corporation
INCOME STATEMENT
For the years ended December 31
2011 2010
Sales 1,000,000 900,000
Cost of Sales 430,000 395,000
Gross Profit 570,000 505,000
Operating Expenses 210,000 205,000
Administrative Expenses 140,000 105,000
350,000 310,000
Net Income 220,000 195,000

Additional Information:
After auditing FEGs books and records, the auditor wrote down the following information:
1. An analysis of collections and losses on account receivable during the past two years indicates a
drop in anticipated losses due to bad debts. After consultation with management it was
determined that the bad debts loss should be reduced by P10, 000 in the year ended 2011.
2. An analysis of marketable securities revealed that this investment portfolio consisted entirely of
short-term available for sale investments in marketable equity securities that were acquired in
2010. The total market valuation for these investments as of the end of each year was as
follows:
December 31, 2010 81,000
December 31, 2011 62,000
3. The merchandise inventory at December 31, 2010 was overstated by P4,000 and the
merchandise inventory at December 31, 2011, was overstated by P6, 100.
4. On January 2, 2010, equipment costing P12,000 (estimated useful life of 10 years and residual
value of P1,000) was incorrectly charged to operating expenses. FEG records depreciation on the
straight-line method. In 2011 fully depreciated equipment (with no residual value) that originally
cost P17, 500 was sold as scrap for P2, 500. FEG credited the proceeds of P2, 500 to property
and equipment.
5. An analysis of 2010 operating expenses revealed that FEG charged to expense a three year
insurance premium of P2, 700 on January 15, 2010.

REQUIRED:
A. Prepare the journal entries to correct he books at December 31, 2011. (Assuming the books
have not been closed).
B. Assuming that any adjustments will be reported on comparative statements for the two years,
prepare a schedule showing the corrected net income for the years ended December 31, 2011
and 2010.

SOLUTION:
A. ADJUSTING JOURNAL ENTRIES
1. Allowance for Doubtful Accounts 10,000
Bad Debts Expense 10,000
2. Unrealized Holding Loss-OCI 16,000
Available for Sale 16,000
3. Retained Earnings, beginning 4,000
Cost of Sales 2,100
Inventory 6,100
4. Accumulated Depreciation 15,300
Depreciation Expense 1,100
Property and Equipment 3,000
Retained Earnings 10,900
Gain 2,500


5. Prepaid Insurance 900
Insurance Expense 900
Retained Earnings 1,800
B. SCHEDULE

2011 2010
Unadjusted Balances 220,000 195,000
1. Allowance for Doubtful Accounts 10,000
3. Merchandise Inventory-overstated 4,000 (4,000)
Merchandise Inventory-overstated (6,100)
4. Equipment incorrectly charged to operating 12,000
Expenses (1,100) (1,100)
5.3 year Insurance Premium charged 1,800
To operating expense (900)
Adjusted Balances-Net Income P228,400 P203,700

Additional Correction (Reclassifying Entry)
Ordinary Shares 60,000
Share Premium 60,000


AUDIT FINDINGS: