AUDITING PROBLEMS AND AUDITING THEORY

QUIZ BEE

EASY
1. Below are several accounts and balances from the 2011 financial statements for Winthrop, Inc..
CALCULATE the intangible asset section of the companys balance sheet, as well as a partial income
statement in the space provided below using the accounts provided.

Amortization expense $ 32,000

Amortization since inception 89,000
Loss on sale of copyright 12,000
Copyright 120,000
Patents 60,000
Land 80,000
Goodwill 140,000
Research and development costs 160,000

2. On January 1, 2010, Maxon Company purchased an asset for $137,500. For financial accounting purposes,
the asset will be depreciated on a straight-line basis over five years with no residual value at the end of that time.
For tax purposes, the asset will be depreciated as follows: 2010, $45,000; 2011, $35,000; 2012, $25,000; 2013,
$20,000; and 2014, $12,500. Assume that the company is subject to a 35% tax rate.

REQUIRED:
. What is the amount of deferred tax at December 31, 2014?

3.An accountant should not submit unaudited financial statements to

the management of a non-public company unless, at a minimum, the
accountant
a. Assists in adjusting the books of account and prepares
the trial balance.
b. Types or reproduces the financial statements on plain
paper.
c. Complies with the standards applicable to compilation
engagements.
d. Applies analytical procedures to the financial
statements.

4.Under which of the following circumstances would a disclaimer of

opinion not be appropriate?
a. The auditor is engaged after fiscal year-end and is
unable to observe physical inventories or apply
alternative procedures to verify their balances.
b. The auditor is unable to determine the amounts
associated with illegal acts committed by the client's
management.
c. The financial statements fail to contain adequate
disclosure concerning related party transactions.
d. The client refuses to permit its attorney to furnish
information requested in a letter of audit inquiry.
5. On January 1, 2010, Tomas Company purchased machinery costing
$3,000,000. The company uses straight-line depreciation and estimated
the machinery's useful life to be 12 years and its residual value to
be $600,000.
At the end of 2013, the company felt that technological advances had caused an impairment of its
machinery and that its remaining useful life was only four years. The company estimates the machinery
will generate cash inflows of $500,000 and cash outflows of $100,000 each of the next four years. The
company uses a 15% rate of return to evaluate capital budgeting projects.

Required:

. Calculate the amount of any impairment loss to be recognized. The present value
of an annuity is 2.85498; present value of $1 is 0.57175; and future value of
annuity is 4.99338.

AVERAGE

1. Bender Corp.
Bender Corp. sells merchandise only on credit. For the year ended December 31, 2012, the following
data is available:

Sales $2,400,000
Sales returns and allowances 60,000
Accounts Receivable - January 1, 2012 270,000
Allowance for doubtful accounts - January 1, 2012 25,600
Collections during 2012 2,426,300
Accounts written off as uncollectible during 2012 23,700

Allowance for doubtful accounts December 31, 2012 45,600

Refer to the data for Bender Corp.

Determine the balance of Accounts Receivable at December 31, 2012.

2. On January 1, 2012, Ranger Company purchased a piece of equipment with a list price of $80,000.
The following amounts were related to the equipment purchase:

Terms of the purchase were 2/10, net 30. Ranger paid for the purchase on January 8.
Freight costs of $1,250 were incurred.
A state agency required that a pollution control device be installed on the equipment at a cost of
$3,300.
During installation, the equipment was damaged and repair costs of $4,200 were incurred.
Architects fees of $6,100 were paid to redesign the work space to accommodate the new equipment.
Ranger purchased liability insurance to cover possible damage to the asset. The three-year policy cost
$8,700.
Ranger financed the purchase with a bank loan. Interest of $4,600 was paid on the loan during 2012.

REQUIRED:
Determine the acquisition cost of the equipment.
3. Which of the following is a "Type I" subsequent event?
a. The client's Long Island warehouse was destroyed by fire
two weeks following the balance sheet date. The warehouse
and its contents were uninsured and represented 15% of the
client's total assets.
b. As the result of an uninsured flood loss, one of the
client's major customers declared bankruptcy. The client
doesn't expect to recover more than 5% of the outstanding
receivable which accounts for 30% of total accounts
receivable. The flood and bankruptcy declaration both
occurred after the balance date but before the release of
the audit report. No additional provision for loss had
been made as of year end.
c. Three weeks after the balance sheet date, a major strike
was called by the labor union representing 80% of the
client's work force.
d. After the balance sheet date, but prior to release of the
audit report, a product liability judgment against the
client was rendered by a judge. The judgment assessed
damages and fines totaling 30% of audited net income. The
events giving rise to the judgment occurred prior to the
balance sheet date. The client does not plan to appeal the
decision.

4. Although most substantive testing is performed during the final

audit, some substantive tests may be done on the interim audit.
Which of the following statements concerning the timing of
substantive tests is true?
a. When internal control is weak, extensive substantive
testing should be performed during the interim audit.
b. Substantive testing should be performed during the interim
audit only under conditions of excellent internal control.
c. As a general rule, the auditor performs substantive tests
of balances as of the balance sheet date and tests
transactions during the interim audit as well as the final
audit.
d. If internal control is weak, the auditor should confirm
accounts receivable as of a point in time at least one
month prior to the client's fiscal year end.

5.As of December 31, 2010, the Rau Corporation has 10,000 shares of
10% preferred stock issued and outstanding with a total par value of
$250,000. In addition, as of this date, Rau has 75,000 shares of
common stock issued and outstanding with a total par value of
$750,000. Dividends for 2009 and 2010 have not been paid. As of
December 31, 2010, the Rau Corporation declared total cash dividends
of $290,000 to be paid to both the preferred stockholders and the
common stockholders.

Required:

How much cash will be distributed to both the preferred stockholders and the common stockholders,
respectively, on December 31, 2010, under this following situation?

The preferred stock is cumulative and partially participating up to 15% of its par value.
 DIFFICULT
1.. Big Box Inc. and Egg Head Electronics are competitors in the same industry.
The following information was summarized from a recent annual report of Big Box Inc.:
(In millions)
Receivables:
December 31, 2011 $ 1,968
December 31, 2010 642
Revenue for the year ended:
December 31, 2011 46,980
December 31, 2010 40,023

The following information was summarized from a recent annual report of Egg Head Electronics:
(In millions)
Accounts and notes receivable, net
December 31, 2011 $ 246
December 31, 2010 264
Revenues for the year ended:
December 31, 2011 4,335
December 31, 2010 4,251

REQUIRED:
1. Calculate the accounts receivable turnover ratios for Big Box and Egg Head for the most recent year.

2. Yang Corporation
Use the following Assets section of Yang Corporations balance sheets for the years ended December
31, 2011 and 2010 to answer the questions that follow.

YANG CORPORATION
Assets Section of Consolidated Balance Sheets (in millions)
at December 31,
2011 2010
ASSETS
Current Assets
Cash and equivalents $719 $2,610
Short-term investments 0 886
Receivables, less allowances of 6,054 464
$1,889 and
$97
Inventories 1,791 0
Prepaid expenses and other current 1,710 711
assets
Total Current Assets $10,274 $4,671
Noncurrent inventories and film costs 6,853 0
Investments 6,886 3,824
Land and $2,107 $440
buildings
Cable television equipment 9,966 0
Furniture, fixtures, and equipment 4,329 1,297
Property, plant, and equipment $16,402 $1,737
Less: Accumulated depreciation (3,718) (696)
Property, plant, and equipment (net) 12,684 1,041
 Music catalogue, and copyrights 2,927 0
Cable television and sport franchises 27,109 0
Brands and trademarks 10,684 0
Goodwill and other intangibles 128,338 713
Other assets 2,804 578
Total assets $208,559 $10,827

Yang Corporation recorded depreciation expense of $344 million for 2010.

Refer to the information for Yang Corporation.

Required:
Calculate the ratio for Yang for 2011.
. Average age of property, plant, and equipment

12. 3. Overton Industries had the following transactions during the year:
a. Overton purchased inventory on account from a supplier for $12,000. Assume
that Overton uses a periodic inventory system.
b. On May 1, land was purchased for $68,500. A 25% down payment was made,
and an 18-month, 9% note was signed for the remainder.
c. Overton returned $545 worth of inventory purchased in (a), which was found
broken when the inventory was received.
d. Overton paid the balance due on the purchase of inventory.
e. On June 1, Overton signed a one-year, $14,000 note to Central State Bank and
received $12,750.
f. Overton sold 350 gift certificates for $30 each for cash. Sales of gift certificates
are recorded as a liability. At year-end, 40% of the gift certificates had been
redeemed.
g. Sales for the year were $100,000, of which 85% were for cash. State sales tax of
7% applied to all sales must be remitted to the state by January 31.
. What is the total of the current liabilities at the end of the year?

4. Which of the following is not an audit procedure

which the independent auditor would perform with
respect to litigation, claims, and assessments.
a. Inquire of and discuss with management the
policies and procedures adopted for identifying,
evaluating, and accounting for litigation, claims, and
assessments.
b. Obtain from management a description and
evaluation of litigation, claims, and assessments that
existed at the balance sheet date.
c. Obtain assurance from management that it has
disclosed all unasserted claims that the lawyer has
advised are probable of assertion and must be disclosed.
d. Confirm directly with the client's lawyer that
all claims have been recorded in the financial
statements.

5. The most effective means for the auditor to determine whether a

recorded intangible asset possesses the
characteristics of an asset is to
a. Vouch the purchase by reference to underlying
documentation.
b. Inquire as to the status of patent applications.
 c. Evaluate the future revenue-producing capacity of the
intangible asset.
d. Analyze research and development expenditures to
determine that only those expenditures possessing
future economic benefit have been capitalized.

CLINCHER

1.
Focus, Inc.
Balance Sheet Accounts
(all accounts have normal balances)
(in millions)

Dec. 30, 2013 Dec. 31, 2012

Inventories $1,780 $1,649
=====
Total current assets $9,428 $8,625
===== =====
Liabilities in order of significance:
Long-term debt $14,465 $15,001
Other noncurrent liabilities 4,421 3,148
Deferred income taxes 3,504 3,543
Accounts payable 2,556 2,468
Other current liabilities 2,066 1,738
Accrued salaries and wages 1,538 1,082
Short-term borrowings 1,200 1,126
Accrued advertising expense 793 928
Income taxes payable 658 1,142
Refer to the account information for Focus, Inc.
REQUIRED:
Compute the total current liabilities for the years 2013 and 2012.

2.A cereal company includes one premium coupon in every cereal box. Upon returning 10 such
coupons to the company, a customer will be sent a free cereal bowl. In a recent year, the company sold
200,000 boxes of cereal for $1 a box. It is estimated that 20% of the coupons will be returned. If the
cereal bowls cost the company $3 each, what amount of liability for premium redemptions must be
recorded by the company?

3. In testing accounts receivable, an auditor sends out

positive confirmation requests to 100 randomly selected
customers. A customer returns the confirmation indicating
that the balance is correct when, in fact, the balance is
overstated. This is an example of
a. Tainting.
b. Sampling error.
c. Standard error.
d. Non-sampling error.

4. An auditor is using the mean-per-unit method of variables

sampling to estimate the correct total value of a group of
inventory items. Based on the sample, the auditor estimates
with precision of +-4% and confidence of 90% that the
correct total is $800,000. This means that:
a. There is a 4% chance that the actual correct total is
less than $720,000 or more than $880,000.
 b. There is a 10% chance that the actual correct total is
less than $768,000 or more than $832,000.
c. The probability that the inventory is not significantly
overstated is between 6% and 14%.
d. The inventory is not likely to be overstated by more than
4.4% ($35,200) nor understated by more than 3.6%($28,800).

5. An auditor who uses statistical sampling for attributes in

testing internal controls should increase the assessed level
of control risk when the
a. Sample occurrence rate is less than the expected
occurrence rate used in planning the sample.
b. Tolerable rate less the allowance for sampling risk
exceeds the sample occurrence rate. c.
Sample occurrence rate plus the allowance for sampling
risk exceeds the tolerable rate.
d. Sample occurrence rate plus the allowance for sampling
risk equals the tolerable rate.

6. An auditor is required to obtain a basic understanding of the

client's internal control to plan the audit. The auditor may
then decide to perform tests of controls on all internal control
procedures
a. That would aid in preventing fraud.
b. Documented in the flowchart.
c. Considered to be weaknesses that might allow errors to
enter the accounting system.
d. Considered to be strengths for which the auditor desires
further reduction in the assessed level of control risk.

7. The auditor's understanding of the client's internal control is

documented in order to substantiate
a. Conformity of the accounting records with generally
accepted accounting principles.
b. Compliance with generally accepted auditing standards.
c. Adherence to requirements of management.
d. The fairness of the financial statement presentation.

8. To determine whether the client's system of internal control

operated effectively to minimize errors of failure to invoice a
shipment, the auditor would select a sample of transactions from
the population represented by the
a. Customer order file.
b. Bill of lading file.
c. Open invoice file.
d. Sales invoice file.

9. When evaluating a client's system of internal control to

determine whether the necessary procedures are prescribed and
have been implemented satisfactorily, an auditor must
a. Develop questionnaires and checklists.
b. Obtain an understanding of internal control.
c. Perform tests of internal control procedures.
d. Evaluate administrative policies.

10. Of the following internal control policies or procedures, which

would most likely allow for a reduction in the scope of the
auditor's tests of depreciation expense?
 a. Review and approval of the periodic equipment depreciation
entry by a supervisor who does not actively participate in
its preparation.
b. Comparison of equipment account balances for the current
year with the current-year budget and prior-year actual
balances.
c. Review of the miscellaneous income account for salvage
credits and scrap sales of partially depreciated equipment.
d. Authorization of payment of vendors' invoices by a
designated employee who is independent of the equipment
receiving function.

11. Tracing copies of sales invoices to shipping documents will

provide evidence that all
a. Shipments to customers were recorded as receivables.
b. Billed sales were shipped.
c. Debits to the subsidiary accounts receivable ledger are for
sales shipped.
d. Shipments to customers were billed.

12. In assessing control risk, the auditor must, as a minimum

a. Perform tests of all significant controls.
b. Obtain an understanding of the design and
implementation of the client's internal control.
c. Obtain an understanding of the design of the client's
internal control.
d. Obtain an understanding of the design, implementation, and
operating effectiveness of the client's internal control.

13. An independent auditor has concluded that the client's records,

procedures and representations can be relied upon based on tests
made during the year when internal control was found to be
effective. The auditor should test the records, procedures, and
representations again at year-end if
a. Inquiries and observations lead the auditor to believe that
conditions have changed significantly.
b. Comparisons of year-end balances with like balances at
prior dates revealed significant fluctuations.
c. Unusual transactions occurred subsequent to the completion
of the interim audit work.
d. Client records are in a condition that facilitate effective
and efficient testing.

14. An auditor is least likely to further test control procedures by

examining documents with respect to controls relating to
a. Segregation of the functions of recording disbursements and
reconciling the bank account.
b. Comparison of receiving reports and vendors' invoices with
purchase orders.
c. Approval of the purchase and sale of marketable securities.
d. Classification of revenue and expense transactions by
product line.

15. An auditor usually examines receiving reports to support

entries in the
a. Voucher register and sales returns journal.
b. Sales journal and sales returns journal.
c. Voucher register and sales journal.
d. Check register and sales journal.
16. Regardless of whether the auditor decides to test controls for
operating effectiveness, he/she must fully document his or her
understanding of the internal control policies and procedures
obtained through whatever means. Which of the following does
not describe an appropriate means for documenting such
understanding?
a. Internal control flowchart.
b. Internal control implementation.
c. Internal control memorandum.
d. Internal control questionnaire.

17. Which of the following best describes the primary reason for the
auditor's use of flowcharts during an audit engagement?
a. To comply with the requirements of generally accepted
auditing standards.
b. To classify the client's documents and transactions by
major operating functions, e.g., cash receipts, cash
disbursements, etc.
c. To record the auditor's understanding of the client's
internal control policies and procedures.
d. To interpret the operational effectiveness of the client's
existing organizational structure.

FINAL ROUND
1.Marker Corp.
Use the following selected data and additional information from the records of Marker Corp. to answer
the questions that follow.

Balance Sheet Data 2012 2011

Accounts receivable $ 36,000 $ 42,000
Inventories 28,000 25,000
Accounts payable 31,000 35,000
Salaries payable 2,000 1,000
Equipment 60,000 40,000
Accumulated depreciation 12,000 16,000
Bonds payable 50,000 100,000
Common stock 150,000 100,000
Retained earnings 38,000 20,000

Income Statement Data 2012

Net sales $420,00
0
Cost of goods sold 300,000
Operating expenses (excluding
depreciation 84,000
expense)
Net income 30,000
Gain on sale of equipment (included in
net 2,000
income above)

Additional information:

(1) Equipment with a cost of $15,000 and a book value of $3,000 was sold for $5,000
during 2012.

(2) Common stock was issued to retire bonds payable during 2012.
(3) The only items affecting retained earnings in 2012 were net income and dividends
declared and paid.
Review the data for Marker Corp.

REQUIRED:
What is the amount paid for purchases of merchandise during 2012?

2.Selected data from the financial statements of Mission Corporation for the years ended December
31, 2011 and 2012 are presented below.
(In thousands) 2012 2011

Cash and cash equivalents $ ? $ 4,506

Total current assets (except cash) 149,978 132,335
Income taxes paid 2,142 767
Interest paid 5,073 5,597
Net cash provided by operating activities 3,103 5,221
Net cash used by investing activities 2,853 3,278
Net cash provided by financing activities 1,323 6,891
Depreciation and amortization 3,479 2,770
Total stockholders' equity 103,253 94,843
Net income 1,877 1,223

REQUIRED:
What is the amount of cash and cash equivalents at the end of 2012?
3.Fairtime Cruise Lines
Selected data from the financial statements of Fairtime Cruise Lines for the years ended December 31,
2012 and 2011, are presented below. Also, certain assumptions are presented. Use these data and
assumptions to answer the questions that follow.
(In millions) 2012 2011
Property, plant and equipment $11,142.3 $10,868.4
Accumulated depreciation 3,519.0 3,461.0
Investments 375.1 394.4
Long-term debt 1,440.2 1,242.6
Short-term debt 44.0 45.2
Common stock 594.5 567.2
Treasury - common stock (20.6) (20.6)
Reinvested income (retained earnings) 3,522.9 3,425.9
Net income 770.4 712.7

Assumptions:

(1) Cash additions to property, plant, and equipment during 2012 were $550.0. An
additional $86.2 of plant assets were acquired through debt in a noncash
transaction. Depreciation expense for 2012 was $343.3. Gains on disposals of
property, plant and equipment during 2012 were $27.7.

(2) The cash proceeds from the sale of investments in 2012 were $82.7. There was a
$17.8 gain on the sale of the investments.

(3) Proceeds from long-term debt issued during 2012 were $167.7.

(4) The issuance of common stock totaled $28.6 in 2012.

(5) During 2012, $389.4 in cash was used to purchase and retire common stock. A
total of $365.4 of the cost was recorded as an increase to Reinvested Income.

(6) Net income, dividends declared/paid, and the $365.4 amount in (5) were the only
items that affected reinvested income during 2012.
Review the data and assumptions for Fairtime Cruise Lines.
REQUIRED:
(A) What was the cost of the property, plant and equipment which was disposed of during 2012?

ANS:

4. Nickolas Industries invested its excess cash in the following instruments during December 2012:

Certificate of deposit, due January 31, 2013 $ 45,000

Certificate of deposit, due June 30, 2013 95,000
Investment in City of Cleveland bonds, due May 1, 2014 15,000
Investment in Techno Data stock 66,000
Money market fund 125,000
90-day Treasury bills 95,000
Treasury note, due December 1, 2013 200,000

Determine the amount of cash equivalents that should be combined with cash on the companys
balance sheet at December 31, 2012, and for purposes of preparing a statement of cash flows for the
year ended December 31, 2012.

5.The stockholders' equity section of Barker, Inc. is as follows:

Preferred stock, 7%, $10 par, 1,000 shares

authorized, 300 shares issued $ 3,000
Additional paid-in capital--preferred 9,000
Common stock, $1 par value, authorized
15,000 shares, issued 4,000 shares 4,000
Additional paid-in capital--common 20,000
Retained earnings 50,000
Total contributed capital and retained earnings $86,000
Less: Treasury stock (1,000 common shares at
(6,000)
cost )
Total stockholders' equity $80,000
The market price of the stock on December 31, 2012, was $8 per share.

What balance will be in the retained earnings account immediately after the declaration of a 20%
common stock dividend on December 31, 2012?

6. Magenta Magic
Magenta Magic reported inventory on its balance sheet at December 31, 2011 at $32,000. During 2012,
Magenta Magic purchased goods totaling $634,000 on account with terms of 2/10, n/30, FOB shipping
point. Total charges paid by Magenta Magic directly to the freight company were $1,000. At the end of
2012, inventory on hand totaled to $45,000. Net sales for 2012 totaled $1,300,000. Magenta Magic
employs a periodic inventory system.

Refer to the information about Magenta Magic.

How much would Magenta Magic pay its supplier if Magenta Magic paid for one-half of the goods
acquired within the discount period, and the other half after the expiration of the discount period?

7. The following bank reconciliation was prepared by the assistant

controller of Hawkley, Inc., one of your audit clients:

Hawkley, Inc.
First National Bank and Trust
Bank Reconciliation
December 31, 2002

12/31/02 Balance per bank statement $12,000

 Add deposits in transit 23,000
35,000
Deduct outstanding checks:
20803 1,600
21879 450
21883 1,100
21884 7,600
21885 323
11,073
12/31/02 Balance per general ledger $24,927
=======

Additional data:

1. You obtained a cutoff bank statement, dated 1/9/03 directly

from First National Bank and Trust and it revealed the following:

Deposits:

1/2/03 $6,000
1/3/03 4,000
1/4/03 7,000
1/5/03 6,000
1/6/03 8,000
1/9/03 5,000
Checks:
Check. No. Check Date Check Amount
21879 12/29/02 $ 450
21883 12/31/02 1,100
21884 12/31/02 7,600
21885 12/31/02 323
21886 12/31/02 4,557
21887 12/31/02 8,300
21888 1/2/03 1,250

REQUIRED:
Compute the bank overdraft.Haha!

8. Kiting, a type of fraudulent financial reporting used to conceal

bank overdrafts or cash misappropriations, may be detected by an
analysis of .

9.A performs the same function as the bank

reconciliation and, in addition, reconciles the client's recorded
receipts and disbursements with bank statement credits and debits.

10.A bank auditor is interested in estimating the average

account balance of its depositors based on a sample. This
substantive test is an example of
a. Attribute sampling.
b. Discovery sampling.
c. Acceptance sampling.
d. Variables sampling.

11.Which of the following statements most likely represents a

disadvantage for an entity that keeps microcomputer-prepared
data files rather than manually prepared files?
a. It is usually more difficult to detect transposition
errors.
 b. Transactions are usually authorized before they are
executed and recorded.
c. It is usually easier for unauthorized persons to access
and alter the files.
d. Random error associated with processing similar
transactions in different ways is usually greater.

12. The development of constructive suggestions to clients for

improvements in internal accounting control is
a. A requirement of the auditor's study and evaluation of
internal accounting control.
b. A desirable byproduct of an audit engagement.
c. Addressed by the auditor only during a special engagement.
d. As important as establishing a basis for reliance upon the
internal accounting control system.

13. Which of the following statements with respect to the

independent auditor's evaluation of internal control is correct?
a. The auditor should decrease control testing when weaknesses
in cash receipts are mitigated by strong controls in cash
disbursement procedures.
b. The auditor should increase control testing when weaknesses
in billing procedures are mitigated by strong controls in
collection procedures.
c. The auditor generally should not evaluate the overall
effectiveness of internal control, but should separately
evaluate each of the transaction cycles.
d. The auditor should evaluate all internal control
weaknesses before determining the control procedures that
should prevent or detect errors or irregularities.

14. In the case of Fischer v. Kletz (Yale Express), the auditors

were charged with fraud for failing to inform users of
nonexistent accounts receivable. Although the case was settled
out of court, it did encourage the profession to issue a
Statement on Auditing Standards relating to

a. Related party transactions.

b. Auditor responsibility for detecting illegal acts.
c. Audit risk assessment.
d. Subsequent discovery of facts existing at the date of the
audit report.

15. Accounting firms should establish quality control

procedures for professional development in order to provide
reasonable assurance that
a. Persons promoted possess the appropriate
characteristics to perform competently.
b. Personnel will have the knowledge required to fulfill
responsibilities assigned.
c. The extent of supervision and review in a given
instance will be appropriate.
d. Association with a client whose management lacks
integrity will be minimized.

16.Client outsourcing of certain accounting functions, such as

internal auditing, to the national accounting firms may cause
financial statement users to question ___________ _______________.
17.The two factors that contribute to the probability that unaudited
financial statements contain material errors or fraud are
?

18.You are engaged to examine the financial statements of the DDF (DOMINGO DUMA FELLIZAR)
MANUFACTURUNG Co. for the year ended December 31, 2006. The following schedules for property, Plant and
Equipment and related Accumulated depreciation accounts have been prepared by your client. The opening
balances agree with your prior years audit working papers.

DDF MANUFACTURING Co.

Analysis of Property, Plant and
Equipment and Related Accumulated Depreciation Accounts
Year Ended December 31, 2006

Cost

Final Per books

12-31-05 Additions Retirements 12-31-06
Land 422,500 5,000 427,500
Buildings 120,000 17,500 26,000 137,500
Machinery & Equipment 385,000 40,400 26,000 399,400
927,500 62,900 26,000 964,400

Accumulated Depreciation

Buildings 60,000 5,150 - 65,150

Machinery & Equipment 173,250 39,220 - 212,470
232,250 44.370 - 277,620

Further investigation revealed the following:

a. All equipment is depreciated on the straight-line basis (with no salvage value) based on the following
estimated lives: Buildings 25 years, all other items 10 years. The companys policy is to take one
half-years depreciation on all assets addition and disposals during the year.
b. The company entered into a 10-year lease contract for a derrick machine with annual rental of P5,000
payable in advance every April 1. The parties to the contract stipulated that a 30-day written notice is
required to cancel the lease. Estimated useful life is 19 years. The derrick was recorded under the
machinery and equipment at P40,400 and P2,020, applicable to the machine was
c. The company finished construction of a new building wing in June. The lowest construction bid was
P17,500 which was the amount recorded. Company personnel constructed the building at a total cost of
P16,000.
d. P5,000 was paid for the construction of a parking lot which was completed on July 1, 2006. The
expenditure was charged to land.
e. The P26,000 equipment under retirement column represent cash received on October 1, 2006 for a
machinery bought in October 1, 2002 for P48,000. The bookkeeper recorded depreciation expense of
P3,500 on this machine in 2006.
f. Ms. M. Pagpantay, the president donated land and building appraised at P100,000 and P400,000
respectively to the company to be used as plant site. The company began operating the plant on
September 1, 2006. Since no money was involved, the bookkeeper did not make any entry for the
above transaction.

QUESTIONS: In your audit and appraisal of the above data, you are to provide the following:
The book value of the building as of December 31, 2006:?

19.You were able to obtain the following information from your audit of CRUZ2DANAO
Corporations Accounts Receivable for Doubtful accounts:

From the general ledger you noted that the Accounts Receivable has a balance of P848,000 as of
December 31, 2006. Below is a transcript of the Allowance for Doubtful Accounts

Debit Credit Balance

January 1-Balance P20,000
July 31-Write off P16,000 4,000
December 31-Provision P48,000 P52,000

The summary of the subsidiary ledger as of December 31, 2006 was totaled as follows:
 Debit balances:
Under one month P360,000
One to six months 368,000
Over six months 152,000
P880,000

Credit balances:
Dayrit, A P8,000 OK; additional billing in January 2007
Dela Cruz, L 14,000 Should have been credited to Dimaranan
Dela Cruz, M 18,000 Advances on sales contract
P40,000

* Account is one to six months classification

The customers ledger is not in agreement with the accounts receivable control. The client requested
you to adjust the control to the subsidiary ledger after corrections are made.

It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six months are
expected to require a reserve of 2 percent. Accounts over six months are analyzed as follows:

Definitely bad P48,000

Doubtful (estimated to be 50% collectible) 24,000
Apparently good, but slow (estimated to be 90% collectible) 80,000
Total P152,000

QUESTIONS: Considering the above data and the result of the audit, answer the following:

How much is the adjusted balance of the Allowance for Doubtful Accounts as of 12,31.06?

20.The work-in-process inventories of CHAVEZ CORPUZ COMPANY were completely destroyed by

fire on June 1, 2003. Your audit were able to establish physical inventory figures as follows:

January 1, 2003 June 1, 2003

Raw materials P60,000 P120,000
Work-in-process 200,000
Finished goods 280,000 240,000

Sales from January 1 to May 31, were P546,750. Purchases of raw materials were P200,000 and freight on
purchases, P30,000. Direct labor during the period was P160,000. It was agreed with the insurance adjusters
that an average gross profit rate of 35% based on cost be used and that the direct labor cost was 160% of
factory overhead.

QUESTIONS: With the audited given data above, you are to determine:

The value of goods manufactured and completed as of June 1, 2003:

Prepared by: The One Sir Stan

 AUDITING PROBLEMS AND AUDITING THEORY
QUIZ BEE

EASY
1.ANS:
BALANCE SHEET

Intangible Assets:
Copyright $120,000
Patents 60,000
Goodwill 140,000
Total Intangible assets $320,000
Less: Accumulated amortization (89,000)
Total Intangible Assets $231,000

2.ANS: Zero

1. Deferred Tax Liability for 2010 = $6,125 ($45,000 $27,500*) 0.35

2. The amount will be a deferred tax liability.
3. At December 31, 2014, the amount of deferred tax will be $0.
*Depreciation for Financial Accounting = ($137,500 $0) /5years = $27,500
3.
ANSWER: C

4. ANSWER: C

5.ANS:
. Present value of expected net cash flow ($400,000 2.85498) $ 1,141,992
Book value (2,200,000)
Impairment loss recognized $(1,058,008)

AVERAGE

1.ANS:
$160,000
$270,000 (Accounts Receivable at Jan. 1) + $2,400,000 (Sales) - $60,000 (Sales returns &
allowances) - $2,426,300 (Collections) - $23,700 (Accounts written off) = $160,000
 2.ANS:

The acquisition cost of the asset should be computed as follows:

List price $ 80,000

Less: Discount of 2% (1,600)
Freight 1,250
Pollution control device 3,300
Architects fee 6,100
Total acquisition cost $ 89,050

3. ANSWER: D

4. ANSWER: C

5.Answer:

Preferred stockholders:
$25,000 3 years $ 75,000
.05 $250,000 12,500 $ 87,500
Common stockholders:
$750,000 .1 $ 75,000
$750,000 .05 37,500
$290,000 - $75,000 - $12,500 - $75,000 -
$37,500 90,000 $202,500

DIFFICULT

1.ANS:
1. Accounts receivable turnover ratios:

Big Box :
$46,980/[($1,968 + $642)/2] = $46,980/$1,305 = 36 times

Egg Head:
$4,335/[($246 + $264)/2] = $4,335/$255 = 17 times

2. ANS:
B Average Age = Accumulated Depreciation/Depreciation Expense
.
$696/$344 = 2.0 years

12. 3. ANSWER:
3.Sales tax payable $ 7,000.00
Notes payable, due November 1 51,375.00
Notes payable, due June 1 $14,000.00
Less: Discount on notes payable* 520.83 13,479.17
Unearned sales revenue** 6,300.00
Interest payable 3,082.50
Total current liabilities $81,236.67

*$1,250 $729.17 = $520.83

 **$10,500 $4,200 = $6,300

4.
ANSWER: D

5.
ANSWER: C
CLINCHER

1.ANS:
The current liabilities have increased from $8,484 in 2012 to $8,811 in 2013. The percentage change of
current liabilities was: ($8,811 - $8,484)/ $8,484 = .0385 or approximately 3.9% increase

2013: $8,811
$2,556 (Accounts Payable) + $2,066 (Other current liabilities) + $1,538 (Accrued salaries and wages) +
$1,200 (Short-term borrowings) + $793 (Accrued advertising expense) + $658 (Income taxes payable)
= $8,811

2012: $8,484
$2,468 (Accounts Payable) + $1,738 (Other current liabilities) + $1,082 (Accrued salaries and wages) +
$1,126 (Short-term borrowings) + $928 (Accrued advertising expense) + $1,142(Income taxes payable)
= $8,484

2.Answer:
200,000 Boxes x .20 or 20% = 40,000 Coupons; 40,000 Coupons / 10 Coupons per Bowl = 4,000
Bowls; 4,000 Bowls x $3 = $12,000

3. ANSWER: D

4. ANSWER: B

5. ANSWER: C

6. ANSWER: D

7. ANSWER: B

8. ANSWER: B

9. ANSWER: B

10. ANSWER: A

11.ANSWER: B

12.ANSWER: B

13.ANSWER: A

14.ANSWER: A
15.ANSWER: A

16.ANSWER: B

17.ANSWER: C

FINAL ROUND
1.ANS:
$307,000
$300,000 (Cost of goods sold) + $28,000 (Ending Inventories) - $25,000 (Beginning inventories) +
$35,000 (Beginning Accounts payable) - $31,000 (Ending Accounts payable) = $307,000

2.ANS:
Net cash provided by operating activities $3,103
Net cash used by investing activities (2,853)
Net cash used by financing activities 1,323
Net increase in cash $1,573
Cash & cash equivalents--beginning of year 4,506
Cash & cash equivalents--end of year $6,079
3.ANS:
(A) $362.3
$10,868.4 (Property, plant, and equipment - 2011) + $550.0 (Additions during 2012) + $86.2 (Non
cash plant assets acquisitions) - $11,142.3 (Property, plant and equipment - 2012) = $362.3

4.ANS:
Investments made during December 2012 that qualify as cash equivalents at December 31, 2012:

Certificate of deposit, due January 31, 2013 $ 45,000

Money market fund 125,000
90-day Treasury bills 95,000
Cash equivalents at December 31, 2012 $265,000

5.ANSWER:
$50,000 - (20% 4,000 $8) = $43,600

6.ANS:
Payment within discount period: ($634,000 1/2) 98% = $310,660
Payment after discount period: ($634,000 1/2) = $317,000
Total paid = $310,660 + $317,000 = $627,660

7. SOLUTION:

a. Balance per general ledger as presented $24,927

Add (Deduct):
Subtraction error (35,000 - 11,073 = 23,927)(1,000)
Listed deposits in transit representing
2003 cash receipts (17,000)(1)
2002 checks not included in outstanding
list (12,857)(2)
Bank overdraft $ (5,930)
=======
(1) The deposit in transit listed in the 12/31/02 bank
reconciliation, $23,000, is the sum of the first four deposits
appearing on the 1/9/03 cutoff bank statement. Of these four, it is
likely that only the first one for $6,000, dated 1/2/03, represents
the 12/31/02 deposit in transit. The latter three probably represent
2003 cash receipts. Deposits in transit, therefore, are overstated
by $17,000.
(2) Checks 21886 and 21887 are dated 12/31/02 and are therefore most
likely 2002 disbursements. Outstanding checks, therefore, are
understated by the amounts of these two checks, $12,857.

8. ANSWER: INTERBANK TRANSFERS

9. ANSWER: PROOF OF CASH

10.ANSWER: D

11.ANSWER: C

12.ANSWER: B

13.ANSWER: C
14. ANSWER: D

15. ANSWER: B

16.ANSWER: AUDITOR INDEPENDENCE (OR INDEPENDENCE OF THE AUDITOR)

17.ANSWER: INHERENT RISK, CONTROL Risk

18.Answer: 462,533

19.
answer: 30,680

20. answer:. 365,000