APPLIED AUDITING

CORRECTION OF ERRORS

EXERCISE 1

1. The company failed to reocord purchases of merchandise on account of P25,000 at the end of 2017
2017 2018

A Purchases for the year

B Accounts Payable at the end of the year

C Net Income for the year

d Retained Earnings at year-end before closing

e Retained Earnings at year-end after closing

2. Sale on merchandise of account on December 30, 2017 amounting to P 69,000 was not recorded until the
customer paid his account in January 2018.
2017 2018

A Sales for the year

B Accounts Receivable at the end of the year

c Net Income for the year

d Retained Earnings at year-end before closing

e Retained Earnings at year-end after closing

3. The company paid one-year insurance premium of P 54,000 on April 1, 2017. The entire amount was debited to
expense account and no adjustment was made at the end of 2017.
2017 2018

A Expense for the year

B Prepaid Insurance at the end of the year

c Net Income for the year

d Retained Earnings at year-end before closing

e Retained Earnings at year-end after closing

4. The depreciation expense in 2017 was overstated by P 69,000

2017 2018

A Expense for the year

b Accumulated Depreciation at the end of the year

c Net Income for the year

d Retained Earnings at year-end before closing

e Retained Earnings at year-end after closing

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APPLIED AUDITING

5. On December 31, 2017, the Company acquired a parcel of land and a building at a total cost of P 690,000. The
entire amount paid was debited to the land account. A reasonable estimate of the cost that should have been
allocated to the building was P 390,000 with estimated useful life of 20 years.
2017 2018

a Land at the end of the year

b Building at the end of the year

c Net Income for the year

d Retained Earnings at year-end before closing

e Retained Earnings at year-end after closing

EXERCISE 2

2017 2018
Net Income

Net Income
Liabilities

Liabilities
Revenue

Revenue
Expense

Expense
Capital

Capital
Assets

Assets
Failure to record
prepaid rent
at the end of 2017
Understatement of
2017 ending
inventory

Failure to record
merchandise
purchase on account
at the end of 2017

Failure to record
accrued interest on
notes payable at the
end of 2017
Failure to record
amortization of
patent

Failure to record sale

of merchandise on
account at the end
of 2017
Failure to record bad
debt expense at the
end of 2017

Failure to recognize
unearned rent at the
end of 2017
Failure to take up
prepaid insurance at
the end of 2017

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APPLIED AUDITING

EXERCISE 3

You are examining the financial statements of DBA Corporation whose fiscal year ends on December 31. DBA
Corporation uses the physical inventory system of accounting for inventory. In the course of your examination you
discover the errors below.

A. The inventory at December 31, 2017 was understated as a result of errors in the physical count.
B. Goods received in December 2017 were recorded as purchase when paid for in 2018. The goods were included
in the 2017 ending inventory.
C. Goods received in December 2017 were recorded as purchases when paid in 2018. The goods were excluded
from the 2017 ending inventory
D. 2017 sales were recorded in 2018; goods were excluded from the 2017 ending inventory.
E. 2017 sales were recorded in the 2018; goods were included from the 2017 ending inventory.

A B C
Income Statement 2017
Purchases ______ ______ ______

Ending Inventory ______ ______ ______

Cost of Sales ______ ______ ______

Net Income ______ ______ ______

Balance Sheet December 31, 2017

Inventory ______ ______ ______

Accounts Payable ______ ______ ______

Retained Earnings, before closing ______ ______ ______

Retained Earnings, after closing ______ ______ ______

Income Statement 2018

Beginning Inventory ______ ______ ______

Purchases ______ ______ ______

Ending Inventory ______ ______ ______

Cost of Sales ______ ______ ______

Net Income ______ ______ ______

Balance Sheet 2018

Retained Earnings, before closing ______ ______ ______

Retained Earnings, after closing ______ ______ ______

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APPLIED AUDITING

D E
Income Statement 2017
Sales ______ ______

Ending Inventory ______ ______

Cost of Sales ______ ______

Net Income ______ ______

Balance Sheet December 31, 2017

Inventory ______ ______

Receivable ______ ______

Retained Earnings, before closing ______ ______

Retained Earnings, after closing ______ ______

Income Statement 2018

Sales

Beginning Inventory ______ ______

Ending Inventory ______ ______

Cost of Sales ______ ______

Net Income ______ ______

Balance Sheet 2018

Retained Earnings, before closing ______ ______

Retained Earnings, after closing ______ ______

EXERCISE 4

The Income Statement of Walang Forever Company for the years ended December 2016, 2017 and 2018 indicate the
following income; 2016 - P 120,000 2017 – P 185,000 2018 – P 150,000

An examination of the accounting records for these years indicates that several errors were made in arriving at the net
income amounts reported. The following errors were discovered:

A. Accrued interest on noted receivable were consistently omitted from the records. These amounts omitted were:
2016 – P 10,000 2017 – P 14,000 2018 – P 16,000

B. The merchandise inventory at December 31, 2017 was overstated by P 9,000 as the result of errors made in the
footings and extensions on the inventory sheets.

C. Unexpired insurance of P 12,000 applicable to 2018 was expensed in 2017.

D. Accrued utilities of P 2,000 was not recorded on December 31, 2016.

E. On January 02, 2017, a piece of equipment costing P 40,000 was sold for P 13,000. At the date of sale, the
equipment had an accumulated depreciation of P 24,000. The cash received was recorded as income in 2017. In
addition, depreciation was recorded for this equipment in both 2017 and 2018 at the rate of 10% cost.

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APPLIED AUDITING

1. The adjusted net income in 2016 is:

A. P 128,000
B. P 130,000
C. P 118,000
D. P 132,000

2. The adjusted net income in 2017 is:

A. P 188,000
B. P 186,000
C. P 182,000
D. P 178,000

3. The adjusted net income for 2018 is:

A. P 149,000
B. P 153,000
C. P 151,000
D. P 145,000

EXERCISE 5

You were first appointed Auditor of the Pablo Corporation in 2017. You completed the audit for 2017 and prepared
audited financial statements directly from the audit working papers.

You have returned to make the 2018 audit and discovered that the client’s bookkeeper failed to record the adjusting
entries you made in 2017 audit working papers, which entailed adjustments for the following items;

1. December 31, 2017 inventory was understated by P 5,000.

2. No entry was made for the accrued utilities expense of P 2,500 as of year-end.
3. Motor repairs of P 3,200 were charged to accumulated depreciation during 2015.
4. The company failed to record the provision for uncollectible accounts of P 6,000

Your examination of the 2018 entries in the accounts uncovered the following.

1. An expenditure of P 10,000 for repairs of office equipment had been charged to furniture and equipment. The
company records depreciation at 10% of the December 31 balance of the property and equipment accounts.
2. A 2017 accounts receivable in the amount of P 4,000 had been written off as uncollectible by a charge to
Retained Earnings.
3. Salesmen’s commission includes P 2,400 paid on undelivered customers’ orders.

Additional Data

1. The audited statement of 2017 showed net income of P 250,000.

2. The unadjusted net income for 2018 is P 320,000.

1. The unadjusted net income for the year 2017 is:

A. P 253,500 B. P 256,700 C. P 263,700 D. P 261,700

2. The adjusted net income for the year 2018 is:

A. P 315,900 B. P 308,400 C. P 314,900 D. P 310,900

3. By how much would December 31, 2018 retained earnings be misstated if no adjustments were made for the
above errors.
A. Retained Earnings overstated by P 11,800
B. Retained Earnings overstated by P 12,800
C. Retained Earnings overstated by P 15,800
D. Retained Earnings overstated by P 16,800