WESLEYAN UNIVERSITY – PHILIPPINES

COLLEGE OF BUSINESS AND ACCOUNTANCY

Mabini Extension, Cabanatuan City

AUDITING PROBLEMS 1
Prelim Examination

PROBLEM 1:
The “CASH” account of TEDDIE SALAZAR CORPORATION’S ledger on December 31,
2019 showed the following:

a. Petty cash fund (including P7,500 unreplenished

voucher of which P2,400 is dated January 3, 2020) P 15,000
b. Redemption Fund Account – PNB 500,000
c. Traveler’s check 100,000
d. Money order 10,000
e. Treasury bill, purchased December 1, 2019 (due on Feb. 1, 2020) 50,000
f. Time deposit due on March 31, 2020 50,000
g. 180-day Treasury bill, due March 15, 2020 120,000
h. Note receivable in the possession of a collecting agency 20,000
i. PNB – Checking Account #211-009-091 325,900
j. Cash on hand, including customer postdated check of P15,000 23,000
k. Savings deposit, earmarked for acquisition of equipment 210,000
l. A check payable to FRODO MY LOVE Incorporated, dated
January 5, 2020, that was included in the December 31
PNB Checking Account #211-009-091 50,000
m. Bond Sinking Fund (used to finance the maturing
long-term obligation on March 31, 2020) 150,000
n. Overdraft in PNB Checking Account #211-099-085 ( 50,000)
o. Check #801 in payment to Accounts Payable, dated Dec. 31, 2019
not mailed until January 5, 2020 20,000
p. Advances to Officers/Employees for Seminars (no liquidation is
required) 80,000
q. Money market placement (due June 30, 2020) 600,000
r. Listed stock held as temporary investment 100,000
s. Check #789 in payment to Suppliers, dated January 5, 2020 and
recorded December 31, 2019. 35,000
t. Customers’ certified checks 10,000
u. Pension Fund 150,000
TOTAL 2,568,900

Requirements:
1. TEDDIE SALAZAR CORPORATION’S Cash and cash equivalent is over/understated
by: Overstated by P1,950,100
2. TEDDIE SALAZAR CORPORATION’S adjusted cash and cash equivalents balance
is: P 618,800

Solution

a. Operating expenses 5,100

Cash 5,100
b. Investment 500,000
Cash 500,000
c. No adjustment
d. No adjustment
e. No adjustment
f. No adjustment
g. Short-term investment 120,000
Cash 120,000
h. Notes receivable 20,000
Cash 20,000
i. No adjustment
j. Accounts receivable 15,000
Cash 15,000
k. Cash – restricted 210,000
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Cash 210,000
l. No adjustment
m. Investment – current 150,000
Cash 150,000
n. No adjustment
o. No adjustment
p. Operating expenses 80,000
Cash 80,000
q. Short-term investment 600,000
Cash 600,000
r. Short-term investment 100,000
Cash 100,000
s. No adjustment
t. No adjustment
u. Investment 150,000
Cash 150,000

PROBLEM 2:
Based on your preliminary understanding of internal control over BAKIT PARANG
KASALANAN KO CORP.’S cash account, you have ascertained that internal
controls over cash is weak thus you have placed the control risk assessment
at the maximum level. Consequently, you have planned to render an extensive
substantive test procedure to audit its cash balance.

The November bank statement balance was at P1,245,900. The statement also
revealed that a P450,000 note payable of BAKIT PARANG KASALANAN KO CORP. paid
by the bank in November in behalf of the company. Interest paid on the same
note was P45,000. Bank loan proceeds amounting to P600,000 in November also
appeared in the November bank statement. These were recorded by the company
in its cash records in December. A bank debit amounting to P91,000 was
charged by the bank to the company in error. This was immediately corrected
by the bank in December. The November deposits in transit was at P298,500
while P521,800 disbursement checks remained outstanding as at November 30.

Total bank credits for December amounted to P5,235,600 while total bank
debits for December was at P4,865,300. Total collections per book was at
P6,130,500 while total disbursement was at P4,976,800. Cash balance per books
as of December 31, was at P2,162,300.

The December bank statement included bank debits for bank loan payment
amounting to P120,000 and loan interest at P12,500. A customer NSF check
amounting to P122,000 also appeared as a December bank debit. The check was
cleared with the customer and was redeposited to the bank the following
month.

A December disbursement check amounting to P152,000 was erroneously recorded

by the company as P125,000. The company has made no correction yet for this
check. Another December disbursement check amounting to P159,000 was recorded
by the company as P195,000. This was discovered and corrected immediately in
December.

Requirements:
3. What is the correct cash in bank balance as of November 30? P1,113,600
4. What is the correct deposits in transit as of December 31? P684,400
5. What is the correct outstanding checks as of December 31? P383,800
6. What is the correct cash in bank balance as of December 31? P1,880,800

AUDITING PROBLEMS I – PRELIM EXAMINATION

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PROBLEM 3:
In your year-end audit of REBREB CORPORATION, the cashier showed a cash
accountability of P1,100,000 as at December 31, 2019. The following
transactions were extracted in the books of the company, in summary form:

Accounts receivable, beginning P 275,000

Accounts receivable, end 385,000
Sales (80% on credit) 1,850,000
Accounts written-off 25,000
Recovery of accounts written-off, included
in the collection of account receivable 15,000
Depreciation of fixed assets 150,000
Inventory, end 185,000
Inventory, beg 203,000
Cost of sales 960,000
Income tax accrued 18,500
Payment of bank loan 200,000
Subscription receivable 250,000
Subscribed capital stock 950,000
Purchases of fixed assets 320,000
Proceeds from short-term bank loan 300,000
Accounts payable, end 425,000
Accounts payable, beg. 200,000

Requirements:
7. The correct cashier’s accountability at December 31, 2019 is: P 1,493,000
8. REBREB CORPORATION’S cash account is over/understated by: Understated by P
393,000
Solution

Proceeds from collection of accounts receivable 1,360,000 *

Proceeds from cash sales 370,000
Proceeds from bank loan 300,000
Proceeds from issuance of capital stock (P950,000 – P250,000) 700,000
Payment of accounts payable ( 717,000) **
Payment of short-term bank loan ( 200,000)
Purchase of fixed assets ( 320,000)
Total Accountability 1,493,000
Total Cash 1,100,000
Cash shortage 393,000

* Accounts Receivable
Beg. bal 275,000 Collection 1,360,000 squeeze figure
Cr. Sales 1,480,000 Write-off 25,000
Recovery 15,000 ________
1,770,000 1,385,000
End bal 385,000

** Accounts payable *** Beg. Inv. 203,000

Payment 717,000 Beg. bal. 200,000 Purchases 942,000
_______ Purchases 942,000 *** TGAS 1,145,000
717,000 1,142,000 End inv. 185,000
End bal. 425,000 COS 960,000

PROBLEM 4:
The income statement and a schedule reconciling cash flows from operating
activities to net income are provided below (P in 000s) for ALEX - THE BLACK
SHEEP CORP.

ALEX - THE BLACK SHEEP CORP.

Income Statements
For the year ended Dec. 31, 2019

Sales 305
Cost of goods sold 185
Gross profit 120
Salaries expense 41
Insurance expense 19
Depreciation expenses 11

AUDITING PROBLEMS I – PRELIM EXAMINATION

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Loss on sale of land 5 76
Income before tax 44
Income tax expense 22
Net Income 22

ALEX - THE BLACK SHEEP CORP.

Income Statements
For the year ended Dec. 31, 2019

Net income 22
Adjustments for Noncash effects:
Depreciation expense 11
Loss on sale of land 5
Decrease in accounts receivable 6
Increase in inventory ( 13)
Decrease in accounts payable ( 8)
Increase in salaries payable 5
Decrease in prepaid insurance 9
Increase in income tax payable 20
Net cash flows from operation 57
Questions:
9. The cash received from customer during the reporting period is: P 311
10. The cash paid to suppliers of goods during the reporting period is: P
206
11. The cash paid to employees during the reporting period is: P 36
12. The cash paid for insurance during the reporting period is:P 10
13. The cash paid for income taxes during the reporting period is: P 2

Solution –
* - assumed amount
Accounts Receivable___ Accounts payable___
beg. bal. 10* collection 311 (squeezed figure) payment 206 beg. bal. 10 *
Sales 305 ___ (squeezed purchases 198
315 311 figure) ___ ___
end. bal 4 * 206 208
end bal. 2
Inventory – beg 10 *
Purchases 198 (squeezed figure)
TGAS 208
Inventory – end 23 *
COS 185

Salaries insurance Income taxes

Cash paid – squeezed figure 36 10 2
Prepaid expense – beg * 10
Accrued expenses – end * 15 * 30
Prepaid expense – end * ( 1)
Accrued expenses – beg * (10) __ * (10)
Expenses – IS 41 19 22

PROBLEM 5:
You were engaged to audit the financial statements of CHARARAT CORPORATION
for the year ended December 31, 2019. The summary of the company’s cash
transactions are presented below:

Receipts:
Cash Sales 2,000,000
Collections from customers 5,920,000
Collections on notes receivable 980,000
Interest 220,000

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Purchase returns and allowances (total returns
and allowances, P260,000) 60,000
Additional Investment 100,000

Disbursements:
Cash purchases 1,200,000
Sales returns and allowances (total sales returns
and allowances, P280,000) 40,000
Payments on Accounts Payable 3,400,000
Insurance 80,000
Equipment 360,000
Office expenses 2,760,000
Other expenses 260,000
Withdrawals 400,000

Additional information:
Further analysis of the company’s incomplete records revealed the following
changes in the following account balances:

Increase/(Decrease)
Cash 780,000
Accounts Receivable 280,000
Notes Receivable (100,000)
Accrued Interest receivable 80,000
Inventory 320,000
Prepaid insurance (20,000)
Equipment* 80,000
Accounts Payable 200,000
Accrued office expenses 40,000
Unearned interest income (120,000)
*no other transaction affecting the equipment apart from the newly acquired
equipment and depreciation.

Requirements:
14. Gross sales 9,320,000
15. Gross purchases 5,000,000
16. Cost of sales 4,420,000
17. Gross profit 4,620,000
18. Interest income 420,000
19. Depreciation Expense 280,000
20. Net income 1,600,000

PROBLEM 6:
21. Which of the following is not an audit objective related to cash?
a. Reported cash exists
b. The client has ownership rights in the reported cash.
c. Compensating cash balances are reported as other assets.
d. The reported cash balance includes all cash transaction that should
have been recorded.

22. The process of transferring money from one bank account to another and
improperly recording the transaction
a. Lapping
b. Embezzling
c. Kiting
d. Defalcation

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23. An auditor who is engaged to examine the financial statements of a
business enterprise will request a cut-off bank statement primarily in
order to
a. Verify the cash balance reported on the bank confirmation inquiry
form.
b. Verify reconciling items on the client’s bank reconciliation.
c. Detect lapping
d. Detect kiting

24. To gather evidence regarding the balance per bank in a bank

reconciliation, an auditor would examine all of the following except
a. cut-off bank statement
b. bank confirmation
c. year-end bank statement
d. general ledger

25. The auditor should ordinarily mail confirmation requests to all banks
which the client has conducted any business during the year, regardless of
the year-end balance, since
a. The confirmation form also seeks information about indebtedness to
the bank.
b. This procedure will detect kiting activities which would otherwise
not be detected.
c. The mailing confirmation forms to all such banks are required by PSA.
d. Tis procedure relieves the auditor of any responsibility with respect
to non-detection of forged checks.

26. Which of the following sets of information does an auditor usually

confirm on one form?
a. Accounts payable and purchase commitments.
b. Cash in bank and collateral for loans.
c. Inventory on consignments and contingent liabilities.
d. Accounts receivable and accrued interest receivable

27. In October, three months before year-end, the bookkeeper erroneously

recorded the receipt of a one year bank loan with a debit to cash and
credit to miscellaneous revenue. Select the most effective method for
detecting this type of error.
a. Foot the cash receipts journal for October
b. Send a bank confirmation as of the year-end
c. Prepare bank reconciliation as of the year-end.
d. Prepare a bank transfer schedule as of the year-end

28. Which of the following error will be discovered as a result of the

audit of the bank reconciliation?
a. Failure to record bank deposits
b. Billing customer for an improper amount
c. Payment for raw materials that were not received
d. Payment of interest to an affiliate for an amount in excess of the
existing rate

29. An auditor ordinarily sends a standard confirmation request to all

banks with which the client has done business during the year under audit,
regardless of the year-end balance. A purpose of this procedure is to
a. Provide the data necessary to prepare a proof of cash
b. Request that cut-off bank statement and related checks be sent to the
auditor.
c. Detect kiting activities that may otherwise no bet discovered.
d. Seek information about other deposit and loan amounts that come to
the attention of the institution in the process of completing the
confirmation

30. As one of the year-end audit procedures, the auditor instructed the
client’s personnel to prepare a standard bank confirmation request for a
bank account that had been closed during the year. After the client’s

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treasurer had signed the request, it was mailed by the assistant
treasurer. What is the major flaw in this audit procedure?
a. The confirmation request was signed by the treasurer
b. Sending the request was meaningless because the account was closed
before the year-end
c. The request was mailed by assistant treasurer.
d. The CPA did not sign the confirmation request before it was mailed.

31. The auditors’ count of cash should be coordinated with the:

a. Consideration of the internal controls with respect to cash.
b. Close business on the balance sheet date
c. Count of marketable securities
d. Count of inventories

32. The receipt of the completed standard bank confirmation form would
provide the auditor with all of the following items except
a. The balances in all bank accounts with that bank
b. Any restrictions on withdrawals
c. The adjusted cash balances
d. Loan balances with that bank

33. An auditor should trace bank transfers for the last part of the audit
period and first part of the subsequent period to detect whether
a. The cash receipts journal was held open for a few days after year-
end.
b. The last checks recorded before the year-end were actually mailed by
the year-end
c. Cash balances were overstated because of kiting.
d. Any unusual payments to or receipts from related parties occurred.

***The information below was taken from the bank transfer schedule prepared
during the audit of TOTI MARIE Co.’s financial statement for the year ended
December 31, 2019. Assume all checks are dated and issued on December 30,
2019.

Disbursement date Receipt date

Check no. From To Per books Per bank Per books Per bank
101 National Federal Dec. 30 Jan.4 Dec.30 Jan. 3
202 Country State Jan.3 Jan.2 Dec.30 Dec.31
303 Federal American Dec. 31 Jan.3 Jan.2 Jan. 2
404 State Republic Jan. 2 Jan.2 Jan.2 Dec.31

34. Which of the above checks might indicate kiting?

a. #101 and #303 c. #202 and #404
b. #101 and #40 d. #202 and #303

35. A cash shortage may be concealed by transporting funds from one

location to another or by converting negotiable assets to cash. Because of
this, which of the following is vital?
a. simultaneous confirmations
b. simultaneous bank reconciliations
c. simultaneous verifications
d. simultaneous surprise cash count.

36. When negotiable instrument securities are of considerable volume,

planning by the auditor is necessary to guard against
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted.
c. Substitution of securities already counted for other securities which
should be on hand but are not.
d. Substitution of authentic securities with counterfeit securities.

37. A client has large and active investment portfolio that kept in bank
safe deposit box. If the auditor is unable to count the securities at the
balance sheet date, the auditor most likely will

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a. Request the bank to confirm to the auditor the contents of the safe
deposit box at the balance sheet date.
b. Examine supporting evidence for transactions occurring during the
year.
c. Count the securities at the subsequent date and confirm with the bank
whether securities were added or removed since the balance sheet
date.
d. Request the client to have the bank seal the safe deposit until the
auditor can count the securities at a subsequent date.

38. By preparing a four-column reconciliation (“proof of cash”) for the

last month of the year, an auditor will generally be able to detect:
a. An unrecorded check written at the beginning of the month which was
cashed during the period covered by the reconciliation.
b. A cash sale which was not recorded on the books and was stolen by a
bookkeeper
c. An embezzlement of unrecorded cash receipts on receivables before
they had been deposited into the bank.
d. A credit sale which has been recorded twice in the sales journal.
39. Jones embezzled P10, 000 from his company’s account in Bank A. At year-
end he did the shortage by making a deposit on December 31 in Bank A,
drawn on Bank B. He has not recorded the transaction on the books. This an
example of
a. Lapping
b. Effective cash management
c. Kiting
d. Related party transactions

40. Which of the following is most likely to be effective in detecting

kiting?
a. Bank confirmation
b. Bank transfer schedule prepared using only the cash receipts and cash
disbursements journals
c. Comparison of bank cut-off statement to the cash receipts and
disbursements records
d. Receivable confirmation

41. Which of the following manipulations of cash transactions would

overstate the cash balance on the financial statements?
a. Understatement of outstanding checks
b. Overstatement of outstanding checks
c. Understatement of deposit in transit
d. Overstatement of deposit in transit

42. The standard form to confirm account balances with Financial

Institutions includes information on all of the following except:
a. Date due of direct liability
b. The principal amount paid on direct liability
c. Description of collateral for direct liability
d. The interest date of the direct liability

43. Which of the following is one of the better auditing techniques that
might be used by an auditor to detect kiting?
a. Review composition of authenticated deposit slips
b. Review subsequent bank statements and cancelled checks received
directly from the banks
c. Prepare a schedule of bank transfers
d. Prepare year-end bank reconciliations

44. On receiving the bank cut-off statement, the auditor should trace:
a. Deposits in transit on the year-end bank reconciliation to deposits
in the cash receipts journal
b. Checks dated prior to year end to the outstanding checks listed on
the year-end reconciliation

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c. Deposits listed on the cut-off statement to deposits in the cash
receipts journal
d. Checks dated subsequent to year end to the outstanding checks listed
on the year-end bank reconciliation

45. Which of the following cash transfers result in a misstatement of cash

at December 31, 2011?
Disbursement Receipts
Recorded Paid by Recorded Received
in books bank in books by bank
A. 12/31/11 01/04/12 12/31/11 12/31/11
B. 01/04/12 01/05/12 12/31/11 12/31/11
C. 12/31/11 01/05/12 12/31/11 01/04/12
D. 01/04/12 01/11/12 01/04/12 01/04/12

“Adversity causes some men to break; others to break record”

– William Arthur Ward
Prepared by:

Prof. JELWIN DL. BAUTISTA, CPA

Subject Professor

AUDITING PROBLEMS I – PRELIM EXAMINATION