AUDITING REVIEW

QUIZ NO. 1

Problem 1

Mari Company is a manufacturer of high-tech industrial parts that was started in 2015
by two talented engineers with little business training. As part of an internal audit, the
following facts were discovered. The audit occurred during 2017 before any adjusting
entries or closing entries were prepared.
a. A five-year casualty insurance policy was purchased at the beginning of 2015 for
Php35,000. The full amount was debited to insurance expense at the time of
payment.
b. On December 31, 2016, merchandise inventory was overstated by Php25,000
due to a mistake in the physical inventory count using the periodic inventory
system.
c. At the end of 2016, the company failed to accrue Php15,500 of sales
commissions earned by employees during 2016. The expense was recorded
when the commissions were paid in early 2017.
d. Bad debts expense is determined each year as 1% of credit sales. Actual
collection experience of recent years indicates that .75% is a better indication of
uncollectible accounts. Management effects the change in 2017. Credit sales for
2017 are Php4,000,000; in 2016 they were Php3,700,000.
e. Additional industrial robots were acquired at the beginning of 2015 and added to
the company’s assembly process. The Php100,000 cost of the equipment was
inadvertently recorded as repair expense. Robots have 10-year useful lives and
no material salvage value. This class of equipment is depreciated by the straight-
line method.
Questions:
1. The entry in 2017 to correct the error described in item (a) should include a
a. Credit to prepaid insurance, Php21,000.
b. Credit to retained earnings, Php21,000.
c. Debit to insurance expense, Php14,000.
d. Credit to insurance expense, Php7,000.
e. No adjusting entry is needed

2. The entry in 2017 to correct the error described in item (b) should include a
a. Debit to inventory, Php25,000
b. Debit to retained earnings, Php25,000
c. Credit to purchases, Php25,000.
d. Credit to Accounts payable, Php25,000.
e. No adjusting entry is needed.

3. The entry in 2017 to correct the error described in item (c) should include a
a. Debit to retained earnings, Php15,500.
b. Credit to retained earnings, Php15,500
c. Debit to commission expense, Php15,500.
d. Credit to accrued commission expense, P15,500
e. No adjusting entry is needed.

4. The entry in 2017 to correct the error described in item (d) should include a
a. Debit to doubtful account expense, Php30,000.
b. Credit to allowance for uncollectible accounts, Php30,000.
c. Debit to retained earnings, Php30,000
d. Credit to allowance for uncollectible accounts, Php40,000
e. No adjusting entry is needed.

5. The entry in 2017 to correct the error described in item (e) should include a
a, Credit to retained earnings, Php70,000
b. Credit to retained earnings, Php80,000
c. Credit to retained earnings, Php100,000.
d. Credit to repair expense, Php100,000.
e. no adjusting entry is needed.
Problem 2

The accounting period of Pau Company ends on December 31. The following
information is available about the company’s cash.

Balance per bank statement, 10/31 Php 18,005

Deposit in transit 1,790
Outstanding checks
No. 143 Php 4,563
No. 144 2,118
----------------- ( 6,681)
---------------------
Correct cash balance Php 13,114
============

Balance per books, 10/31 Php 11,534

Note collected by bank
Principal Php 1,500
Interest 100
----------------- 1,600
Bank service charge ( 20)
---------------------
Correct cash balance Php 13,114
===========

Kapamilya Bank
Date Deposits Withdrawal Balance
10/31 18,005
11/1 1,790 19,795
11/2 4,563 15,232
11/4 5,967 2,118 19,081
11/4 4,567 14,514
11/5 963 13,551
11/6 3,410 16,961
11/7 2,515 14,446
11/11 1,037 15,483
11/13 2,264 13,219
11/18 3,325 9,894
11/24 4,255 964 13,185
11/28 750 CM 619 13,316
11/29 500 CM 3,000 10,816
11/29 35 DM 10,781
11/30 665 NSF 10,116
11/30 22 SC 10,094

General Ledger

Cash
-------------------------------------------------------------------------------------
Balance, Oct 31 11,534 : CDJ 21,575
CRJ 18,269 :
--------------------------------------------------------------------------------------
Balance, Nov 30 8,228 :
======
Cash Receipt Journal (CRJ) Cash Disbursement Journal
Date Amount Date Check No. Amount
11/3 5,967 11/1 145 4,567
11/6 3,410 11/4 146 963
11/11 1,037 11/5 147 2,515
11/23 4,255 11/10 148 3,264

11/30 3,600 11/17 149 3,325

----------- 11/22 150 694
18,269 11/27 151 619
======= 11/28 152 760
11/29 153 3,000
11/30 154 1,868
-----------
21,575
======

Additional information:

a. After preparing the October 31 reconciliation, Pau Company failed to record the
necessary journal entries.
b. The NSF check had been received during November from a customer on
account. Pau Company has not yet recorded the return of the check.
c. The credit memos shown on the bank statement pertain to Php750 of bond
interest that Pau earned during the current accounting period and that the bank
collected on the company’s behalf ( collection not yet recorded on Pau’s books)
and a Php500 collection made for Dar Company that the bank erroneously
credited to Pau’s account.
d. The Php35 debit memo shown on the bank statement pertains to the rental of a
safe deposit box during November.
e. Pau made two errors in recording cash payments during November:
Check No. Actual amount of check Amount recorded
148 Php 2,264 Php 3,264
150 964 694
Check No. 148 was issued to purchase equipment, Check No. 50 was for
advertising expense.

Questions:
6. Deposit in transit on November 30
a. Php2,600 c. Php1,600
b. Php3,600 d. Php 600

7. Outstanding checks on November 30

a. Php2,628 c. Php3,268
b. Php2,826 d. Php1,628

8. Adjusted receipts in November

a. Php17,519 c. Php15,419
b. Php19,019 d. Php21,309

9. Correct cash balance on November 30

a. Php10,094 c. Php11,066
b. Php13,694 d. Php10,566

10. Assuming each reconciling item will be given an adjusting entry, how many
adjusting entries will be made on November 30.
a. 8 c. 6
b. 4 d. 5
Problem 3

You are conducting an audit of Quiapo Company for the year ended December 31,
2017. The internal control procedures surrounding cash transactions were not
adequate. Elsa , the bookkeeper-cashier, handles cash receipts, maintains accounting
records, and prepares the monthly reconciliation of the bank account.

The bookkeeper-cashier prepared the following reconciliation at the end of the year:
Balance per bank statement Php 350,000
Add: Deposit in transit Php 175,250
Note collected by
The bank 15,000
-------------------- 190,250
---------------------
Balance 540,250
Less: Outstanding checks 246,750
---------------------
Balance per general ledger Php 293,500
============

In the process of your audit, you gathered the following:

a. At December 31, 2017, the bank statement and the general ledger showed
balances of Php350,000 and Php293,500, respectively.
b. The cut-off bank statement showed a bank charge on January 2, 2018 for
Php30,000 representing a correction of an erroneous bank credit.
c. Included in the list of the outstanding checks were the following:
 A check payable to a supplier, dated December 29, 2017, in the amount of
Php14,750 released on January 5, 2018.
 A check representing advance payment to a supplier in the amount of
Php37,210, the date of which is January 4, 2018 and released in December
2017.
d. On December 31, 2017, the company received and recorded customer’s
postdated check amounting to Php50,000.

Questions:

11. The adjusted deposit in transit as at December 31, 2017

a. Php175,250 c. Php225,250
b. Php125,250 d. Php125,000

12. The adjusted outstanding checks as at December 31, 2017

a. Php298,710 c. Php209,540
b. Php232,000 d. Php194,790

13. The adjusted cash to be presented as at December 31, 2017

a. Php235,460 c. Php265,460
b. Php250,460 d. Php310,460

14. The cash shortage in 2017

a. Php45,000 c. Php60,000
b. Php58,040 d. Php8,040

15. The net adjustment to the cash account in 2017

a. Php43,040 c. Php58,040
b. Php60,000 d. Php45,000