CPA REVIEW SCHOOL OF THE PHILIPPINES AP 95 PW

Manila

AUDITING PROBLEMS CPA Review

SITUATIONAL

SITUATION 1

The following accounts were included in the unadjusted trial balance of BUNCHING COMPANY
as of December 31, 2024:

Cash ..................................................................................... P 963,200

Accounts receivable .................................................................2,254,000
Inventory ................................................................................6,050,000
Accounts payable ....................................................................4,201,000
Accrued expenses ..................................................................... 431,000

During your audit, you noted that Bunching Company held its cash books open after year-end.
In addition, your audit revealed the following:

1. Receipts for January 2025 of P654,600 were recorded in the December 2024 cash receipts
book. The receipts of P360,100 represent cash sales and P294,500 represent collections from
customers, net of 5% cash discounts.

2. Accounts payable of P372,400 was paid in January 2025. The payments, on which discounts
of P12,400 were taken, were included in the December 2024 check register.

3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The following

information has been found relating to certain inventory transactions:

a. The invoice for goods costing P175,000 was received and recorded as a purchase on
December 31, 2024. The related goods, shipped FOB destination, were received on
January 4, 2025, and thus were not included in the physical inventory.

b. A P182,000 shipment of goods to a customer on December 30, 2024, terms FOB

destination, are not included in the year-end inventory. The goods cost P130,000 and
were delivered to the customer on January 3, 2025. The sale was properly recorded in
2025.

c. Goods costing P637,500 were shipped on December 31, 2024, and were delivered to the
customer on January 3, 2025. The terms of the invoice were FOB shipping point. The
goods were included in the 2024 ending inventory even though the sale was recorded in
2024.

d. Goods costing P217,500 were received from a vendor on January 4, 2025. The related
invoice was received and recorded on January 6, 2025. The goods were shipped on
December 31, 2024, terms FOB shipping point.

e. Goods valued at P275,000 are on consignment with a customer. These goods are not
included in the inventory figure.

f. Goods valued at P612,800 are on consignment from a vendor. These goods are not
included in the physical inventory.

Based on the above and the result of your audit, determine the adjusted balances of the following
as of December 31, 2024:

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1. Cash
A. P963,200 B. P681,000 C. P668,600 D. P693,400

2. Accounts receivable
A. P2,908,600 B. P2,564,000 C. P2,254,000 D. P2,548,500

3. Inventory
A. P6,035,000 B. P6,080,000 C. P5,860,000 D. P5,010,000

4. Accounts payable
A. P4,790,900 B. P4,615,900 C. P4,573,000 D. P4,603,500

SITUATION 2

You are auditing general cash for the DION COMPANY for the fiscal year ended July 31, 2024.
The client has not prepared the July 31 bank reconciliation. After a brief discussion with the
owner you agree to prepare the reconciliation, with assistance from one of Dion Company’s clerks.
You obtain the following information:

General Bank
Ledger Statement
Beginning balance P 46,110 P 57,530
Deposits 250,560
Cash receipts journal 254,560
Checks cleared (236,150)
Cash disbursements journal (218,110)
July bank service charge (870)
Note paid directly (61,000)
NSF check (3,110)
Ending balance P82,560 P6,960

June 30 Bank Reconciliation

Information in General Ledger and Bank Statement

Balance per bank P57,530

Deposits in transit 6,000
Outstanding checks 17,420
Balance per books 46,110

Additional information obtained is:

1. Checks clearing that were outstanding on June 30 totaled P16,920.

2. Checks clearing that were recorded in the July disbursements journal totaled P204,670.

3. A check for P10,600 cleared the bank, but had not been recorded in the cash disbursements
journal. It was for an acquisition of inventory. Dion uses the periodic inventory method.

4. A check for P3,960 was charged to Dion Company but had been written on a different
company’s bank account.

5. Deposits included P6,000 from June and P244,560 for July.

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6. The bank charged Dion Company’s account for a not-sufficient-fund check totaling P3,110.
The credit manager concluded that the customer intentionally closed its account and the
owner left the city. The check was turned over to a collection agency.

7. A note for P58,000, plus interest, was paid directly to the bank under an agreement signed
four months ago. The note payable was recorded at P58,000 on Dion Company’s books.

Based on facts given, answer the following:

1. The checks outstanding on July 31 amount to

A. P9,980 B. P10,830 C. P13,940 D. P3,340

2. The deposits in transit on July 31 amount to

A. P6,890 B. P10,000 C. P6,000 D. P9,110

3. The adjusted cash balance on July 31 is

A. P6,980 B. P10,940 C. P3,870 D. P3,020

SITUATION 3

LAGUNDI COMPANY applies the allowance method to value its accounts receivable. The company
estimates its uncollectible accounts based on past experience, which indicates that 1.5% of net
credit sales will be uncollectible. Its total sales for the year ended December 31, 2024, amounted
to P4,000,000 including cash sales of P400,000. After a thorough evaluation of the accounts
receivable from Nolog Company amounting to P20,000, Lagundi has decided to write off this
account before year-end adjustments are made.

Shown below are Lagundi’s account balances at December 31, 2024, before any adjustments and
the P20,000 write off.
Sales P4,000,000
Accounts receivable 1,500,000
Sales discounts 250,000
Allowance for doubtful accounts 33,000
Sales returns and allowances 350,000
Doubtful accounts expense 0

Lagundi has decided to value its accounts receivable using the statement of financial position
approach as suggested by its external auditors. Presented below is the aging of the accounts
receivable subsidiary ledger accounts at December 31, 2024.
Less than 61-90 91-120 Over
Account Balance 60 days days days 120 days
Antiporda P100,000 P100,000
Balbakwa 256,000 180,000 P 76,000
Curdapia 654,000 500,000 154,000
Dagul 50,000 P50,000
Empoy 420,000 P420,000
Total P1,480,000 P780,000 P230,000 P420,000 P50,000
% collectible 99% 95% 85% 60%

1. The entry to write off Lagundi’s accounts receivable from Nolog of P20,000 will
A. Decrease total assets and net income for 2024
B. Increase total assets and decrease net income for 2024
C. Have no effect on total assets and net income for 2024
D. Have no effect on total assets and increase net income for 2024

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2. Lagundi’s doubtful accounts expense for 2024 based on net credit sales is
A. P60,000 C. P45,000
B. P12,000 D. P56,250

3. The final entry to adjust the allowance for doubtful accounts is

A. Doubtful accounts expense 44,300
Allowance for doubtful accounts 44,300
B. Doubtful accounts expense 45,000
Allowance for doubtful accounts 45,000
C. Doubtful accounts expense 24,300
Allowance for doubtful accounts 24,300
D. Allowance for doubtful accounts 24,300
Doubtful accounts expense 24,300

4. What is the net realizable value of Lagundi’s accounts receivable on December 31, 2024?
A. P1,435,700 C. P1,397,700
B. P1,435,000 D. P1,377,700

5. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertions of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents.
B. Comparing receivable turnover ratios with industry statistics for reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for doubtful accounts for reasonableness.

SITUATION 4

CALEMBANG COMPANY, whose accounting year ends on December 31, provides delivery
services for packages to be taken between the city and the airport.

On January 1, 2022, the company acquired a delivery van from Togo Trucks. The company paid
cash of P3,060,000 to Togo, which included registration fees of P60,000. Insurance costs for the
first year amounted to P72,000. The truck is expected to have a useful life of five years. At the
end of its useful life, the asset is expected to be sold for P1,440,000, with costs relating to the
sale amounting to P24,000.

On January 1, 2023, Calembang’s management decided to add another vehicle, a flat-top, to the
fleet. This vehicle was acquired from a liquidation auction at a cash price of P1,800,000. The
vehicle needed some repairs for the elimination of rust (cost P138,000) and the replacement of
all tires (cost P37,200). The company believed it would use the flat-top for another two years
and then sell it. Expected selling price was P900,000, with selling costs estimated to be P24,000.

On January 1, 2023, a radio communication system was installed in both vehicles at a cost per
vehicle of P18,000. This was not expected to have any material effect on the future selling price
of either vehicle.

Insurance costs for 2023 were P72,000 for the first vehicle and P54,000 for the newly acquired
vehicle.

On January 1, 2024, the flat-top that had been acquired at auction broke down. The company
thought about acquiring a new vehicle to replace this one but, after considering the costs, decided
to repair the flat-top instead. The vehicle was given a major overhaul at a cost of P390,000.
Although this was a major expense, management believed that the company would keep the
vehicle for another two years. The estimated selling price in three years’ time is P720,000, with
selling costs estimated at P18,000. Insurance costs for 2024 were the same as for the previous
year.

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Questions:

1. On January 1, 2022, Calembang should record the delivery van at

A. P3,000,000 B. P3,060,000 C. P3,132,000 D. 3,156,000

2. What is the total cost of the flat-top vehicle?

A. P1,800,000 B. P1,837,200 C. P1,938,000 D. P1,993,200

3. What is the depreciation expense for 2022?

A. P312,000 B. P316,800 C. P328,800 D. P343,200

4. What is the depreciation expense for 2023?

A. P873,600 B. P879,000 C. P879,900 D. P901,800

5. What is the depreciation expense for 2024?

A. P637,500 B. P691,000 C. P695,500 D. P879,900

SITUATION 5

The management of PIG, INC. has engaged you to assist in the preparation of year-end
(December 31) financial statements. You are told that on November 30, the correct inventory
level was 145,730 units. During the month of December, sales totaled 138,630 units including
40,000 units shipped on consignment to AA Corp. A letter received from AA indicates that as of
December 31, it has sold 15,200 units and was still trying to sell the remainder.

A review of the December purchase orders to various suppliers shows the following:

Purchase Order Invoice Quantity Date Date

Date Date in Units Shipped Received Terms
12/31/23 01/02/24 4,200 01/02/24 01/05/24 FOB Destination
12/05/23 01/02/24 3,600 12/17/23 12/22/23 FOB Destination
12/06/23 01/03/24 7,900 01/05/24 01/07/24 FOB Shipping point
12/18/23 12/20/23 8,000 12/29/23 01/02/24 FOB Shipping point
12/22/23 01/05/24 4,600 01/04/24 01/06/24 FOB Destination
12/27/23 01/07/24 3,500 01/05/24 01/07/24 FOB Destination

Pig, Inc. uses the “passing of legal title” for inventory recognition.

1. Goods purchased during December totaled

A. 11,600 units C. 19,500 units
B. 15,800 units D. 8,000 units

2. How many units were sold during December?

A. 138,630 units C. 98,630 units
B. 113,830 units D. 153,830 units

3. How many units should be included in Pig, Inc.’s inventory at December 31, 2023?
A. 18,700 units C. 43,500 units
B. 39,900 units D. 47,700 units

4. Purchase cutoff procedures should be designed to test whether all inventory

A. Purchased and received before year-end was paid for.
B. Ordered before year-end was received.
C. Purchased and received before year-end was recorded.
D. Owned by the company is in the possession of the company at year-end.

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5. The audit of year-end physical inventories should include steps to verify that the client’s
purchases and sales cutoffs were adequate. The audit steps should be designed to detect
whether merchandise included in the physical count at year-end was not recorded as a
A. Sale in the subsequent period.
B. Purchase in the current period.
C. Sale in the current period.
D. Purchase return in the subsequent period.

SITUATION 6

Included in DADANG Company’s unadjusted trial balance on December 31, 2024, are Accounts
payable and Accrued expenses of P523,100 and P63,100, respectively. Upon verification, you
discovered the following information:

1. On December 28, 2024, the company issued checks to creditors totaling P115,000. These
checks were released on January 5, 2025.

2. A check dated December 12, 2024, in payment of accounts payable was recorded as P12,000.
Upon examination of the checks returned by the bank, the actual amount was P21,000.

3. On December 26, 2024, the company purchased on account goods worth P215,000, but no
entry was made in the books. The goods were already included in the year-end physical
count.

4. The following items were erroneously included in accounts payable:

• Accrued expenses totaling P37,450
• A cash advance from the President of Dadang Company amounting to P350,000 to be
used as working capital. This will be repaid within 6 months without interest.
• A debit balance of P87,250 representing advance payment for goods ordered to be
shipped by the supplier on January 12, 2025.

5. Your review of subsequent payments from January 2–15, 2025, revealed that no accrual was
made on December 31, 2024, for the following:
Light and water for Nov. and Dec. 2024 P 21,200
Telephone bills for Dec. 2024 18,150
Representation expenses for Dec. 2024 11,990
Minor repair of a delivery car on Dec. 26, 2024 3,180
Transportation expenses for 2024 2,560
Total P 57,080

1. The adjusted balance of Accounts payable at December 31, 2024, is

A. P437,900 C. P395,900
B. P543,900 D. P738,900

2. The adjusted balance of Accrued expenses on December 31, 2024, is

A. P157,630 C. P155,070
B. P54,520 D. P57,080

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