Name: ________________________

Auditing Problems

1. Which of the following statements best describes assurance services?

A. Independent professional services that are intended to enhance the credibility of
information to meet the needs of an intended user.
B. Services designed to express an opinion on the fairness of historical financial
statements based on the results of an audit.
C. The preparation of financial statements or the collection, classification, and
summarization of other financial information.
D. Services designed for the improvement of operations, resulting in better outcomes.

2. What type of assurance engagement is involved when the practitioner expresses a

negative form of conclusion?
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement

3. A practitioner should accept an assurance engagement only if

A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioners conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users or the
practitioner.

4. Jayson, CPA, was offered the engagement to audit W Corporation for the year ended
December 31, 2016. He had served as a director of W Corporation until December 31,
2014, and his spouse currently owns 6,000 of the 100,000 outstanding share capital of
W Corporation. Jayson disassociated from W Corporation prior to being offered the
engagement. Moreover, the engagement does not cover any period that includes
Jaysons association or employment with W Corporation. Under the code of ethics,
Jayson should
A. Accept the engagement.
B. Let a partner from the same office accept and conduct the engagement.
C. Refuse the engagement because he had served as a director.
D. Refuse the engagement because of his spouses stock ownership.

5. A professional accountant in public practice is allowed to

A. Refer to, use or cite actual or purported testimonials by third parties.
B. Publish services in billboard (e.g., tarpaulin, streamers, etc.) advertisements.
C. Publish and compare fees with other CPAs or CPA firms or compare those services
with those provided by another firm or CPA practitioner.
D. Inform interested parties through any medium that a partnership or salaried
employment of an accountancy nature is being sought.

6.Analytical procedures used in planning an audit should focus on

A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential material misstatements will be identified.
C. Enhancing the auditors understanding of the clients business and identifying
areas of potential risk.
D. Assessing the adequacy of the available evidential matter.

7. When inherent risk is high, there will need to be

A lower More evidence
assessment of audit risk. accumulated by the auditor.
A. Yes Yes
B. No No
C. Yes No
D. No Yes
8. Which of the following is not one of the three primary objectives of effective
internal control?
A. Reliability of financial reporting.
B. Efficiency and effectiveness of operations.
C. Compliance with laws and regulations.
D. Assurance of elimination of business risk.

9.Which of the following is of least concern to an auditor in assessing the risks of

material misstatement?
A. Signed checks are distributed by the controller to approved payees.
B. Checks are signed by one person.
C. Cash receipts are not deposited intact daily.
D. Treasurer does not verify the names and addresses of check payees.

10. In performing tests of the operating effectiveness of an entitys controls, an

auditor selects from a variety of techniques, including
A. Reperformance and observation.
B. Inquiry and analytical procedures.
C. Comparison and confirmation.
D. Inspection and verification.

11. The primary responsibility for the prevention and detection of fraud rests with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the entity and management.
D. Either those charged with governance of the entity or management

12. The use of a computer changes the processing, storage, and communication of financial
information. A CIS environment may affect the following, except
A. The accounting and internal control systems of the entity.
B. The overall objective and scope of an audit.
C. The auditors design and performance of tests of control and substantive
procedures to satisfy the audit objectives.
D. The specific procedures to obtain knowledge of the entitys accounting and
internal control systems.

13. Which of the following statements concerning evidential matter is true?

A. Appropriate evidence supporting managements assertions should be convincing
rather than merely persuasive.
B. Effective internal control contributes little to the reliability of the evidence
created within the entity.
C. The cost of obtaining evidence is not an important consideration to an auditor in
deciding what evidence should be obtained.
D. A clients accounting records cannot be considered sufficient evidence to support
the financial statements.

14. An auditor selected items for test counts while observing a clients physical
inventory. The auditor then traced the test counts to the clients inventory
listing. This procedure most likely obtained evidence concerning managements
assertion of
A. Rights and obligations C. Existence
B. Completeness D. Valuation

15. Which of the following events most likely indicates the existence of related parties?
A. Making a loan without scheduled terms for repayment of the funds.
B. Discussing merger terms with a company that is a major competitor.
C. Selling real estate at a price that differs significantly from its book value.
D. Borrowing a large sum of money at a variable rate of interest.

16. Which of the following statements best describes the date of the financial
statements?
 A. The date on which those with the recognized authority assert that they have
prepared the entitys complete set of financial statements, including the related
notes, and that they have taken responsibility for them.
B. The date that the auditors report and audited financial statements are made
available to third parties.
C. The date of the end of the latest period covered by the financial statements,
which is normally the date of the most recent balance sheet in the financial
statements subject to audit.
D. The date on which the auditor has obtained sufficient appropriate audit evidence
on which to base the opinion on the financial statements.

17. Which of the following statements concerning management representations is incorrect?

A. Representations by management can be a substitute for other audit evidence that
the auditor could reasonably expect to be available.
B. If the auditor is unable to obtain sufficient appropriate audit evidence regarding
a matter, which has, or may have, a material effect on the financial statements
and such audit evidence is expected to be available, this will constitute a
limitation in the scope of the audit, even if a representation from management has
been received on the matter.
C. If a representation by management is contradicted by other audit evidence, the
auditor should investigate the circumstances and, when necessary, reconsider the
reliability of other representations by management.
D. The auditors working papers would ordinarily include a summary of oral
discussions with management or written representations from management.

18. The following statements relate to the date of the auditors report. Which is false?
A. The auditor should date the report as of the completion date of the audit.
B. The date of the auditors report should not be earlier than the date on which the
financial statements are signed or approved by management.
C. The date of the auditors report should not be later than the date on which the
financial statements are signed or approved by management.
D. The date of the auditors report should always be later than the date of the
financial statements (i.e., the balance sheet date).

19. A note to the financial statements of the Prudent Bank indicates that all of the
records relating to the banks business operations are stored on magnetic disks, and
that no emergency backup systems or duplicate disks are stored because the bank and
its auditors consider the occurrence of a catastrophe to be remote. Based upon this
note, the auditors report should express
A. A qualified opinion C. An adverse opinion
B. An unmodified opinion D. A subject to opinion

20. An auditor may express a qualified opinion under which of the following
circumstances?
Lack of Sufficient Restriction on the
Appropriate Evidence Scope of the Audit
A. No No
B. No Yes
C. Yes No
D. Yes Yes

21. Which of the following is not a basic element of an audit report?

a. Title of the report. c. Clients address.
b. Introductory paragraph. d. Auditors address.

22. If the principal auditors report refers to the audit of another auditor, he is
required to disclose the
a. name of another auditor.
b. portion of the financial statements audited by the other auditor.
c. opinion expressed by the other auditor and the reason if the opinion is other than
unqualified.
d. reason for being unwilling to assume the responsibility for the other auditors
work.
 23. When additional language is added to the auditors report without modifying the
opinion, the additional language should be included in
a. the introductory paragraph. c. the opinion paragraph.
b. the scope paragraph. d. one or more additional paragraphs that
follow the opinion paragraph.

24. Millard, CPA, is engaged in the audit of the financial statements of Alpha Company,
a manufacturing entity with branch offices in many widely separated cities. Millard was
not able to count the substantial undeposited cash receipts on the last day of the
fiscal year at all branch offices. As an alternative procedures, Millard verified all
the reported undeposited cash collections in the cut-off bank statements and was
satisfied as to cut-off of cash receipts.
How should Millard prepare his audit report?
a. Issue an unqualified opinion with an emphasis of matter paragraph that refers to
the use of alternative audit procedure.
b. Issue a qualified opinion due to scope limitation.
c. Issue an unqualified opinion on income statement and a qualified opinion on the
balance sheet.
d. Issue a standard unqualified opinion.

25. Trulav Company has prepared financial statements but has decided to omit the
statement of cash flows. The management believes that the users of the financial
statements the statement of cash flows confusing and prefer not have it included.
The omission of the statement of cash flows would require the auditor to
a. Include an unqualified report on emphasis of matter paragraph that explains the
reasons for such an omission of the statement.
b. Issue an adverse opinion due to inadequate disclosure.
c. Issue a qualified opinion due to inadequate disclosure.
d. Issue an unqualified opinion based on limited reported objective.

26. Which of the following auditing procedures should not be considered a test of
control?
a. Observing preparation of the bank reconciliation
b. Inquiring about the entitys organization structure
c. Inspecting customer order forms for the signature of the credit manager
d. Confirming with the customer the amount owed to the client

27. One of the companys internal control structure procedures requires that shipping
documents be matched with customer invoices. To which of the following is that
procedure relevant?
a. The completeness assertion for revenue
b. The existence assertion for inventory
c. The occurrence assertion for purchases
d. The presentation and disclosure assertion for accounts receivable

28. The sequence of the steps in the auditors consideration of the internal control
structure is as follows:
a. Obtain an understanding, design substantive tests, perform tests of controls,
determine assessed level of control risk.
b. Design substantive tests, obtain an understanding, perform tests of control,
determine assessed level of control risk.
c. Obtain an understanding, performs tests of controls, determine assessed level of
control risk, design substantive tests.
d. Perform tests of controls, obtain an understanding, determine assessed level of
internal control, design substantive tests
29. The primary difference between an audit of the balance sheet and the audit of income
statement is that the audit of the balance sheet date more with the verification of
a. Transactions c. Costs
b. Authorizations d. Balances

30. When an auditor tests the internal controls of a computerized accounting system,
which of the following is true of the test data approach?
a. Test data are coded to a dummy subsidiary so they can be extracted from the system
under actual operating conditions.
b. Test data programs need not be tailor-made by the auditor for each client's computer
applications.
c. Test data programs usually consist of all possible valid and invalid conditions
regarding compliance with internal controls.
d. Test data are processed with the client's computer and the results are compared with
the auditor's predetermined results.

31. Which of the following computer-assisted auditing techniques allows fictitious and
real transactions to be processed together without client operating personnel being
aware of the testing process?
a. Parallel simulation c. Test data approach
b. Integrated test facility approach d. Exception report tests

32. A critical aspect of a disaster recovery plan is to be able to regain operational

capability as soon as possible. In order to accomplish this, an organization can have
an arrangement with its computer hardware vendor to have a fully operational facility
available that is configured to the user's specific needs. This is best known as a(n)
a. Uninterruptible power system. c. Cold site.
b. Parallel system. d. Hot site.

33. The most critical aspect of the separation of duties within a mainframe information
systems environment is between
a. Programmers and project leaders. c. Programmers and users.
b. Programmers and systems analysts. d. Programmers and computer operators.

34. If an auditor is using test data in a client's computer system to test the integrity
of the systems output, which of the following types of controls is the auditor testing?
a. General controls. c. User controls.
b. Quantitative test controls. d. Application controls.

35.In which of the following circumstances would an auditor usually choose between issuing a
qualified opinion or a disclaimer of opinion?
a. Departure from GAAP.
b. Inadequate disclosure of accounting policies.
c. Inability to obtain sufficient competent evidential matter.
d. Unreasonable justification for a change in accounting principle.
 Situation I

The following data relate on the Plant Assets account of Licab, Inc. at December 31, 2005:

Plant Assets
L A R E
Original cost P87,500 P127,500 P200,000 P200,000

Year Purchased 2000 2001 2002 2004

Useful life 10 years 37,500 hours 15 years 10 years

Salvage value P7,750 P7,500 P12,500 P12,500

Depreciation SYD Activity Straight-line Double-

method declining
balance

Note: In the year an asset is purchased, Licab, Inc. does not record any depreciation expense on the asset.

In the year an asset is retired or traded in, Licab, Inc. takes a full year depreciation on the asset.

The following transaction occurred during 2006:

(a) On May 5, Asset L was sold for P32,500 cash.

(b) On December 31, it was determined that asset A had been used 5,250 hours during 2006.

(c) On December 31, before computing depreciation expense on Asset R, the management of Licab, Inc. decided the
useful life remaining from 1/1/06 was 10 years.

(d) On December 31, it was discovered that a plant asset purchased in 2005 had been expensed completely in that
year. This asset costs P55,000 and has useful life of 10 years and no salvage value. Management has decided
to use the double-declining balance for this asset, which can be referred to as Asset S.

QUESTIONS:

Based on the above and the result of your audit, answer the following: (Disregard tax implications)

1. How much is the gain or loss on sale of Asset L?

a. P10,250 loss c. P16,050 gain
b. P10,250 gain d. P16,050 loss
2. How much is the depreciation of Asset R for 2006?
a. P15,000 c. P16,250
b. P21,429 d. P23,214

3. The adjusting entry to correct the error of failure to capitalize Asset S would include a debit/credit to Retained
Earnings of
a. P55,000 debit c. P44,000 credit
b. P55,000 credit d. P 0

4. How much is the adjusted balance of Plant Assets as of December 31, 2006?
a. P670,000 c. P615,000
b. P527,500 d. P582,500

5. How much is the total depreciation expense for 2006?

a. P83,300 c. P82,050
b. P88,479 d. P80,600

Situation II

You were able to obtain the following information in connection with your audit of the Cash account of the Pasay
Company as of December 31, 2006:

November 30 December 31
a. Balances per bank P480,000 P420,000
b. Balances per books 504,000 539,000
c. Undeposited collections 244,000 300,000
d. Outstanding checks 150,000 120,000

e. The bank statement for the month of December showed total credits of P240,000 while the debits per books
totaled P735,000.

f. NSF checks are recorded as a reduction of cash receipts. NSF checks which are later redeposited are then
recorded as regular receipts. Data regarding NSF checks are as follows:
1. Returned by the bank in Nov. and recorded by the company in Dec., P10,000.
2. Returned by the bank in Dec. and recorded by the company in Dec., P25,000.
3. Returned by the bank in Dec. and recorded by the company in Jan., P29,000.

g. Check of Pasaway Company amounting to P90,000 was charged to the companys account by the bank in error
on December 31.

h. A bank memo stated that the companys account was credited for the net proceeds of Anitos note for P106,000.

i. The company has hypothecated its accounts receivable with the bank under an agreement whereby the bank
lends the company 80% of the hypothecated accounts receivable. The company performs accounting and
collection of the accounts. Adjustments of the loan are made from daily sales reports and deposits.

j. The bank credits the company account and increases the amount of the loan for 80% of the reported sales. The
loan agreement states specifically that the sales report must be accepted by the bank before the company is
credited. Sales reports are forwarded by the company to the bank on the first day following the date of sale.
The bank allocates each deposit 80% to the payment of the loan, and 20% to the company account. Thus, only
80% of each days sales and 20% of each collection deposits are entered on the bank statement. The company
accountant records the hypothecation of new accounts receivable (80% of sales) as a debit to Cash and a credit
to the bank loan as of the date of sales. One hundred percent of the collection on accounts receivable is
recorded as a cash receipt; 80% of the collection is recorded in the cash disbursements books as a payment on
the loan. In connection with the hypothecation, the following facts were determined:

Included in the undeposited collections is cash from the hypothecation of accounts receivable. Sales were
 P180,000 on November 30, and P200,000 at December 31. The balance was made up from collections
which were entered on the books in the manner indicated above.
Collections on accounts receivable deposited in December, other than deposits in transit, totaled P725,000.

k. Interest on the bank loan for the month of December charged by the bank but not recorded in the books,
amounted to P38,000.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. How much is the adjusted cash balance as of November 30, 2006?

a. P574,000 c. P430,000
b. P394,000 d. P350,000

2. How much is the adjusted book receipts for December, 2006?

a. P860,000 c. P876,000
b. P280,000 d. P296,000

3. How much is the adjusted book disbursements for December, 2006?

a. P180,000 c. P180,000
b. P905,000 d. P760,000

4. How much is the adjusted cash balance as of December 31, 2006?

a. P690,000 c. P440,000
b. P530,000 d. P490,000

5. How much is the cash shortage as of December 31, 2006?

a. P32,000 c. P8,000
b. P90,000 d. P0

Situation III

You noted the following items relative to the companys Intangible assets in connection with your audit of the Paete
Corporations financial statements for the year 2006.

On January 1, 2006, Paete signed an agreement to operate as franchisee of Clear Copy Service, Inc. for an
initial franchise of P680,000. Of this amount, P200,000 was paid when the agreement was signed and the
balance was payable in four annual payments of P120,000 each, beginning January 1, 2007. The agreement
provides that the down payment is not refundable and no future services are required of the franchisor. The
implicit rate for loan of this type is 14%. The agreement also provides the 5% of the revenue from the franchise
must be paid to the franchisor annually. Paetes revenue from the franchise for 2006 was P8,000,000. Paete
estimates that the useful life of the franchise to be ten years.

Paete incurred P624,000 of experimental and development costs in its laboratory to develop a patent which was
granted on January 2, 2006. Legal fees and another costs associated with the registration of the patent totaled
P131,200. Paete estimates that the useful life of the patent will be eight years.

A trademark was purchased from Tsek Company for P320,000 on July 1, 2003. Expenditures for successful
litigation in defense of the trademark totaling P80,000 were paid on July 1, 2006. Paete estimates that the
trademarks useful life will be indefinite.

QUESTIONS:

Based on the above and the result of your audit, determine the following: (Round off present value factors to 4
decimal places)

1. Total expenses related to franchise in 2006

a. P503,914 c. P448,950
 b. P535,200 d. P454,964

2. Carrying amount of franchise as of December 31, 2006

a. P549,644 c. P538,733
b. P494,680 d. P612,000

3. Carrying amount of patent as of December 31, 2006

a. P131,200 c. P124,640
b. P114,800 d. P123,482

4. Carrying amount of trademark as of December 31, 2006

a. P320,000 c. P304,000
b. P288,000 d. P400,000

5. Carrying amount of intangible assets as of December 31, 2006

a. P1,046,800 c. P1,009,480
b. P 984,444 d. P 929,480

Situation IV

In connection with your audit of Pagbilao Corporation, you gathered the following liability and equity account
balances as of December 31, 2005:

11% bonds payable, at face value P10,000,000

Premium on bonds payable 704,760
Common stock 16,000,000
Additional paid in capital 4,590,000
Retained earnings 4,930,000
Treasury stock, at cost 650,000

Transactions during 2006 and other information relating to the Corporations liability and equity accounts were as
follows:

a) The bonds were issued on December 31, 2003, for P10,756,000 to yield 10%. The bonds mature on December
31, 2018. Interest is payable annually on December 31. The Corporation uses the effective interest method to
amortize bond premium.

b) At December 31, 2005, the Corporation had 4,000,000 authorized shares of P10 par common stock.

c) On January 15, 2006, the Corporation reissued 30,000 of its 50,000 shares of treasury stock for 550,000. The
treasury stock had been acquired on February 28, 2005.

d) On November 2, 2006, the Corporation borrowed P8,000,000 at 9% evidenced by a note payable to ABC Bank.
The note is payable in five equal annual principal installments of P1,600,000. The first principal and interest
payment is due on November 2, 2007.

e) On December 31, 2006, the Corporation owned 20,000 shares of Awoo Corp. common stock which represented
a 1% ownership interest. Pagbilao accounts for this as available for sale securities. The stock was purchased
on May 4, 2005 at P20 per share. The market price was P21 per share on December 31, 2005, and P18 per
share on December 31, 2006.

QUESTIONS:

Based on the above and the result of your audit, answer the following questions:

1. How much is the carrying of the bonds payable on December 31, 2006?
a. P10,675,236 c. P 9,324,764
b. P10,704,760 d. P10,654,360
2. How much is the treasury stock balance as of December 31, 2006?
a. P200,000 c. P260,000
b. P650,000 d. P100,000

3. How much is the noncurrent portion of the note payable to bank as of December 31, 2006?
a. P6,400,000 c. P8,000,000
b. P1,600,000 d. P 0

4. How much is the 2006 total interest expense?

a. P1,220,000 c. P1,249,524
b. P1,190,476 d. P1,187,236

5. How much is the net unrealized loss on available for sale securities as of December 31, 2006?
a. P60,000 c. P20,000
b. P40,000 d. P 0

Situation V

You were able to gather the following information in connection with your audit of the stockholders equity section of
the balance sheet of Liloan, Inc. The company is a manufacturer of school and office equipment. As of December
31, 2005, the stockholders equity of the company is presented below:

Cumulative preferred stock (P15 par value; 100,000

shares authorized, 12,000 shares issued and
outstanding) P 180,000
Common stock (P10 par value; 1,000,000 shares
authorized, 330,000 shares issued and 3,300,000
outstanding
Retained earnings 1,866,000
P5,346,000

Liloans capital stock transactions during 2006 were as follows:

a. On January 31, 24,000 preferred shares were issued in exchange for land with a fair value of P300,000. Six
months ago, 2,000 shares of Liloans preferred stock were exchanged over the counter for P14 per share.

b. On February 14, 13,500 shares of common stock were sold to Ms. P. Saway at P25 per share.

c. On December 14, Liloan purchased dissident stockholder Saways 13,500 shares at P27 per share. The
shares are to be held as treasury shares. (Saway violently opposed Liloan business strategy and Liloans
management decided to eliminate her interest.)

d. On December 20, Liloan contracted with Ms. Buti for the sale of 30,000 previously unissued shares at P25
per share to be issued when the purchase price is fully paid. At December 31, only P585,000 had been paid.
Buti agreed to pay the balance on or before January 31, 2007.

e. On December 31, Liloan retired 12,000 preferred shares at P18 per share.

f. A cash dividend of P2 per share was declared on the preferred shares on October 15, and paid on November
15.

g. A cash dividend of P1.50 per share was declared on December 15, and payable on January 15, 2007.

h. Liloans net income for the year 2006 was P750,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31, 2006:

1. Preferred stock
a. P360,000 c. P264,000
b. P300,000 d. P324,000

2. Common stock
a. P3,435,000 c. P3,735,000
b. P4,020,000 d. P3,637,500

3. Additional paid-in capital

a. P592,500 c. P625,500
b. P202,500 d. P142,500

4. Total retained earnings

a. P1,977,000 c. P2,013,000
b. P1,648,500 d. P2,037,000

5. Total stockholders equity

a. P6,171,000 c. P6,396,000
b. P6,036,000 d. P6,336,000

Situation VI

You were engaged by Asingan Corporation for the audit of the companys financial statements for the year ended
December 31, 2006. The company is engaged in the wholesale business and makes all sales at 25% over cost.

The following were gathered from the clients accounting records:

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P7,800,000 Balance forwarded P4,200,000
12/27 SI No. 965 60,000 12/28 RR #1059 36,000
12/28 SI No. 966 225,000 12/30 RR #1061 105,000
12/28 SI No. 967 15,000 12/31 RR #1062 63,000
12/31 SI No. 969 69,000 12/31 RR #1063 96,000
12/31 SI No. 970 102,000 12/31 Closing entry
(4,500,000)
12/31 SI No. 971 24,000 P -
12/31 Closing entry
(8,295,000)
P -
Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable P750,000

Inventory 900,000
Accounts payable 600,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was
properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report
which had been used was No. 1063 and that no shipments had been made on any Sales Invoices whose
number is larger than No. 968. You also obtained the following additional information:

a) Included in the warehouse physical inventory at December 31 were goods which had been purchased and
received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost
was P27,000.
b) On the evening of December 31, there were two trucks in the company siding:
Truck No. XXX 888 was unloaded on January 2 of the following year and received on Receiving Report No.
1063. The freight was paid by the vendor.
Truck No. MGM 357 was loaded and sealed on December 31 but leave the company premises on January 2.
This order was sold for P150,000 per Sales Invoice No. 968.

c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to ABC Trading
Corporation. ABC received the goods, which were sold on Sales Invoice No. 966 terms FOB Destination, the
next day.

d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No.
1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by the client. However, the
freight was deducted from the purchase price of P800,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Sales for the year ended December 31, 2006

a. P8,100,000 c. P7,875,000
b. P7,725,000 d. P8,025,000

2. Purchases for the year ended December 31, 2006

a. P4,500,000 c. P5,631,000
b. P5,727,000 d. P4,527,000

3. Accounts receivable as of December 31, 2006

a. P330,000 c. P525,000
b. P555,000 d. P180,000

4. Inventory as of December 31, 2006

a. P1,452,000 c. P1,200,000
b. P1,221,000 d. P1,296,000

5. Accounts payable as of December 31, 2006

a. P600,000 c. P 531,000
b. P627,000 d. P1,827,000

Situation VII

The Davao Company engaged you in 2006 to examine its books and records and to make whatever adjustments are
necessary.

Your examination disclosed following:

a. Prior to any adjustments, the Retained Earnings account is reproduced below:

RETAINED EARNINGS

Date Particulars Debit Credit Balance

2004
Jan. 1 Balance P580,000
Dec. 31 Net income for the year 310,000 890,000
2005
Jan. 31 Dividends paid 140,000 750,000
Apr. 3 Paid in capital in excess of 90,000 840,000
par
Aug. 30 Gain on retirement of
preferred stock at less
than issue price 64,500 904,500
 Dec. 31 Net loss for the year 205,000 699,500
2006
Jan. 31 Dividends paid 100,000 599,500
Dec. 31 Net loss for the year 165,500 P434,000

b. The company failed to properly recognize accruals and prepayments. Selected accounts revealed the following
information:

2003 2004 2005 2006

Prepaid expenses P8,500 P6,200 P7,400 P9,500
Accrued expenses 5,400 7,300 8,700 9,000
Unearned income 6,900 7,800 8,900 9,600
Accrued income 4,700 5,600 6,200 7,800

c. Dividends had been declared on December 31 in 2004 and 2005 but had not been entered in the books until
paid.

d. The company purchased a machine worth P270,000 on April 30, 2003. The company charged the purchase to
expense. The machine has an estimated useful life of 3 years. The company uses the straight line method and
residual values are deemed immaterial.

e. The company received a transportation equipment as donation from one of its stockholders on September 30,
2005. The equipment was used to deliver goods to customers. The equipment costs P750,000 and has a
remaining life of 3 years on the date of donation. The equipment has a fair value of P240,000 and P30,000 was
incurred for registering the transfer of ownership. The company did not record the donation on its books. The
expenses paid related to the donated equipment were charged to expense.

f. The physical inventory of merchandise had been understated by P64,000 and by P44,500 at the end of 2004
and 2006, respectively.

g. The merchandise inventories at the end of 2005 and 2006 did not include merchandise that was then in transit
shipped FOB shipping point. These shipments of P43,400 and P32,600 were recorded as purchases in January
2006 and 2007, respectively.

QUESTIONS:

Based on the above audit findings, the adjusted balances of the following are: (Disregard tax implications)

1. Retained earnings, 12/31/04

a. P976,700 c. P930,700
b. P860,700 d. P720,700

2. Net loss for 2005

a. P269,700 c. P349,700
b. P379,700 d. P359,700

3. Retained earnings, 12/31/05

a. P481,000 c. P341,000
b. P411,000 d. P241,000

4. Net loss for 2006

a. P118,300 c. P148,300
b. P228,300 d. P178,300

5. Retained earnings, 12/31/06

a. P302,700 c. P252,700
b. P362,700 d. P332,700