CRC-ACE REVIEW SCHOOL

The Professional CPA Review School

735-9031 / 735-8901

AUDITING PROBLEMS
OCTOBER 2007 BATCH
GENERAL INSTRUCTIONS: Select the correct answer for each of the following
questions. Mark only one answer for each item by writing a VERTICAL LINE
corresponding to the letter of your choice on the answer sheet provided. STRICTLY
NO ERASURES ALLOWED. Use PENCIL NO. 1 or NO. 2 only.
PROBLEM 1
The CRC-ACE Co. is on a calendar year basis.
during your audit:

The following data were found

I. Goods in transit shipped FOB Destination by a supplier in the amount of

P20,000 had been excluded from the inventory, and further testing revealed
that the purchase had been recorded.
II. Goods costing P10,000 had been received, included in the inventory and
recorded as a purchase. However, upon inspection, the goods were found to
be defective and would be immediately returned.
III. Materials costing P50,000 and billed on December 30 at a selling price of
P64,000 had been segregated in the warehouse for shipment to a customer.
The materials had been excluded from inventory as a signed purchase order
had been received from the customer. Terms, FOB destination.
IV. Goods costing P14,000 was out on consignment with Libra, Inc. Since the
monthly statement from Libra listed those materials as on hand, the items
had been excluded from the final inventory and invoiced on December 31 at
P16,000.
V. The sale of P30,000 worth of materials and Costing P24,000 had been
shipped FOB point of shipment on December 31. However, this inventory
was found to be included in the final inventory.
VI. Goods costing P20,000 and selling for P28,000 had been segregated but not
shipped at December 31, and were not included in the inventory. A review of
the customers purchase order set forth terms as FOB destination. The sale
had not been recorded.
VII. Your client has an invoice from a supplier, terms FOB shipping point but the
goods had not arrived as yet. However, these materials costing P34,000 had
been included in the inventory count, but no entry had been made for their
purchase.
VIII. Merchandise costing P40,000 had been recorded as a purchase but not
included in inventory. Terms of shipment are FOB shipping point according
to the suppliers invoice which was received on December 31.
Further inspection of the clients records revealed the following December 31
balances. Inventory, P220,000;
Accounts receivable, P116,000; Accounts payable, P138,000; Sales, P1,010,000;
Purchases, P640,000; Net
Income, P102,000.
Compute the adjusted balances of the following items:
1. Inventory
a. P310,000
b. P300,000
c. P334,000

d. none of these

2. Accounts receivable
a. P100,000
b. P52,000

d. none of these

3. Accounts payable

c. P36,000

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a. P152,000

b. P108,000

c. P142,000

d. none of these

4. Sales
a. P946,000

b. P930,000

c. P994,000

d. none of these

5. Purchases
a. P644,000

b. P654,000

c. P610,000

d. none of these

6. Net income
a. P118,000

b. P108,000

c. P142,000

d. none of these

PROBLEM 2
The account of the XYZ Co. appears as shown below at December 31, 2007:
Motor vehicles
1/1 Balance
7/15
CR15
P8,500,000
P300,000
3/1 V5
79,000
7/1 V 8
654,000
Your examination revealed that P79,000 represents the 2007 registration fees of
XYZs motor vehicles. The charge of P654,000 represents the invoice price of a
new carag-carag car, including a P14,000 comprehensive car insurance premium
for one year. The credit of P300,000 represents the proceeds from the sale of a
truck costing P1,200,000 and had been fully depreciated. Fifty percent (50%) of
the beginning balance represents fully depreciated motor vehicles.
The Co.s policy on depreciation is detailed as follows:
a. 20% straight-line
b.No residual value
c. Full in the year of acquisition and none in the year of disposal
Compute the following items:
7. The adjusted cost of motor vehicle is
a. P7,940,000
b. P4,890,000
c. P8,840,000
8. Insurance expense in 2007 is
a. P0
b. P14,000
c. P7,000
9. Gain on disposal of asset on July 15 is
a. P0
b. P300,000
c. P1,200,000

d. None of these
d. None of these
d. None of these

PROBLEM 3
In conducting your audit of Toyota Corporation, a company engaged in import and
wholesale business, for the fiscal year ended June 30, 2007, you determined that
its internal control system was good. Accordingly, you observed the physical
inventory at an interim date, May 31, 2007 instead of at June 30, 2007.
You obtained the following information from the companys general ledger:
Sales for eleven months ended May 31, 2007
Sales for the fiscal year ended June 30, 2007
Purchases for eleven months ended May 31, 2007
(before audit adjustments)
Purchases for the fiscal year ended June 30, 2007
Inventory, July 1, 2006

P 672,000
768,000
540,000
640,000
70,000

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Physical inventory, May 31, 2007

110,000

Page 3

Your audit disclosed the following additional information:

(1)
(2)
(3)

Shipments costing P6,000 were received in May and included in the

physical inventory but recorded as June purchases.
Deposit of P2,000 made with vendor and charged to purchases in April,
2007. Product was shipped in July, 2007.
A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its cost of P8,000.

In audit engagements in which interim physical inventories are observed, a

frequently used auditing procedure is to test the reasonableness of the year-end
inventory by the application of gross profit ratios.
10. The gross profit ratio for eleven months ended May 31, 2007 is
a. 20%
b. 25%
c. 30%
d.
35%
11. The cost of goods sold during the month of June 2007 using the gross profit
ratio method is
a. P22,000
b.
P44,000
c.
P74,000
d.
P88,000
12. The June 30, 2007 inventory using the gross profit method is
a. P 88,000
b.
P 114,000
c.
P 174,000
d.
P
130,000
PROBLEM 4
The CARR Corporation manufactures a highly flammable product. On June 30,
2007 a fire completely destroyed its factory and all the work in process inventory
therein. However, some records were saved which showed the following inventory
balances as of June 30, 2007.
Raw materials
Finished goods
and as of January 1, 2007 the inventories
were as follows:
Raw materials
Work in Process
Finished goods

60,000
120,000

30,000
100,000
140,000

A review of the records showed that sales and gross profit fort the past five years
are as follows:
Sales
Gross Profit
2002
P 300,000
P
80,000
2003
320,000
100,000
2004
330,000
100,000
2005
270,000
80,000
2006
280,000
90,000
Sales for the first six months of 2007 were P300,000. Raw material purchases were
P100,000. Freight on purchase was P20,000. Direct labor for the six months was
P80,000. For the past five years manufacturing overhead was 50 percent of direct
labor cost.
Required:
13. Compute the average gross profit rate for the 5 year period.
a. 25%
b. 28%
c. 30 %
d. 32%
14. What was the value of the work in process inventory as of June 30, 2007?
a. P 80,000
b. P140,000
c. P 100,000
d. P 120,000
PROBLEM 5

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As the first auditor of the Sunaga Company you discover that the following entries
have been made in the property, plant and equipment account:
Property, Plant, and Equipment
2005
2005
Plant purchased
P 60,000
Depreciation
P 6,310
Legal fees
700
Insurance
2,400
2006
2006
Repairs
2,000
Depreciation
6,879
Addition to Building
10,000
2007
2007
Repairs
3,000
Machine sold
500
Insurance
2,800
Depreciation
7,421
Machine purchased
7,000
You discover the following additional information:
1.
2.

3.
4.
5.

The purchase of the plant included a building and machinery. When

the plant was purchased, an appraisal showed that the building was
valued at P39,000 and the machinery at P26,000.
Depreciation has been recorded each year at 10% of the balance in the
account. The 10% was chosen because the property is being
depreciated over 10 years for tax purposes. Subsequent investigation
indicates that the expected lives at the time of acquisition were:
Building, 20 years; machinery, 8 years.
Each insurance payment was made on January 1 and was for a 2-year
policy.
The machine that was sold in 2007 had an original cost of P800.
All purchases and sales of property, plant, and equipment items
occurred at the beginning of the year indicated.

15. The costs of the building and machinery acquired in 2005 should be
Building
Machinery
a.
P 36,000
P 24,000
b.
P 39,000
P 26,000
c.
P 36,700
P 24,000
d.
P 36,420
P 24,280
16. The 2005 depreciation expense was:
a. correctly
b understated by
c. overstated by
d. overstated by
stated
P1,510
P1,454
P1,510
17. The 2006 depreciation expense was:
a. correctly
b overstated by
c. overstated by
d. overstated by
stated
P1,579
P1,523
P1,497
18.
The gain or loss on machine disposal was:
a. P 100 loss
b. P 100 gain
c. P 300 loss
d. P 140 loss
19. The adjusted balance of Machinery account at December 31, 2007 is:
a. P 30,200
b. P30,480
c. P 30,780
d. P 31,280
20. The carrying value of the building at December 31, 2007 is:
a. P 39,904
b. P 39,600
c. P 39,547
d. P 39,457
PROBLEM 6
The following account balances were included in the balance sheet of the Bromley
Company on December 31, 2006:
Land
100,000
Land improvements
20,000
Buildings
300,000
Machinery and equipment
500,000
During 2007 the following transactions occurred:

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Land was acquired for P70,000 for a future building site. Commissions of P4,000
were paid to a real
estate agent.
II. A factory and land were acquired form the Kent Development Company by
issuing 20,000 shares of P3 par common stock. At that time the stock was
selling for P10 per share on the Philippine Stock Exchange. The independently
appraised values of the land and the factory were P60,000 and P180,000,
respectively.
III. Machinery and equipment was acquired at a cost of P120,000. In addition,
sales tax, freight costs, and installation costs were P7,000, P10,000 and
P16,000, respectively. During installation, the machinery was damaged and
P2,000 was spent in repairs.
IV. A new parking lot was installed at a cost of P30,000
V. A machine that had cost P20,000 on January 1, 2003 and had a book value on
December 31, 2007 of P4,000 was sold on that date for P6,000
VI. Half the land purchased in item 1 was prepared as a building site. Costs of
P26,000 were incurred to clear the land, and the timber recovered was sold for
P3,000. A new building was built for P60,000 plus architects fees and imputed
interest on equity funds used during construction of P18,000 and P15,000,
respectively. No debt is outstanding.
VII. Costs of P20,000 were incurred to improve some leased office space. The lease
will terminate in 2007 and is not expected to be renewed.
VIII. A group of new machines was purchased under a royalty agreement that
provides for payment of annual royalties based on units produced. The invoice
price of the machines was P30,000, freight costs were P2,000, and royalty
payments for 2007 were P12,000.
Compute the adjusted balances of the following accounts at December 31, 2007.
21. Land
a. P 210,000
b. P 213,000
c. P 220,000
d. P 216,000
22. Building
a. P 545,000
b. P 543,000
c. P 528,000
d. P 530,000
23. Machinery and equipment
a. P 665,000
b. P 663,000
c. P 677,000
d. P 675,000
PROBLEM 7
In connection with the audit of MONDAY Companys financial statements, you
obtained the following information pertaining to its cash account.
Cash in bank
July 31
Book disbursements- August
136,429
111,423
Book receipts- August
August 31 balance
141,230
166,236
Further examination revealed the following:
The cash receipts book in August was underfooted by P10,000.
Included in the book receipts in August is a note collected by the bank in July
for P1,500.
July NSF checks of P526 and bank service charges of P50 were recorded by
the Company in August.
The bank statement in August showed total debits of P110,098, total credits
of P149,951, and an ending balance of P 180,413.
Among the bank debits are:
NSF checks
P 700
Bank error
900
Correction of July error
1,000

CRC-ACE/AP:

Service charges
65
Among the bank credits are:
Correction of July error
P 600
Note collected by bank
4,277
Bank error
3,000
Deposits in transit: July 31, P5,200 ; Aug. 31, 8,330
Outstanding checks as of July 31, P8,007.

Page 6

Determine the following:

24. Cash Shortage
a. P 6,026
b. P 4,526
c. P 5,474
d. P 4,000
25. Outstanding checks, August 31
a. P 11,421
b. P 9,332
c. P 8,007
d. P 3,876
26. Adjusted cash Balance, August. 31
a. P 175,222
b. P 169,748
c. P 125,841
d. P
166,236
27. Adjusted cash balance, July 31
a. P 136,429
b. P 137,353
c. P 111,612
d. P 148,481
PROBLEM 8
The Allen Company is a wholesale distributor of automotive replacement parts.
Initial amounts taken
from Allens accounting records are as follows:
Net income for the year ended December 31, 2007
P 2,172,000
Inventory at December 31, 2007 (based on Physical count of goods in Allens
warehouse on December 31, 2007)
1,250,000
Net purchases in 2007
3,215,000
Net sales in 2007
9,000,000
Vendor
B Company
C Company
D Company
E Company
F Company
G Company

Terms
2% 10 days, net
30
Net 30
Net 30
Net 30
Net 30
Net 30

Amount
P
265,000
210,000
300,000
225,000
P1,000,00
0

Additional information is as follows:

Parts held on consignment from C to Allen, the consignee, amounting to
P155,000, were included in the physical count of goods in Allens warehouse
on December 31, 2007, and in accounts payable at December 31, 2007.
P22,000 of parts which were purchased from F and paid for in December
2007 were sold in the last week of December 2007 for P28,000. Allen
appropriately recorded the sale in December. The parts were included in the
physical count of goods in Allens warehouse on December 31, 2007,
because the parts were on the loading dock waiting to be picked up by
customers.
Parts in transit on December 31, 2007, to customers, shipped F.O.B. shipping
point, on December 28, 2007, amounted to P34,000. The customers received
the parts on January 6, 2008. Sales of P40,000 to the customers for the parts
were recorded by Allen on January 2, 2008.
Retailers were holding P210,000 at cost (P250,000 at retail), of goods on
consignment from Allen, the consignor, at their stores on December 31,
2007.

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Page 7

Goods were in transit from G to Allen on December 31, 2007. The cost of the
goods was P25,000, and they were shipped F.O.B. shipping point on
December 29, 2007.
A quarterly freight bill in the amount of P2,000 specifically relating to
merchandise purchases in December 2007, all of which was still in the
inventory at December 31, 2007, was received on January 3, 2008. The
freight bill was not included in either the inventory or in accounts payable at
December 31, 2007.
All the purchases from B occurred during the last seven days of the year.
These items have been recorded in accounts payable and accounted for in
the physical inventory at cost before discount. Allens policy is to pay
invoices in time to take advantage of all cash discounts, adjust inventory
accordingly, and record accounts payable, net of cash discounts.
28. Adjusted inventory balance at the end of 2007.
a. P1,326,700
b. P1,306,700
c. P1,304,700
d. P1,310,000
29. Adjusted balance of accounts payable at December 31, 2007.
a. P888,700
b. P866,700
c. P1,021,700
d. P872,000
30. Adjusted net purchases in 2007.
a. P3,081,700
b. P3,087,000
c. P3,079,000
d. P3,103,000
31. Adjusted net sales in 2007.
a. P9,000,000
b. P9,040,000
c. P8,960,000
d. P9,018,000
32. Adjusted net income in 2007.
a. P2,400,000
b. P3,422,000
c. P2,425,000
d. P2,403,000
PROBLEM 9
On January 1, 2007, Andromeda, Inc., paid P700,000 for 10,000 shares of Belly
Companys voting ordinary shares, which was a 10% interest in Belly. At that date
the net assets of Belly totaled P6,000,000. The fair values of all of Bellys
identifiable assets and liabilities were equal to their book values. Andromeda does
not have the ability to exercise significant influence over the operating and
financial policies of Belly. Andromeda received dividends of P0.90 per share from
Belly on October 1, 2007. Belly reported net income of P400,000 for the year
ended December 31, 2007.
On July 1, 2008, Andromeda paid P2,300,000 for 30,000 additional shares of Belly
Companys voting ordinary shares, which represents a 30% investment in Belly.
The fair values of all of Bellys identifiable assets net of liabilities were equal to
their book values of P6,500,000. As a result of this transaction, Andromeda has the
ability to exercise significant influence over the operating and financial policies of
Belly. Andromeda received dividends of P1.10 per share from Belly on April 1,
2008, and P1.35 per share on October 1, 2008. Belly reported net income of
P500,000 for the year ended December 31, 2008, and P200,000 for the 6 months
ended December 31, 2008. Andromeda does not amortize goodwill but evaluates at
each year-end its possible impairment. No impairment on goodwill has been
observed though.
33.

Investment income in 2007

a. P 9,000
b. P 30,000
c. P 40,000
34. Carrying value of the investment on December 31, 2007
a. P 721,000
b. P730,000
c. P 691,000
35. Investment income in 2008
a. P 110,000
b. P 200,000
c. P 150,000
36. Carrying value of the investment on December 31, 2008.
a. P 3,000,000
b. P 3,076,000
c. P 3,110,000

d. P 90,000
d. P 700,000
d. P 140,000
d. P 3,150,000

PROBLEM 10
CITY FAIR Corporation purchased P100,000 8% bonds for P 92,418 on January 1,
2004. CITY FAIR classified the bonds as available for sale. The bonds were
purchased to yield 10% interest. Interest is payable annually every January 1.

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Page 8

The market values of the bonds are as follows:

December 31, 2004
P 97,160
December 31, 2005
90,393
December 31, 2006
97,240
37. Interest income in 2004
a. P 9,242
b. P 8,000
c. P 10,000
d. P 9,124
38. Interest income in 2006
a. P 8,000
b. P 9,366
c. P 9,503
d. P 10,000
39. Unrealized gain or loss at the December 31, 2006.
a. gain P 711
b. loss P 711
c. gain P 3,267
d. loss P 3,267
40. Carrying value of held-to-maturity investment on December 31, 2006.
a. P 95,026
b. P 93,660
c. P 92,418
d. P 96,529
- END -

AUDITING PROBLEMS
1
2
3
4
5
6
7
8
9
10

A
C
C
B
A
B
A
C
B
B

11
12
13
14
15
16
17
18
19
20

C
D
C
D
D
C
D
A
B
A

21
22
23
24
25
26
27
28
29
30

A
C
A
B
A
A
B
C
B
A

31
32
33
34
35
36
37
38
39
40

B
A
A
D
A
B
A
C
A
D