Name: ANABO, IVAN G.

Course & Year: BSA – 3 (First Sem)

Subject: AUDCAP1 Sec Code: 212
Teacher: RESULA, GERALD

UNIT 1
AUDIT OF CASH AND CASH EQUIVALENTS

UNIT ACTIVITY
ESSAY:
1. Audit Assertions of Cash
Existence
 Cash balance reported on financial statements actually exist at the reporting date.
 Assertions about existence or occurrence deal with whether assets or liabilities of the
entity exist at a given date and whether recorded transactions have occurred during
a given period.
 To test these items of the financial statement, it is hot sufficient that only books are
consulted which record the assets or the liabilities.
 There should be proof of the existence of physical assets or liability. For checking
existence help is also sought from outside.
Completeness
 Cash reported on the balance sheet reflects all cash transactions that have occurred
during the accounting period.
 Checking completeness of a financial statement is to analyze whether all the
transactions that are already given in the financial statement are correctly included.
 To abide by the completeness assertion, the auditors prove with the help of sufficient
evidence that all the recorded transactions deserve to be included.
 This is further supported by an external document to provide evidence regarding the
occurrence of the transaction.
Rights and Obligations
 All cash reported on financial statements as at the reporting date really belongs to
the company.
 This is to check whether the assets that are included in the financial statement are the
rights and the liabilities are the obligations of the company.
 To ensure this, sometimes special purpose entities are created.
Valuation
 Cash balances truly reflects its economic value
 Assertions about valuation or allocation deal with whether asset, liability, revenue
and expense components have been included in the financial statements at
appropriate amounts.
 Valuation checks whether the different components of the financial statement have
been included in the right proportion.
 The components are assets, liabilities, expenses, and revenue. The auditor does this
with the help of GAAP.

Presentation and Disclosure

  Cash is properly classified and sufficiently disclosed in the notes to financial
statements.
 Assertions about presentation and disclosure deal with whether particular
components of the financial statements are properly classified, described, and
disclosed.
 This assertion is to ensure whether the items in the financial statements are classified
in the right way.
 It is important to check that the account balance is calculated as well as disclosed
properly.

2. The key factors that can lead to an under/overstatement of the cash balance:
Making Estimates
 This tend to understate or overstate to the company’s future performance, it is also
the best way to avoid misstatement in following standard accounting principles.
Follow Procedure
 In digital, errors happen because people don't write down stuff. Training everyone
to report transactions efficiently will minimize misstatement. Simple step such as
reconciling items or bank statement should catch more error.
Making Changes
 Changing approaches have a risk of being misunderstood. Sample, in cash process,
you start business then change to accrual. You should not wait for payment in the
accrual. That changes are not only when you report income, but how you track it to
ledger.

3. The directional risk of cash applied in determining the appropriate audit procedure to be
performed as of the directional risk for cash is overstatement. A directional risk is the
potential bias that a client has regarding an account balance, also it is a caused due to
movement in stock price, interest rates and more.
A client might desire an overstatement of assets and an understatement of liabilities
since each makes the balance sheet appear healthier. The directional risk for cash is
overstatement. So, in performing your audit procedures, perform procedures such as
testing the bank reconciliation to ensure that cash is not overstated

4. The different risks associated in the accounting cash are:

Cash is stolen
Cash is intentionally overstated to cover up theft
Not all cash accounts are on the general ledger
Cash is misstated due to errors in the bank reconciliation
Cash is misstated due to improper cutoff

5. Cash control deficiencies affect the development of audit procedures for cash:
One-person receipts and/or disburses monies, records those transactions in the general
ledger, and reconciles the related bank accounts
The person performing the bank reconciliation does not possess the skill to perform the
duty
Bank reconciliations are not timely performed
  Cash control deficiencies appear to come from the audit process in the financial
statement error resulting from this failure, it will reasonably be anticipated to be
more than inconsistent, but less than material, since individual intercompany
transactions are not material and a material error should be identified by the
compensating controls operating monthly. Therefore, these deficiencies comply with
the concept of material deficiency that will guide the production of cash audit
procedures.

6. According to Charles Hall (2020), in smaller audit engagements, auditors may assess
control risk at high for each assertion. If control risk is assessed at less than high, then
controls must be tested to support the lower risk assessment. Assessing risks at high is
usually more efficient than testing controls.
He further added that, when control risk is assessed at high, inherent risk becomes
the driver of the risk of material misstatement (control risk X inherent risk = risk of material
misstatement). For example, if control risk is high and inherent risk is moderate, then my
Risk Material Misstatement is moderate.
Auditors response to higher risk assessments is to perform certain substantive
procedures: namely, bank confirmations and testing of the bank reconciliations. As Risk
Material Misstatement increases, auditors examine more of the period-end bank
reconciliations and more of the outstanding reconciling items. Also, they more inclined
confirm the balances (Charles Hall, 2020).

PROBLEM SOLVING
1. MAGDALO GROUP CO.
(Requirement 1)

November 20, 2020

BANK BOOK
Unadjusted Balance P 15,200 Unadjusted Balance P 7,860
Add: Deposit in Transit 4,000 Add: Credit Memo 5,000
Erroneous Bank Change 2,000 Less: Debit Memo (60)
Less: Outstanding Checks (8,500) Adjusted Book Balance 12,800
Adjusted Bank Balance P 17,800

December 31, 2020

BANK BOOK
Unadjusted Balance P 25,900 Unadjusted Balance P 24,280
Add: Deposit in Transit 10,980 Add: Error 1,782
Less: Outstanding Checks (18,098) Less: Debit Memo (Check (80)
418)
Adjusted Bank Balance P 18,782 DAIF Check 504 (1,200)
Erroneous Entry (6,000)
Adjusted Book Balance 12,800

(Requirement 2)
A.)
 Unadjusted Balance P 25,900
Deposit in Transit 10,980
Outstanding Checks (18,098)
Adjusted Cash Balance P 18,782

B.)

Adjusted Balance P 12,800

Add: Debit Memo 60
Less: Credit Memo (5,000)
Unadjusted Book Balance P 7,860

C.)

Unadjusted Balance P 7,860

Add: Debit Memo 5,000
Less: Credit Memo (60)
Adjusted Cash Balance P 12,800

D.)
Deposit in Transit P 4,000
Add: Total Bank Receipt 36,780
Less: Credit Memo (5,000)
Erroneous Entry (6,000) 25,780
Total: 29,780
Less: Bank Credit 20,800
Bank Error (2,000) (18,000)
Deposit in Transit (12/31/30) P 10,980

E.)
Outstanding Checks P 8,500
Add: Total Book 20,360
Debt Memo (60)
Error (1,782) 18,518
Total Checks to be recognized by 27,018
bank
Check recognized by bank:
Bank Debit 10,200
Debit Memo (80)
DAIF (1,200) (8,920)
Outstanding Checks (12/31/30) P 18,098

(Requirement 3)
November 30, 2020
 Journal Entries
Accounts Debit Credit
Cash in Bank 5,000
Notes Receivable 5,000
Bank Service Change 60
Cash in Bank 60

December 31, 2020

Adjusting Journal Entries

Accounts Debit Credit
Cash in Bank 1,782
Accounts Payable 1,782
Bank Service Change 80
Cash in Bank 80
Accounts Receivable 1,200
Cash in Bank 1,200
Notes Receivable 6,000
Cash in Bank 6,000

2. XYZ COMPANY
(Requirement 1)
BILLS and COINS:
Denomination Quantity Amount
500 2 1,000
100 7 700
50 4 200
10 5 50
5 6 30
1 20 20 P 2,000
CHECKS:
Date Maker Amount
12/29/20 Miss Gwapa 3,000
12/30/20 Wildflower Company 2,600
01/02/21 Lomihauz Company 3,560
01/17/21 Mr. Kupido (received 12/27/20) 2,900
P 12,060

Date Voucher Maker Amount

No.
12/18/20 145 Freight on Merchandise P 600
12/26/20 164 Postage 300
12/29/20 165 Transportation of Messenger 60
01/02/20 166 Repairs completed (12/29/20) 2,000 P 2,960
IOU: Chinita Girl, Employee P 1,200
Postage Stamps: 7 x 20 P 140
TOTAL CASH PER COUNT P 18,360

Customers Accountability:
Petty Cash Fund 30,000
Unremitted Collection:
Refund for Merchandise 2,600
Return
Sale of Junk and Scrap Items 3,560
Unused Postage Stamp 140 P 36,300
CASH SHORTAGE 17,940

(Requirement 2)

A.
Adjusting Journal Entries
Accounts Debit Credit
Receivables from Employee 22,020
Freight – in /COGS 600
Transportation Expense 60
Postage Expense 160
Prepaid Expense 140
Petty Cash Fund 23,000
B.
Repairs and Maintenance 2,000
Accrued Expense 2,000
C.
Cash in Bank 2,600
Purchase Return and Allowances 2,600

3. SANAOIL COMPANY
(Requirement 1)

Nov. 30, 2020 Receipt Disbursement Dec. 31, 2020

Balance Per Book 637,860 306,220 367,660 576,420
DM: Bank Service Charge (60) (60)
CM: Collection of Note 2,060 2,060
Error (980) 980
Adjusted Book Balance P 637,800 P 308,280 P 366,620 P 579,460

Nov. 30, 2020 Receipt Disbursement Dec. 31, 2020

Balance Per Book 685,180 308,900 356,860 637,220
OC: November (64,140) (64,140)
December 74,080 (74,080)
DIT: November 15,260 (15,260)
December 16,140 16,140
 Error: November 1,500 (1,500)
December (180) 180
Adjusted Bank Balance P 637,800 P 308,280 P 366,620 P 579,460

(Requirement 1)
A.)

Total Outstanding Checks 64,140

Less: Checks Cleared by December 2020 (26,140)
Add: Checks written in December 36,080
Outstanding Checks December 31, P 74,080
2020

B.)

Bank Balance November 30, 2020 685,180

Outstanding Checks (64,140)
Deposit in Transit 15,260
Error 1,500
Adjusted Bank Balance P 637,800

C.)

Bank Balance December 30, 2020 637,220

Outstanding Checks (74,080)
Deposit in Transit 16,140
Error 180
Adjusted Bank Balance P 579,460

D.)

Adjusted Bank Receipt Balance 308,280

Add: DIT – November 30, 2020 15,260
Error – November 30, 2020 1,500
Less: DIT – December 31, 2020 (16,140)
Total Bank Receipt - December P 308,900

E.)

Adjusted Bank Disbursement Balance 366,620

Add: OC – November 30, 2020 64,140
Error – November 30, 2020 180
Less: OC – December 31, 2020 (74,080)
Total Bank Disbursement - December 356,860

(Requirement 1)

Adjusting Journal Entry

Date Accounts Debit Credit
11/30/20 Bank Service Charge 60
Cash in Bank 60
12/31/20 Cash in Bank 2,060
Notes Receivable 2,060
Cash in Bank 980
Accounts Payable 980

UNIT 2
AUDIT OF RECEIVABLES AND SALES

UNIT ACTIVITY
ESSAY:
 1. Audit Assertions of Receivables
Existence
 Similar to other asset items, the existence is usually the major auditing issue for us
when we perform the audit of account receivable. This is due to receivable is likely
to be a material area and its inherent risk is usually related to fraud and sales
revenue manipulation, In the audit of account receivable, we can achieve 2 objectives
in performing the receivable confirmation. First, we can verify the existence of the
customer’s balances; second, we can ensure the correctness of these balances.
Completeness
 Completeness assertion tests whether all accounts receivable have been recorded.
Lack of completeness usually result in the understatement of the and balance; in this
case, as we audit accounts receivable, the lack of completeness means the
understatement of account receivable balances.
Rights and Obligations
 This test whether the client has the right of control on all accounts receivable show
on its financial statement. The concern in the audit of account receivable is usually
on the factoring of the receivables in which the client should no longer have the right
of control to receivables.
Valuation
 We usually test valuation by performing both substantive analytical procedures and
tests of details. In substantive analytical procedures, we usually compare figures and
ratios with the previous year and industry average.
Presentation and Disclosure
 Receivables are properly classified to sufficiently disclosed in the notes to financial
statement.

2. Accounts receivable represent cash, a business expects from client, and the term typical pertains
to credit transactions when finance people say a company has overstated its Accounts receivable,
they mean the business has recorded more receivable that costumers owe. The term
“understatement” generally falls under the concept of misstatement which might invite the
security of regulations as diverse of the Internal Revenue Service, the Treasury Department, and
the Securities & Exchange Commission.
3. The directional risk for account receivable and revenue is on overstatement so in performing
your audit procedure performs procedure to ensure that accounts receivable and revenues are not
overstated. For example, review the cutoff procedures at period – end. Be sure that no subsequent
period revenues are recorded in the current fiscal users.

4. Different Risk Associated in the Accounting of Receivable

Inherent Risk
 For account receivable is the risk that relates to nature, size and complexity of the
client’s business. Usually, the more complex the business is, the higher inherent risk.
Control Risk
 For accounts receivable is the risk that internal control cannot prevent or detect
material misstatement. In this case, control risk for accountant’s receivable is high,
auditors usually assert internal control procedures related to accounts receivable to
make sure if the risk is low; hence it can reduce the risk of materials misstatement of
accounts receivable.
5. Control deficiency exist when the design of a control does not allow management or employees.
In the normal course of preparing their assigned practices, to present or detect misstatements in a
timely manner.
A. Deficiency in design exist when a control needs to meet the control objective is missing or
an existing control is not properly designed so that even if the control operates the control
objectives is not always meet.
B. A deficiency in operation exist when a properly assignment control does not operate as
designed or when the person performing the control does not possess the necessary
authority or capabilities to perform the control effectively.

6. Risk of material misstatements for accounts receivable is the risk that can occur in accounts
receivable and internal control procedures related to accounts receivable cannot present or detect
such risk when inherent risk for accounts receivable is high. Auditors usually performs the test of
controls on accounts receivable and they believe internal control procedure can reduce the risk of
material misstatement for accounts receivable. In this case, the test of control is required to prove
that the internal control is strong and effective in presenting or detecting material misstatement.

PROBLEM SOLVING
1. TRUE GRIND COMPANY
(Requirement 1)

Allowance for Bad Debts, 01/01/20 P 254,000

Add: Doubtful Accounts Expense
(26,000,000x5%) P 1,300,000
Recoveries 54,000 1,354,000
Total 1,608,000
Less: Write Off (250,000+230,000) (480,000)
Allowance for Bad Debts, 12/31/20 P 1,128,000

(Requirement 2)

Classification Balance Default Rate Amount

Nov. – Dec. 2020 P 3,270,000 3% P 98,100
July – Oct. 2020 2,400,000 11% 264,000
Jan. – June 2020 950,000 24% 228,000
Prior to Jan. 7, 2020 170,000 73% 124,100
Required Allowance Balance 12/31/20 714,200
Less: Allowance Balance before Adjustments (1,128,000)
Decrease in Allowance P (413,800)

Journal Entry
Date Accounts Debit Credit
XX Allowance for Bad Debts 413,800
Doubtful Account Expense 413,800

(Requirement 3)
 Bad Debts Expense Recorded P 1,300,000
Less: Allowance Adjustment (413,800)
Corrected Bad Debt Expense P 886,200

(Requirement 4)

Gross Accounts Receivable (7,020,000-230,000) P 6,790,000

Less: Required Allowance per aging (714,200)
Net Realizable Value, 12/31/20 P 6,075,800

2. SWERTE COMPANY
(Requirement 1)

Aging Ratio Age Categories Balances Default Rate Amount

60% Not yet due P 1,920,000 2% P 38,400
15% Less than 30 days past due 480,000 10% 48,000
10% 30 to 60 days past due 320,000 15% 48,000
8% 61 to 120 days past due 256,000 30% 76,800
9% 121 to 180 days past due 128,000 37% 47,360
3% Over 180 days past due 96,000 82% 78,720
Required allowance Balance, 12/31/20 P 337,280

(Requirement 2)

Allowance for Doubtful Accounts, 01/31/20 P 90,000

Bad Debts Expense 400,000
Write Off (310,000)
Total Allowance for Doubtful Accounts Before Adjustments 180,000
Required Allowance per Aging 337,280
Increase in Allowance for Doubtful Accounts P 157,280

(Requirement 3)

Gross Accounts Receivable P 3,200,00

Allowance for Doubtful Accounts per Aging (337,280)
Net Realizable Value, 12/31/20 P 2,862,720
(Requirement 4)

Bad Debts Expense Receivable P 400,000

Add: Adjustments 157,280
Correct Bad Debts Expense P 557,280

(Requirement 5)
Bad Debts Expense → 400,000 / 0.05 = P 8,000,000 → Gross Credit Sales for the Year Ended
12/31/20
3. HENYO COMPANY
(Requirement 1)

Adjusting Entry
Date Accounts Debit Credit
XX Bad Debts Expense 2,307
Allowance for Bad Debts 2,307

Entry Made
Date Accounts Debit Credit
XX Cash 2,307
Bad Debt Expense 2,307

Correct Entry
Date Accounts Debit Credit
XX Cash 2,307
Allowance for Bad Debts 2,307

(Requirement 2)

Age Balance Default Rate Amount

0-1 month P 492,071 2% P 9,841.42
1-3 months 421,391 3% 12,641.73
3-6 months 99,831 4% 3,993.24
Over 6 months 9,000 60% 5,400
21,000 10% 2,100
Required Allowance per Aging, 12/31/20 P 33,976.39

(Requirement 3)

Control Accounts Subsidiary

Unadjusted Balances P 677,000 P 1,036,293
Understatement (Write off) 1,000 -
Write off (“over 6 months” category) (5,000) (5,000)
Customer Credit Balance 12,000 12,000
Corrected Balnce 685,000 1,243,293
Unlocated Balance
(1, 043,293 – 685,000) 358,293 -
Adjusted Balance P 1,043,293 P 1,043,293

Accounts Receivable, Dec. 31, 2020 P 1,043,293.00

Less: Required allowance per Aging (33,976.39)
Net Realizable Value, Dec. 31, 2020 P 1,009,316.61

(Requirement 4)

Recorded Doubtful Accounts Expense P 35,960

Decrease in Allowance (5,226)
Correct Doubtful Acc. Exp. For 2020 P 30,734

(Requirement 5)
Required Allowances Balance P 33,976
Allowance Balance, 12/31/20:
Per Books 42,895
Recovery 2,307
Write Off (1,000)
Unrecorded Write Off (5,000) (39,202)
Decrease in Allowance - Adjustment (P 5,226)

Journal Entry
Date Accounts Debit Credit
XX Allowance for Doubtful P 5,226
Accounts
Doubtful Account Expense P 5,226

4. SEEN QUEEN COMPANY

(Requirement A)

December 2020 Sales

Overstatements:
Sales Invoice No. 5309 P 70,000
Sales Invoice No. 5310 54,000
Sales Invoice No. 5308 6,000
P 130,000

January 2021 Sales

Overstatements:
Sales Invoice No. 5307 P 374,000
Sales Invoice No. 5302 22,000
Sales Invoice No. 5306 95,000
Sales Invoice No. 5303 230,00
Net Understatement for P 951,000
December 2020 Sales

(Requirement B)

Unadjusted Sales, 12/31/20 P 12,361,000

Net Understatements 591,000
Adjusted Sales, 12/31/20 P 12,952,000

5. DREAMTEAM CORPORATION
(Requirement 1)

Note Receivable from Sale of Plant P 2,700,000

(8,100K-2,700K 1st Installment – 2,700K Current
portion)
Note Receivable from Sale of Equipment
(1,080,000 x 0.675) 729,000
Add: Interest (Receivable Income) 85,050 814,050
(729,000 x 14% x 10/12)
Note Receivable from Sales of Land
 Balance December 31, 2020 5,000,000
Less: Installment due July 1, 2021:
Total amount to be record 1,562,500
Less: Interest (5,000,000 x 10%) (500,000) (1,062,500) 3,937,500
Total: Non – Current Receivables, December 31, 2020 P 7,451,550

(Requirement 2)

Notes Receivable from Officer (Dec. 2021) P 2,160,000

Notes Receivable from Sales of Plant 2,700,000
Notes Receivable from Sales of Land 1,062,500
Total Current Notes Receivable, 12/31/21 P 5,922,500

(Requirement 3)

Notes Receivable from Sale of Plant P 364,500

(5,400,000 x 9% x 9/12)
Notes Receivable from Sales of Land 250,000
(5,000,000 x 10% x 6/12)
Total Current Notes Receivable, 12/31/21 P 614,500

(Requirement 4)

Add: Unamortized Discount, March 1, 2020 P 351,000

(1,080,000 – 729,000)
Less: Amortization, March 1 to December 31 85,050
Unamortized Discount, December 31, 2020 P 265,950

(Requirement 5)

Note Receivable from Sales of Plant:

Interest Income, January 1 to March 31 P 182,250
(8,100,000 x 9% x 3/12)
Interest Income, April 1 to December 31 364,500
(5,400,000 x 9% x 9/12)
Note Receivable from Officer 237,600
(2,160,000 x 11%)
Note Receivable from Sale of Equipment 85,050
Note Receivable from Sales of Land 250,000
Total Interest Income for 2020 P 1,119,400

UNIT 3
AUDIT OF INVENTORIES AND COST OF SALES

UNIT ACTIVITY
ESSAY:
1. Audit Assertions of Inventories
Existence
 Existing of the inventory balances reported on financial statement should actually
exist at the reporting date. In audit of inventories occurrence of the inventory
 transaction should also be confirmed if it actually took place. This is to avoid
mistakes in recording the physical count.
Completeness
 This test whether all the inventory recorded to the balance sheet really belongs to the
company. The company reviews the purchase invoice or agreement to ensure that
there are no omissions and assets, liabilities and equity interest are valued, recorded
and disclosed appropriately.
Rights and Obligations
 All inventory reported as financial statement as of the reporting date really belongs
to the company. By checking if there is any inventory held for the third party,
reviewing the purchase invoice or purchase agreement, this will ensure the
inventory belongs to the company avoid for the complications in the balance sheet.
Valuation
 Inventory balances should truly reflect its economic value. Accurate valuation of
inventory because the reported amount of inventory will affect the cost of goods sold
and this will be profitable.
Presentation and Disclosure
 This deal with whether components of financial statements are properly classified,
described and disclosed. Inventories are properly disclosed in accordance with
GAAP. This is to obtain satisfaction about the appropriateness of the presentation
and disclose and avoid any threat the company may risk.

2. The key factors that can lead to an under/overstatement of the inventory balance:
Directional Risk for Inventory
 Overstatement of asset and understatement of liabilities since each make the balance
sheet appear healthier.
Susceptibility to Theft
 Possibility of stealing merchandise and raw materials to sell on venues.
Complexity of the Year-End Inventory Procedure
 Making complicated year-end inventory procedure intentionally or non-
intentionally.
Prior-Period Misstatements
 A major issue with valuation is the degree of processing required to move products
from the work-in-process stage to finish good is often misleading.

3. The directional risk for inventory is overstated. So, in performing audit procedure, perform
a procedure such as physical count and cut-off to ensure that COS or the cost of sale is not
overstated.

4. The different risks associated in the accounting inventories are:

Inadequate documentations or record
Key business cycle not properly define
Lack of control with authorization of transformation
No oversight or review
Dated or ineffective information systems
Lack of physical and logical security
 No formal ethical policies and procedure
Job roles and responsibilities are not clearly defined
Lack of separation of duties
Inadequate disaster recovery, backups and business continuity plans.

5. Inventory control deficiencies affect the development of audit procedures for inventories:
 For bigger, this will cause the loss or damages of asset, loss of resources and a
decline in revenue. An effective interval control structure for inventory includes a
company’s plan of organization and all the procedure and actives will take so it will
be predicted against theft and waste.

6. To assess the risk of material misstatement associated with the audit of inventories by
assigning different people the responsibilities of authorizing transactions, recording
transaction and maintaining custody of related assets such as cash.

PROBLEM SOLVING
1. BUBBLE GANG CO.
(Requirement A)

Inventory per count P 704,670

Transaction 2 31,260
3 -
4 -
5 25,620
6 (31,314)
7 (34,560)
8 4,500
Inventory as Corrected P 700,176

(Requirement B)

Journal Entry
Date Accounts Debit Credit
Transaction 2
XX Inventory, End P 31,260
Cost of Sales P 31,260
Transaction 3 NO ENTRY
Transaction 4 NO ENTRY FOR INVENTORY
XX Cost of Sale P 46,890
Accounts Payable P 46,890
Transaction 5
XX Inventory, End P 25,620
Cost of Sale P 25,620
Transaction 6
XX Cost of Sale P 31,314
Inventory, End P 31,314
Transaction 7
 XX Cost of Sale P 34,560
Inventory, End P 34,560
Transaction 8
Inventory, End P 4,500
Cost of Sale P 4,500
Sales Return and Allowances P 7,800
Accounts Receivable P 7,800

2. MARUPOK COMPANY

Inventory Accounting Payable Net Sales

Unadjusted Balances P 3,000,000 P 4,000,000 P 10,000,000
Adjustments:
1 (64,000) 75,500
2 93,000 93,000
3 30,000
4 (67,800)
5 29,000
6 31,200
7 36,000
8 10,000 40,000
Adjusted Balance P 3,069,000 P 4,200,200 P 10,040,100

(Requirement 1) (Requirement 3)

Inventory per Audit P 3,069,000 Net Sales for the Year Ended, 12/31/20 = P 10,040,100
Inventory per Count (3,000,000)
Net Adjusted Increase P 69,000
(Requirement 4)
Accounts Payable, 12/31/20 = P 4,200,200
(Requirement 2)

Accounts Payable per Audit P 4,200,200 (Requirement 3)

Accounts Payable per Book (4,000,000)
Net Adjusted Increase P 200,200 Inventory, 12/31/20 = P 3,213,200

3. TIKTOK, INC.
1.
Nov. 30 Dec. 30
P 1,350,000 P 1,600,000
15,000
(4,000) (4,000)
(2,000) (3,000)
(11,000)
P 1,348,000 P 1,593,000
Answer: C
2.
Sale P 1,680,000
COS: Inventory, Jan. 1 175,000
Net Purchase 1,348,000
Cost of Good Sold Available for Sale 1,523,000
Inventory, Nov. 30 (179,000) (1,344,000)
Gross Profit 366,000
Answer: B

3.
Gross Profit P 336,000
Sale ( ÷ ) 1,680,000
0.2 or 20%
Answer: D

4.
P 1,920,000
(1,680,000)
240,000
(20,000)
220,000
80%
176,000
20,000
P 196,000
Answer: B

5.
Inventory, Nov. 30 P 179,000
Net Purchases 249,000
Gods Available for Sales 428,000
Cost of Goods Sold (196,000)
Estimated Inventory, 12/31/20 P 232,000
Answer: B

4.

SUMMARY OF A WORKNG PAPER ADJUSTMENT

No. Ending Purchases Beginning Accounts Sales Accounts Retained
Inventory Inventory Receivable Balance Earnings
1 (P 25,000) (P 25,000)
2 P 13,200 13,200
3 (P 43,000) (P 43,000)
4 15,000 (P 15,000)
5 (P 18,000)
6 (12,000) 12,000 (12,000)
TOTAL (P 30,000) P 2,000 P 13,200 (P 43,000) (P 43,000) (P 27,000) (P 11,800)

(Requirement 1)
 Adjusting Entry
Date Accounts Debit Credit
XX Retained Earnings P 25,000
Purchases P 25,000

(Requirement 2)

Adjusting Entry
Date Accounts Debit Credit
XX Accounts Receivable P 43,000
Sales P 43,000

(Requirement 3)

Inventory per Client – Prepared Income Statement P 200,000

Add: Item no. 5 18,000
Item no. 6 12,000 30,000
P 230,000

(Requirement 4)
Net Adjustment to Purchase – Increase = P 2,000

(Requirement 5)

Inventory, Jan. 1 (90,000+13,200) P 103,200

Add: Purchase (1,700,000+2,000) 1,702,000
Cost of Goods Available for Sale 1,805,200
Less: Inventory, End (200,000+30,000) (230,000)
Cost of Goods Sold P 1,575,200

UNIT 4
AUDIT OF INVESTMENTS

UNIT ACTIVITY
ESSAY:
1. Audit Assertions of Investments
Existence
 Inspecting investment securities on hand and comparing to the previous year
balances and accounts along with purchases and sales in the current year. This also
takes into the movement of cash from and towards the investment.
Completeness
 The investments have been completely recorded with respect to the interest,
dividends and fair value if applied.
Rights and Obligations
  Checking and verifying that the clients has ownership rights for investments or the
date of balances sheet.
Valuation
 Examining financial statement to check recognition of gains or losses from
investment. This would also mean checking carrying amount of securities under the
equity method.
Presentation and Disclosure
 Verifying that all investments have been properly classified and notes have been
placed with respect to restrictions in investments.

2. The key factors that can lead to an under/overstatement of the investments balance:
 In the audit of investments, the inherent risk of investments involves more on the
existence and valuation of their balances. This is due to the risk of overstatement of
investments is higher than the risk of an understatement and an overstated, in this
case, it could be due fraud. The inherent risk of investments is that client’s
investments may be stolen and their balances may be overstated to cover up the
period.

3. The directional risk for investment is overstated. So, in performing audit procedures is to
ensure that balances are properly stated.

4. The different risks associated in the accounting investments are:

Market Risk
 The risk of investment declining in value because of economic development or other
events that effect the entire market. The main types of market risk are equity risk,
interest risk and currency risk.
Liquidity Risk
 The risk of being unable to sell year investment at a fair price and get your money
out when you want to. To sell the investment, you may need to accept a lower price.
In some cases, such as except market investment, it may not be possible to sell the
investment at all.
Concentration Risk
 The risk of loss because your money is concentrated in investment or type of
investment. When you diversify your investment, you spread the risk over different
types of investments, industries and geographic location.
Reinvestment Risk
 The risk of loss from reinvesting principal or income at a lower interest rate.
Inflation Risk
 The risk of loss in your purchasing power because the value of your investments
does not keep with inflation.
Horizon Risk
 The risk that your investment horizon may be shortened because of an unforeseen
event.
Longevity Risk
 The risk of outliving your savings. The risk is particularly relevant for people who
are retired, or are meaning retirement.
 Foreign Investment Risk
 The risk of loss when investing in foreign countries.

5. Investment control deficiencies affect the development of audit procedures for investments:
 The evaluation of whether a control deficiency present a reasonable possibility of
misstatement can be made without quantifying the probability of occurrence as a
specific percentage or average. Risk factor affect whether there is a reasonable
possibility that a deficiency or a combination of deficiencies, will result in a
misstatement of an account balance.

6. To assess the risk of material misstatement associated with the audit of investments are
useful to note that when auditors assess that the control risk of investment is low and want
to rely on internal controls to reduce some of their substantive works, they need to perform
the test of controls.

PROBLEM SOLVING
1. RELAX LANG COMPANY
(Requirement 1)

Book Value P 900,000

Dividend Declared (22,00)
Cost of FVOCI P 878,000

(Requirement 2)

=[ ( 112.50 x 6,000 )+ 22,000 ]

= P 37,000

(Requirement 3)

Selling Price P 70,000

Less: Commission Tax (7,000)
Net Selling Price 63,000
Less: Carrying Value (60,000)
100,000
[3,600(
6,000
) ]
Gain on Sales P 3,000

(Requirement 4)

ABC Corporation - PS 40,000 30,000

[ 70−(
1,000 ]
) x 1,000 =
DEF, INC. - OS 100,000 109,980
[
35−(
6,000 ]
) x 6,110 =
GHI 90,000 20,000
[
55−(
2,000 ]
) x 2,000 =
REPA Co. 900,000 (108,000)
[112−(
9,000 ]
) x 9,000 =
Unrealized Gain Chargeable to Income Statement P 51,980

(Requirement 5)

ABC Corporation - PS 70 x 1000 70,000

DEF, INC. - OS 35 x 2,400 84,000

GHI 55 x 2,000 110,000

REPA Co. 112 x 9,000 1,008,000

Unrealized Gain Chargeable to Income Statement P 1,272,000

2. CPALE COMPANY
(Requirement 1)

MARE, Co. Share P 1,000,000

Brokerage Fee 19,000
Commission 7,000
Dividends Receivable (16,000)
Cost of FVOCI P 1,010,000

(Requirement 2)

Feb. 14, Dividend Receivable P 16,000

No. 1, Dividends Receivable (3x6,000) 18,000
Dividend Income P 34,000

(Requirement 3)

Proceeds (P20 x 400) P 8,000

Less: Carrying Value (14,000)
77,000
[400(
2,000 x 110 % ]
)

Total (6,000)
Proceeds (50,000-8,000) P 42,000
110,000 36,667
[
Less: Carrying Value 2,000(
6,000
) ]
Total 5,333
Total Loss on Sale (6,000) + 5,333 (P 667)

(Requirement 4)

March, (74,000 – 30,000) P 44,000

June, (60,000 – 30,000) 30,000
Gain on Exchange P 74,000
 (Requirement 5)

WHO Corporation (400 x 50) P 20,000

COC, Inc. (4,000 x 15) 60,000
SIS Co. [ ( 2,000 x 110 % )−400 ] x 45 81,000
MARE, Co. (7,000 x 100) 700,000
MEME Company (2,000 x 60) 120,000
Total Adjusted Balance of Investment P 981,000

3. BADBOYS CORPORATION
(Requirement 1)

Sale Price (200,000x101%) P 202,000

Brokerage Fee (700)
Net 201,300
Carrying Value (375,670 x (208,706)
200/360)
Loss on Sale (P 7,406)

(Requirement 2)

Sale Price (250,000/102%) P 255,000

Brokerage Fee (800)
Net 254,200
Carrying Value (240,000)
Gain on Sale P 14,200

(Requirement 3)

Lami Co.
June 1 – July 1 (250,000 x 7% x 6/12) P 8,750
Nov. 1 – Oct. 1 (300,000 x 9% x 2/12) 4,500
Chic Co.
Jan. 1 – April 1 (360,000 x 7½% x 3/12) 6,750
April 1 – Dec. 31 (200,000 x 7½% x 9/12) 11,250
TOTAL INTEREST INCOME P 31,250
(Requirement 4)

Carrying Value Fair Value

Agidaw Co. Ordinary Shares P 70,000 72,000
Chic Co. 7½% Bonds 166,964 179,200
Lalabs Co, Bonds 318,000 48,200
Labyu Co. Ordinary Shares 44,800 318,000
TOTAL P 599,764 P 617,400
Unrealized Gain on Trading = P 599,764 – P 617,400
= P 17,633

(Requirement 5)

Chic Co. (200,000 x 7½% x 6/12) P 7,500

Lalabs Co. (300,000 x 9% x 6/12) 13,500
Accrued Interest Receivable P 21,000

UNIT 5
AUDIT OF PROPERTY, PLANT AND EQUIPMENT

UNIT ACTIVITY
ESSAY:
1. Audit Assertions of PPE
Existence
 It is reported on the balance sheet really exist as the reporting date.
Completeness
 Recorded include all relevance transactions that have taken place during the
accounting period.
Rights and Obligations
 The company has ownership rights for the assets on the reporting date.
Valuation
  The recorded balance of PPE truly reflects their actual economic value
Presentation and Disclosure
 The PPE balances is reflected on the balance sheet in the non-current section and
adequate disclosure has been made in the note to financial statements.

2. The key factors that can lead to an under/overstatement of the PPE balance, if the control
weakness exist, use create audit produce to respond to them. For example, during the
walkthrough was that one-person purchase property has principal access to equipment.

3. The directional risk of PPE applied in determining the appropriate audit procedure to be
performed as of the directional risk for PPE is overstatement, so in performing your audit
procedures, perform procedure to ensure property, plant and equipment is not overstated.

4. The different risks associated in the accounting of PPE are:

Property is intentionally overstated
Repair expenses are improperly classified as property
Purchases that should be recorded as property are expensed
Depreciation is improperly computed and recorded

5. PPE control deficiencies affect the development of audit procedures for PPE:
Authorizes the purchase of the property
Enters the property in the general ledger and depreciation schedule
Has physical custody of property

6. To asses the risk of material misstatement associated with the audit of PPE, by the risk of
material misstatement for PPE may due to depreciation expenses being improperly
computed and recorded, improper capitalization of repairs expense or purchase that
should recorded at property or expense.

PROBLEM SOLVING
1. DRUMS CORP.
(Requirement 1)

Land (1/1/20) P 3,450,000

Purchase Price
Land A:
Purchase Price 12,500,000
Commission 765,000
Clear Cost 525,000
Recovered (195,000) 13,595,000
Land B:
Purchase of Land 6,300,000
Land (12/31/21) P 23,345,000
Answer: B (Nearest)
 (Requirement 2)

Building (1/1/20) P 13,350,000

Construction of the New Building 4,950,000
Demolition Cost 615,000
Excavation Fees 570,000
Architectural Design Fees 165,000
Building Permit Fees 37,500
Imputed Interest on Funds used 127,500
Building (12/31/20) P 19,815,000
Answer: B (Nearest)

(Requirement 3)

Leasehold Improvement (1/1/20) P 9,700,000

December, Improve Leased in Office 1,535,000
Space
Lease Improvement (12/31/20) P 11,235,000
Answer: D

(Requirement 4)

Machine & Equipment P 13,125,000

Invoice Price 1,305,000
Freight cost 49,500
Installation Cost 36,000
Machine and Equipment P 14,515,000
Answer: B

(Requirement 5)
Land C should be reported in the company’s December 31, 2020, statement of financial
position under INVENTORIES.
Answer: B
2. WILDFLOWER CORP.
(Requirement 1)

P 250,000
(704,000) → CA of June 11, 2020
P (454,000)
Answer: A

(Requirement 2)

P 10,000,000
2017 x 7,000,000 1,125,000 8,875,000
2018 x 7,000,000 1,250,000 7,825,000
2019 x 9,000,000 975,000 6,850,000
2020 x 9,000,000 900,000 5,950,000
Answer: D
 (Requirement 3)

8,000,000 - 3,904,000 = 4,096,000

DB Rate = 20%
4,096,000 x 20% x 6,000/5,000 P 665,600
4,096,000 x 20% 1,500/5,000 x 6/12 64,000
2,137,541 x 20% x 7/12 249,380
P 978,980
Answer: A (Nearest)

(Requirement 4)

Accumulated Depreciation:
= P 5,000,000 – P 500,000
= P 4,500,000 / 5
= P 900,000
900,000 x 1,000/5,000 x 7/12 P 105,000
900,000 x 4,000/5,000 720,000
216,000 x 5/12 90,000
P 915,000
Answer: A

(Requirement 5)
The Auditor may conclude that depression charges may be insufficient if he or she notes:
Excessive recurring losses on retired assets.
Answer: A

3. LOMI HAUZ CORP.

(Requirement 1)

Equipment 4 186,000/5 P 37,200

Equipment 5 (240,000 x 0.98)/5 47,040
Equipment 6 279,000 /5 55,800
Equipment 2 (120,000/5) x 9/12 18,000
P 158,040
Answer: C
(Requirement 2)

Cost P 132,000
Accumulated Depreciation (79,200)
Carrying Amount (62,800)
Net Proceeds 28,450
Gain on Sales of Equipment 3 18,450
Answer: D
 (Requirement 3)

Carrying Amount (P 78,600)

Traded - in 129,000
Gain on Trade – in P 50,400
Equipment
Answer: C

(Requirement 5)

Equipment 4 (186,000 x 9/60) P 27,900

Equipment 5 (235,200 x 18/60) 70,560
Equipment 6 (279,000 x 30/60) 139,500
CA of Equipment 12/31/21 P 237,960
Answer: A

UNIT 6
AUDIT OF INTANGIBLE ASSTS AND PREPAYMENTS

UNIT ACTIVITY
ESSAY:
1. Audit Assertions of Intangible Assets
Existence
 To make or check if the reported balance and financial statement really exist at the
reporting date.
Completeness
 To review if all transactions are properly recorded and have been recorded. This is to
check if the inventory balance on the balance sheet are correct.
Rights and Obligations
 This is to if all reported on financial statements are belongs to the company.
Valuation
  This is to check and to correct the value of the assets.
Presentation and Disclosure
 To check if the assets are properly classified and sufficiently disclosed in the notes to
financial statements.

2. The key factors that can lead to an under/overstatement of the intangible assets balance:
Inappropriate recording of amortization
Inappropriate capitalization of expense incurred
Recording assets in the wrong period
Not using reasonable and consistent amortization methods

3. The directional risk of intangible assets applied in determining the appropriate audit
procedure to be performed is overstatement. So, in performing the audit procedures,
perform procedures to check that research cost have not been capitalized and development
cost are capitalized only after technical and commercial feasibility of the asset for sale or
use have been established.

4. The different risks associated in the accounting of intangible assets are:

The leakage or theft of confidential information
Not being able to prove ownership of intangible assets
Hazardous use of open resources code software
Not owning your brand or brand infringement
Threatened or actual intellectual property litigation

5. Intangible assets control deficiencies affect the development of audit procedures for
intangible assets because they are possibilities of errors, for example, not appropriate of
recording the transactions that can really affect in the balance reported in financial
statement.

6. To assess the risk of material misstatement associated with the audit of intangible assets are
primarily caused deviation from accounting guidelines as provide by PAS 38.
PROBLEM SOLVING
1. BODYSHOTS COMPANY
(Requirement 1)

February 1, Organizing Cost P 83,000

June 15, Promotional Expense 323,000
Organization Expenses P 406,000

(Requirement 2)

Patent P 2,100,000 → P 260,000

Less: Amortization (2,100,000/15 x 9/12) (105,000) → (13,000)
Carrying Value P 1,995,000 → P 247,000

(Requirement 3)
 Prepaid Rent (720,000 x 4/24 months) P 120,000

2. HBL CORP.
(Requirement 1)

Patent P 3,000,000
Less: Amortization (3,000,000/20 years) (150,000)
Total P 2,850,000

(Requirement 2)

License No. 1 P 2,920,000

Less: Recoverable Amount (830,000)
Impairment Loss P 2,090,000

(Requirement 3)

License No. 2 (2,510,000+200,000) P 2,710,000

Less: Amortization (2,710,000/10) (271,000)
Carrying Value P 2,439,000

(Requirement 4)
The amount of goodwill to be presented in the statement of financial position is 0 or zero,
because the amount should be recorded as prepaid advertising.
(Requirement 5)

Patent P 2,850,000
Goodwill 0
Licensing Agreement No. 1 2,090,000
Licensing Agreement No. 2 2,434,000
Total Intangible Asset P 7,373,000

3. SKL CORPORATION
(Requirement 1)

Legal Fees to obtain Patent P 530,000

Patent Application and License Fee 70,000
Cost of Patent P 600,000

(Requirement 2)

Common Stock 7,000

FMV of Stock x 62
Total 434,000
Allocation 2/3
Cost of License P 289,333

(Requirement 3)
Common Stock 7,000
FMV of Stock x 62
Total 434,000
Allocation 1/3
Cost of License P 144,667

(Requirement 4)

Patent P 600,000
License 289,333
Trademark 144,667
Less: Amortization
Patent (600,000/5 x 9/12) 90,000
License (289,333/5 x 8/12) 38,578
Trademark (144,667/5 x 8/12) 19,289 (147,867)
Carrying Amount P 886,133

(Requirement 5)

Organization Expense P 354,000

Salaries Expense 1,750,000
Clown cost, Pamphlets & Candy (20,000+6,000) 26,000
TOTAL P 2,130,000

4. POGI CORPORATION
(Requirement 1)

Trademark P 50,000
Customer List 90,000
Amortization P 120,000

(Requirement 2)

Cash Flow 20,000

Discount Rate / 10%
Total (2,000)
Carrying Value 400,000
Impairment Loss P 398,000

(Requirement 3)
 Trademark P 400,000
Amortization (50,000)
Carrying Value P 350,000

(Requirement 4)
The Carrying Value of Goodwill as of December 31,2020
= P 600,000 or P 1,750,000

(Requirement 5)

Customer List P 350,000

Amortization (70,000)
Carrying Value P 280,000