Problem no.1 In connection with the audit of the PAKYO COMPANY for the year ended December 31 !

"1" you are called u#on to $erify the account% #ayable tran%action%. You find that the com#any doe% not ma&e u%e of a $oucher re'i%ter but enter% all merchandi%e #urcha%e% in a Purcha%e% (ournal from which #o%tin' are made to a %ub%idiary account% #ayable led'er. )he %ub%idiary led'er balance of P1 *"" """ a% of December 31 !"1" a'ree% with the account% #ayable balance in the com#any+% 'eneral led'er. An analy%i% of the account di%clo%ed the followin', )rade creditor% credit balance% )rade creditor% debit balance% Net .%timated warranty on #roduct% %old Cu%tomer+% de#o%it% Due to officer% and %hareholder% for ad$ance% 0ood% recei$ed on con%i'nment at %ellin' #rice 1off%ettin' debit made to Purcha%e%2 P 1 3-3 """ -3 """ P 1 3"" """ 1"" """ / """ *" """ 31 """ P 1 *"" """

A further analy%i% of the 4)rade Creditor%5 debit balance% indicate%, Date Item% Mi%cellaneou% debit balance% #rior to !""6. No information a$ailable due to lo%% of record% in a fire. Amount P 3 """ 9 """ 6 """ * """

"37"37"6 Manila Co. 8Merchandi%e returned for credit but the com#any i% now out of bu%ine%% "-71"7"/ Cebu Cor#. 8 Merchandi%e returned but Cebu %ay% 4ne$er recei$ed5 "671"71" (olo Di%tributor% 8 Allowance 'ranted on defecti$e merchandi%e after the in$oice wa% #aid 1"71"71" :ulacan Co 8 O$er#ayment of in$oice 1! """ !3 """

1!7"*71" Ad$ance to ;ambale% Co. )hi% com#any a'ree% to %u##ly certain article% on a co%t 8#lu% ba%i% 1!7"*71" 0ood% returned for credit and ad<u%tment% on #rice after the in$oice% were #aid= credit memo% from %u##lier not yet recei$ed

3 """ -3 """

Your ne>t %te# i% to chec& the in$oice% in both the #aid and the un#aid in$oice file% a'ain%t led'er account%. In thi% connection you di%co$er an in$oice from Atla% Co. of P3* """ dated December 1! !"1" mar&ed 4Du#licate5 which wa% entered in the Purcha%e (ournal in (anuary !"11. ?#on in@uiry you di%co$er that the merchandi%e co$ered by thi% in$oice wa% recei$ed and %old but the ori'inal in$oice a##arently ha% not been recei$ed. In the ban& reconciliation wor&in' #a#er% there i% a notation that fi$e chec&% totalin' P -3 """ were #re#ared and entered in the Ca%h Di%bur%ement% (ournal of December but the%e chec&% were not i%%ued until (anuary 1" !"11. )he in$entory analy%i% %ummary di%clo%e% 'ood in tran%it of P - """ at December 31 !"1" not ta&en u# by the com#any under audit durin' the year !"1". )he%e 'ood% are included in your ad<u%ted in$entory. 1. )he Account% #ayable 8 )rade balance at December 31 !"1" %hould be A. P 1 361 """ C. P 1 !13 """ :. P 1 -13 """ D. P 1 366 """

!. )he net ad<u%tment to Purcha%e% %hould include a A. Net debit of P *1 """

:. Net credit of P 31 """ C. Net debit of P 1" """ D. Net debit of P 63 """ 3. )he entry to ad<u%t the Account% #ayable account for tho%e account% with debit balance% %hould include a debit to A. P 19 """ C. P 3* """ :. P !3 """ D. P 3/ """

3. )he entry to ad<u%t the Account% #ayable account for tho%e account% with debit balance% %hould include a debit to A. Mi%cellaneou% lo%%e% if P !3 """ :. Ad$ance% to %u##lier% of P !3 """ C. Au##lier% to debit balance% of P 19 """ D. Purcha%e% of P !1 """ *. Auditor confirmation of account% #ayable balance% at the end of the re#ortin' #eriod may be nece%%ary becau%e A. )here i% li&ely to be other reliable e>ternal e$idence to %u##ort the balance% :. Corre%#ondence with the audit client% attorney will re$eal all le'al action by $endor% for nonB#ayment C. )hi% i% a du#lication of cutoff te%t D. Account% #ayable at the end of re#ortin' #eriod may not be #aid before the audit i% com#leted. Problem ! You were able to obtain the followin' from the accountant for Ma$eric% Cor#. Celated to the com#any% liability a% of December 31 !"1". Account% #ayable Note% #ayable 8 trade Note% #ayable 8 ban& Da'e% and %alarie% #ayable Intere%t #ayable Mort'a'e note% #ayable 8 1"F Mort'a'e note% #ayable 8 1!F :ond% Payable P -*" """ 1/" """ 9"" """ 1* """ E -"" """ 1 *"" """ ! """ """

)he followin' additional information #ertain% to the%e liabilitie%, a. All trade note% #ayable are due within %i> month% of the balance %heet date. b. :an& note% #ayable include two %e#arate note% #ayable Allied :an&. 112 A P3"" """ 9F note i%%ued March 1 !""9 #ayable on demand. Intere%t i% #ayable e$ery %i> month%. 1!2 A 1Byear P*"" """ 11 GF note i%%ued (anuary ! !"1". On December 3" !"1" Ma$eric&% ne'otiated a written a'reement with Allied :an& to re#lace the note with !Byear P*"" """ 1"F note to be i%%6ued (anuary ! !"11. )he intere%t wa% #aid on December 31 !"1" c. )he 1"F mort'a'e note wa% i%%ued October 1 !""6. Dith a term of 1" year%. )erm% of the note 'i$e the holder the ri'ht to demand immediate #ayment of the com#any fail% to ma&e a monthly intere%t #ayment within 1" day% of the date the #ayment i% due. A% of December 31 !"1" Ma$eric&% i% three month% behind in #ayin' it% re@uired intere%t #ayment. d. )he 1!F mort'a'e note wa% i%%ued may 1 !""1 with a term of !" year%. )he current #rinci#al amount due i% P 1 *"" """. Princi#al and intere%t #ayable annually on A#ril 3" A #ayment of P!!" """ i% due A#ril 3" !"11. )he #ayment include% intere%t of P 19" """. e. )he bond% #ayable i% 1"Byear 9F bind% i%%ued (une 3" !""1. Intere%t i% #ayable %emiBannually e$ery (une 3" and December 31. :a%ed on the abo$e and the re%ult of your audit an%wer the followin', 1. Intere%t #ayable a% of December 31 !"1" i% a. P1** """ b. 133 """ c. !"3 """ d. !1* """

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3.

3.

)he #ortion of the Note% #ayable 8 ban& to be re#orted under current liabilitie% a% of December 31 !"1" i% a. P 3"" """ b. *"" """ c.9"" """ d. " )otal current liabilitie% a% of December 31 !"1" i% a. P 3 /*" """ b. 3 139 """ c. 3 /39 """ d. 3 //9 """ )otal noncurrent liabilitie% a% of December 31 !"1" i% a. P1 6-" """ b. ! *-" """ c. 3 /-" """ d. 1 /-" """

Problem no. 3 In con<unction with your firm+% e>amination of the financial %tatement% of PIA)ONA COMPANY a% of December 31 !"1" you obtained from the $oucher re'i%ter the information %hown in the wor&in' #a#er below. Item no. 1 ! 3 3 * 6 9 / 1" 11 1! 13 Entry Date 1!.19.1" 1!.19.1" 1!.!1.1" 1!.!1.1" 1!.!1.1" 1!.!-.1" 1!.!9.1" 1!.!9.1" 1!.!9.1" "1."!.11 "1."*.11 "1."*.11 "1."*.11 Voucher Ref. 1!B!"! 1!B!"3 1!B!"1!B!13 1!B!1/ 1!B!!1 1!B!3" 1!B!33 1!B!33 "1B""1 "1B""! "1B""3 "1B""3 Description Au##lie% #urcha%ed HO: de%tination !3.!-.!"= recei$ed 1!.16.1" Auto in%urance 1!.1*.1" 1!.!".11 Ce#air% %er$ice%= recei$ed 1!.!".1" Merchandi%e %hi##ed HO: Ahi##in' #oint 11.!".1"= recei$ed 1!."3.1" Payroll 1!."-.1" to 1!.!".1" 11! wor&in' day%2 Aub%cri#tion to )a> Ce#ortin' Aer$ice for !"11 ?tilitie% for December !"1" Merchandi%e %hi##ed HO: de%tination 1!.!3.1"= recei$ed "1."!.11 Merchandi%e %hi##ed HO: de%tination 1!.!-.1"= recei$ed 1!.!/.1" Ie'al %er$ice%= recei$ed 1!.!9.1" Medical %er$ice% for em#loyee% for December !"1" Merchandi%e %hi##ed HO: %hi##in' #oint 1!.!/.1"= recei$ed "1."3.11 Payroll 1!.!1.1" to "1."*.11 11! wor&in' day% in total 3 wor&in' day% in (an. !"11 Merchandi%e %hi##ed HO: %hi##in' #oint "1."!.11= recei$ed "1."*.11 Manufacturin' royaltie% December !"1" Merchandi%e %hi##ed HO: de%tination "1."3.11= recei$ed "1.1".11 Amount P !" """ !3 """ !3 """ 16 """ -/ """ * """ !/ """ 111 *"" 93 """ 3- """ !* """ ** """ 6! """ Account Charged Au##lie% on hand Pre#aid in%urance Ce#air% and maintenance In$entory Aalarie% and wa'e% Due% and %ub%cri#tion ?tilitie% e>#en%e In$entory In$entory Ie'al and #rofe%%ional e>#en%e Medical e>#en%e In$entory Aalarie% and wa'e%

13 1* 1-

"1.1".11 "1.1!.11 "1.1!.11

"1B""* "1B"""1B""6

-3 """ 3/ """ 39 """

In$entory Manufacturin' co%t In$entory

16 19 1/ !"

"1.13.11 "1.13.11 "1.1*.11 "1.1*.11

"1B""9 "1B""/ "1B"1" "1B"11

Maintenance e %er$ice%= recei$ed "1."/.11 Intere%t on ban& loan 1"B 1!B1" to "!1.1".11 Manufacturin' e@ui#ment in%talled on 1!.!/.1" Di$idend% declared 1!.1*.1"

/ """ 3" """ !*3 """ 1-" """

Ce#air% and maintenance Intere%t .>#en%e Machinery and e@ui#ment Di$idend% #ayable

Accrue% liabilitie% a% December 31 !"1" were a% follow%, Accrued #ayroll P 39 """ Accrued intere%t #ayable !- --6 Di$idend% #ayable 1-" """ Accrue% royaltie% #ayable 3/ """ )he accrue% #ayroll accrued intere%t #ayable and accrued royaltie% #ayable account% were re$er%ed on (anuary 1 !"11. C.J?IC.D, Pre#are ad<u%tin' entrie% a% of December 31 !"1" ba%ed on your re$iew of the data 'i$en abo$e. PROBLEM O ! H..I NA H..I INC. ha% been #roducin' @uality reu%able adult dia#er% for more than two decade%. )he com#any+% fi%cal year run% from A#ril 1 to March 31. )he followin' information relate% to the obli'ation% of Heel Na Heel a% of March 31 !"1". BO D" PA#ABLE Heel Na Heel i%%ued P1" """ """ of 1"F bond% on (uly 1 !""9. )he #re$ailin' mar&et rate of intere%t for the%e bond% wa% 1!F on the date i%%ue. )he bond% will mature on (uly 1 !"19. Intere%t i% #aid %emiannually on (uly 1 and (anuary 1. Heel Na Heel u%e% the effecti$e intere%t rate method to amortiKe bond #remium or di%count O$E" PA#ABLE Heel Na Heel ha% %i'ned %e$eral lon'Bterm note% with financial in%titution%. )he maturitie% of the%e note% are 'i$en in the %chedule below. )he total un#aid intere%t for all of the%e note% amount% to P-"" """ on March 31 !"1" Due Date A#ril 1 !"1" (uly 1 !"1" October 1 !"1" A#ril 1 !"11 B March 31 !"1! A#ril 1 !"1! 8 March 31 !"13 A#ril 1 !"13 8 March 31 !"13 A#ril 1 !"13 8 March 31 !"1* A#ril 1 !"1* 8 March 31 !"1E"$IMA$ED %ARRA $IE" Heel Na Heel ha% a oneByear #roduct warranty on %ome %elected item% in it% #roduct line. )he e%timated warranty liability on %ale% made durin' the !""9B!""/ fi%cal year and %till out%tandin' a% of March 31 !""/ amounted to P19" """. )he warranty co%t on %ale% made from A#ril 1 !""/ throu'h March 31 !"1" are e%timated a% P*!" """. )he actual warranty co%t incurred durin' the current !""/B!"1" fi%cal tear are a% follow%, Darranty claim% honored on !""9B!""/ %ale% P 19" """ Darranty claim% honored on !""/B!"1" %ale% 169 """ )otal warranty claim% honored P 3*9 """ O$&ER I 'ORMA$IO 1. )CAD. PAYA:I.A Account% #ayable for %u##lie% 'ood% and %er$ice% #urcha%ed on o#en account amount to P63" """ a% March 31 !"1" PAYCOII C.IA).D I).MA Amount Due P 3"" """ -"" """ 3"" """ 3"" """ 1 !"".""" 1 """ """ 9"" """ 1 """ """ P 6 """ """

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Merchandi%e %hi##ed HO: de%tination 1!.!3.1"= recei$ed "1."!.11 Accrued Aalarie% and wa'e% P 3"" """ Dithholdin' ta>e% #ayable /3 """ Other #ayroll deduction% 1" """ 3. MIAC.IIAN.O?A ACCC?AIA Other accrual% not %e#arately cla%%ified amount to P1*" """ a% of March 31 !"1" 3. DILID.NDA On march 1* !"1" Heel Na Heel+% board of director% declared a ca%h di$idend of P".!" #er common %hare and a 1"F common %toc& di$idend. :oth di$idend% were to be di%tributed on A#ril 1! !"1" to the common %toc&holder% of record at the clo%e of bu%ine%% on march 31 !"1". Data re'ardin' Heel Na Heel common %toc& are a% follow%, Per Lalue P *."" #er %hare Number of %hare% i%%ued and out%tandin' - """ """ %hare% Mar&et Lalue% of Common Atoc&, March 1* !"1" March 31 !"1" A#ril 1! !"1" %hare 1. Mow much wa% recei$ed by Heel Na Heel from the bond% i%%ued on (uly 1 !""9E a. P9 9*! /-" b. 1" """ """ c. 1" *"" """ d. 1" -36 "3" On March 31 !"1" Heel Na Heel+% %tatement% of financial #o%ition would re#ort total current liabilitie% of a. P* !9- """ b. 3 39- """ c. * 33- """ d. * -3! """ On March 31 !"1 Heel Na Heel+% %tatement of financial #o%ition would re#ort total noncurrent liabilitie% of a. P13 39/.3*" b. 13 3*! !16 c. 13 36" 693 d. 13 !*! /-" O. ( P !!."" #er %hare !1.*" #er %hare !!.*" #er

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3.

PROBLEM

On (anuary 1 !""/ DI;ACDA COCPOCA)ION i%%ued ! """ of it% *Byear P1 """ face $alue 11F bond% date (anuary 1 at an effecti$e annual intere%t rate 1yield2 of /F. Intere%t i% #ayable each December 31. DiKard% u%e% the effecti$e intere%t method of amortiKation. On December 31 !"1". )he ! """ bond% were e>tin'ui%hed early throu'h ac@ui%ition on the O#en Mar&et by DiKard for P1 /9" """ #lu% accrued intere%t. On (uly 1 !""/ DiKard% i%%ued * """ of it% P1 """ face $alue 1"F con$ertible bond% at #at. Intere%t i% #ayable e$ery (une 3" and December 31. On the date of i%%ue the #re$ailin' mar&et intere%t rate for %imilar debt without the con$er%ion o#tion i% 1!F. On (uly 1 !"1" an in$e%tor in DiKard% con$ertible bond% tendered 1 *"" bond% for con$er%ion into 1* """ %hare% of DiKard% common %toc& which had a fair $alue of P1"* and a #ar $alue of P1 at the date of con$er%ion. :a%ed on the abo$e and the re%ult of your audit determine the followin', 1Cound off #re%ent $alue factor% to four decimal #lace%.2 1. )he i%%ue #rice on the ! """ *Byear P1 """ face $alue bond% in (anuary 1 !""/ i% a. P! 1**.*"" b. P! """ """ c. 1 933 3"" d. ! 136 9"" )he carryin' $alue of the ! """ *Byear P1 """ face $alue bond% on December 31 !""/ i% a. 1 9/9 3"" b. ! 1!/ *"" c. ! """ """ d. ! 1!1 1"" )he 'ain on early retirement of bond% on December 31 !"1" i% a. P!" """ b. 11! """ c. 1!1 !"" D. " )he carryin' $alue of the * """ - year P1 """ face $alue bond% on December 31 !""/ i%

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3. 3.

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P3 -"* 9"" b. * """ """ c. 3 63!.96* d. 3 -1* 3"" )he con$er%ion of the 1 *"" -Byear% P1 """ face $alue bond% on (uly 1 !"1" will increa%e APIC by a. P1 39* """ b. 1 363 """ c. 1 31*."*3 d. P1 366 -/6

a.

PROBLEM O. ) )he followin' data were obtained from the initial audit of :I:I COMPANY, *(+, *- year, .onds paya./e, dated 0anuary *, 1--2 De.it Ba/ance Ca%h #roceed% from i%%ue on (anuary 1 !""/ Of 1 """ P1 """ bond%. )he mar&et rate of Intere%t on the date of i%%ue wa% 1!F Bond Interest E3pense Ca%h #aid 17!71" Ca%h #aid 67171" Accrual 1!73171" Accrued Interest on Bonds :alance 17171" Accrual 1!73171" $reasurer .onds Cedem#tion #rice and intere%t to date on !"" bond% #ermanently retired on 1!73171" !-* """ Credit

P 1 16! "33 P 6* """ 6* """ 6* """

P1 16!."33 P 6* """ 1*" """ !!* """ P 6* """ P 6* """ 6* """ 1*" """

P !-* """

:a%ed on the #recedin' information determine the followin', 1. Carryin' $alue of bond% #ayable at December 31 !"1" a. P931 11" b. 9"" """ c. 1 1*1 *93 /!1 !-!. Io%% on :ond redem#tion a. P3 -93 b. P1/ -93 c. 1* """ 3. Accrued Intere%t on :ond% at December 31 !"1" a. P6* """ b. 13* """ c. -" """ 3. :ond Intere%t .>#en%e for the year ended December 31 !"1" a. P1*" """ b. 13/9 163 c. -/ 63*

d.

d. 33 -93 d. *! *"" d. 1-" 9!-

PROBLEM 4 N?00.)A COCPOCA)ION manufacture% and %ell% food #roduct% and food #roce%%in' machinery. It% re#ortin' date i% December 31. Cele$ant e>tract% from it% financial %tatement% at December 31 !""/ are a% follow%, Current /ia.i/ities Pro$i%ion Pro$i%ion for warrantie% oncurrent /ia.i/ities Pro$i%ion Pro$i%ion for warrantie%

P!6" """

P19" """

ote 5)6Contigent Lia.i/ities N?00.)A i% en'a'ed in the liti'ation with $ariou% #artie% in relation to aller'ic reaction t o trace% of #eanut% alle'ed to ha$e been found in #ac&et% of fruit 'um%. N?00.)A %trenuou%ly denie% the alle'ation and a% at the %ame date authoriKin' the financial %tatement% for i%%ue i% unable to e%timate the financial effect if any of any co%t or dama'e% that may be N#ayable to the #laintiff%. )he #ro$i%ion for warrantie% at December 31 !""/ wa% calculated u%in' the followin' a%%um#tion%, )here wa% no balance carried forward from the #rior year.

.%timated co%t of re#air% 8 Product% with minor defect% .%timated co%t of re#air% 8 Product% with minor defect% .>#ected F of #roduct% %old durin' !""9 ha$in' no defect% in !"1" .>#ected O of #roduct% %old durin' !""9 ha$in' minor defect% in !"1" .>#ected O of #roduct% %old durin' !""9 ha$in' Ma<or defect% in !"1" Btho%e with minor defect% !"1" .>#ected timin' of %ettlement of warranty #ayment% Btho%e with ma<or defect% in !"1" -"F in !"1" Durin' the year ended December 31 !"1" the followin' occurred, 1.

P 1 """ """ P - """ """ 9"F 1* F *F all in 3"F

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In a relation to the warranty #ro$i%ion of P3*" """ at December 31 !""/ P!"" """ wa% #aid out of the #ro$i%ion. Of the amount #aid P1*" """ wa% for #roduct% with minor defect% and P*" """ wa% for #roduct% with ma<or defect% all of which related to amount% that had been e>#ected to be #aid in !"1"7 In calculatin' it% warranty #ro$i%ion for December 31 !"1" N?00.)A made the followin' ad<u%tment to the a%%um#tion% u%ed for the #rior year, .%timated co%t of re#air%B#roduct% with minor defect% no chan'e .%timated co%t if re#air% 8 #roduct% with ma<or defect% P * """ """ .>#ected F of #roduct% %old durin' !"/ ha$in' no defect% in !"11 9*F .>#ected F of #roduct% %old durin' !""/ ha$in' minor defect% in !"11 13F .>#ected F of #roduct% %old durin' !""/ ha$in' ma<or defect% in !"11 !F Btho%e with minor defect% all in one !"11 .>#ected timin' of %ettlement of warranty #ayment% !"F in !"11 Btho%e with ma<or defect% 9"F in !"1! N?00.)A determined that #art of it% #lant and e@ui#ment needed an o$erhaul 8 the con$eyor belt on one of it % machine% would need to be re#laced ion about December !"11 at an e%timated co%t of P!*" """. )he carryin' amount of the con$eyor belt at December 31 !""/ wa% P13" """. It% ori'inal co%t wa% P!"" """ N?00.)A wa% un%ucce%%ful in it% defen%e of the #eanut aller'y ca%e and wa% ordered to #ay P1 *""" """ to the #laintiff%. A% at December 31 !"1" N?00.)A had #aid P9"" """ N?00.)A commenced liti'ation a'ain%t one of it% ad$i%er for ne'li'ent ad$ice 'i$en on the ori'inal in%tallation of the con$eyor belt referred to in 132 abo$e in October !"1" the court found in fa$or of N?00.)A. )he hearin' for dama'e% had not been %cheduled a% at the date the financial %tatement for !"1" were authoriKed for i%%ue. N?00.)A e%timated that it would recei$e about P3!* """. N?00.)A %i'ned an a'reement with Cho&o :an& to the effect that N?00.)A would 'uarantee a loan made by Cho&o :an& to N?00.)A+ %ub%iadiary Cha#aChoc&% Itd. Cha#aChoc%+ loan with Cho&o :an& wa% P3 !"" """ a% at December 31 !"1". Cha#aChoc% wa% in a %tron' financial #o%ition at 31 December !"1"

3.

3. *.

-.

:a%ed on the abo$e and the re%ult of your audit an%wer the followin', 1. )he warranty e>#en%e in !"1" i% a. P1"" """ b. 3"" """ c. 1-" """ d. !3" """ )he #ro$i%ion for warrantie% a% of December 31 !"1" i% a. P*9" """ b. !3" """ c. 39" """ d. 31" """ )he #ro$i%ion for warrantie% to be re#orted a% current liability a% of December 31 !"1" i% a. !!" """ b. 1*" """ c. 3"" """ d 33" """ )he #ro$i%ion for warrantie% to be re#orted a% noncurrent liability a% of December 31 !"1" i%

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3.

3.

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P. 9" """ b. P!-" """ c. 1*" """ d. 33" """ )otal #ro$i%ion% to be re#orted in the %tatement of financial #o%ition a% of December 31 !"1" i% a. P39" """ b. 31" """ c. 1 19" """ d. 1 3-" """ O7

a.

PROBLEM

Aelect the be%t an%wer for each of the followin', 1. In Auditin' account% #ayable an auditor #rocedure% mo%t li&ely will focu% #rimarily on mana'ement% a%%ertion of. a. .>i%tence c. Com#letene%% b. Pre%entation and di%clo%ure d. Laluation and allocation An auditor #erform% a te%t to determine whether all merchandi%e for which the client wa% billed wa% recei$ed. )he #o#ulation for thi% te%t con%i%t of all a. Merchandi%er recei$ed c. Canceled chec&% b. Lendor+% in$oice% d. recei$in' re#ort% )he #rimary audit te%t to determine if account% #ayable are $alued #ro#erly i% a. Confirmation of account% #ayable b. Louchin' account% #ayable to %u##ortin' documentation c. An analytical #rocedure d. Lerification that account% #ayable wa% re#orted a% a current liability in the balance %heet. Dhich of the followin' #rocedure% i% lea%t li&ely to be #erformed before the balance %heet dateE a. Ob%er$ation of in$entory count. b. )e%tin' of internal control o$er ca%h. c. Aearch for unrecorded liabilitie%. d. Confirmation of recei$able%. An audit a%%i%tant found a #urcha%e order for a re'ular %u##lier in the amount P * *"" the #urcha%e order wa% date after recei#t of 'ood%. )he #urcha%in' a'ent had for'otten to i%%ue the #urcha%e order. Al%o a di%bur%ement of P3*" for material% did not ha$e recei$in' re#ort. )he a%%i%tant wanted to %elect additional #urcha%e order% for in$e%ti'ation but wa% unconcerned about lac& of recei$in' re#ort. )he audit director %hould. a. A'ree with the a%%i%tant becau%e the amount of the #urcha%e order e>ce#tion wa% con%iderably lar'er than the recei$in' re#ort e>ce#tion b. A'ree with the a%%i%tant becau%e the ca%h di%bur%ement cler& had been a%%ured by the recei$in' cler& that the failure to fill out a re#ort didn+t ha##en $ery often. c. Di%a'ree with the a%%i%tant becau%e two #roblem% ha$e an e@ual ri%& of lo%% a%%ociated with them d. Di%a'ree with the a%%i%tant becau%e the lac& of a recei$in' re#ort ha% a 'reater ri%& of lo%% a%%ociated with it. Dhen u%in' confirmation to #ro$ide e$idence about com#letene%% a%%ertion for account #ayable the a##ro#riate #o#ulation mo%t li&ely i% a. Lendor% with whom the entity ha% #re$iou%ly done bu%ine%% b. Amount% recorded in the account% #ayable %ub%idiary led'er c. Payee% of chec&% drawn in the month after the year end. d. In$oice% filed in the entity+% o#en in$oice file. Dhich of the followin' i% a %ub%tanti$e te%t than an auditor i% mo%t li&ely to #erform to $erify the e>i%tence and $aluation of recorded account% #ayableE a. In$e%ti'atin' the o#en #urcha%e order file to a%certain that #reB numbered #urcha%e order% are u%ed and accounted for.

!.

3.

3.

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6.

9.

/.

Cecei$in' the client+% mail uno#ened for a rea%onable #eriod of time after year end to %earch for unrecorded $endor+% in$oice% c. Louchin' %elected entrie% in the account% #ayable %ub%idiary led'er to #urcha%e order% and recei$in' re#ort%. d. Confirmin' account% #ayable balance% with &now %u##lier% who ha$e Kero balance%. Only one of the followin' four %tatement% which com#are confirmation of account% #ayable with %u##lier% and confirmation of account% recei$in' with debtor% i% fal%e. )he fal%e %tatement% i% that a. Confirmation of account% recei$in' with debtor% i% a more widely acce#ted auditin' #rocedure than u% confirmation of account% #ayable with %u##lier% b. Atati%tical %am#lin' techni@ue% are more widely acce#ted in the confirmation of account% #ayable than in the confirmation of account% recei$able P c. A% com#ared with the confirmation of account% recei$able the confirmation of account% #ayable will tend to em#ha%iKe account% with Kero balance% at the balance %heet date. d. It i% le%% li&ely that the confirmation re@ue%t %ent to the %u##lier will %how the amount owed than that re@ue%t %ent to the debtor will %how the amount date. Dhen title to merchandi%e in tran%it ha% #a%%ed to the audit client the auditor en'a'ed in the #erformance of a #urcha%e cutBoff will encounter the 'reate%t difficulty in 'ainin' a%%urance with re%#ect to the a. Juantity C. Price b. Juality d. )erm% the followin' audit #rocedure% i% lea%t li&ely to detect an unrecorded Analy%i% and recom#utation of intere%t e>#en%e Analy%i% and recom#utation of de#reciation e>#en%e. Mailin' of %tandard ban& confirmation form%. Ceadin' of the minute% of meetin'% of the board of director%

b.

1". Dhich of liabilityE a. b. c. d.

11. ?nrecorded liabilitie% are mo%t li&ely to be found durin' the re$iew of which of the followin' document%E a. ?n#aid bill% c. bill% of ladin' b. Ahi##in' record% d. ?nmatched %ale% in$oice 1!. Dhich of the followin' audit #rocedure% i% be%t for identifyin' unrecorded trade account% #ayableE a. Ce$iewin' ca%h di%bur%ement recorded %ub%e@uent to the balance %heet date to determine whether the related #ayable% a##ly to the #rior #eriod. b. In$e%ti'atin' #ayable% recorded <u%t #rior to and <u%t %ub%e@uent to the balance %heet date to determine whether they are %u##orted by recei$in' re#ort%. c. .>aminin' unu%ual relation%hi#% between monthly account% #ayable balance% and recorded ca%h #ayment%. d. Ceconcilin' $endor% %tatement to the file of recei$in' re#ort% to identify item% recei$ed <u%t #rior to the balance %heet date 13. In $erifyin' debit% to #er#etual in$entory record% of nonmanufacturin' firm the auditor i% mo%t intere%ted in e>aminin' the #urcha%e a. (ournal c. Order b. Ce@ui%ition% d. In$oice%. 13. Dhich of the followin' #rocedure% relatin' to the e>amination of account% #ayable could the auditor dele'ate entirely to the client% em#loyee% a. )e%t footin'% in the account% #ayable led'er b. Ceconcile un#aid in$oice% to $endor% %tatement%

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1-.

16.

19.

1/.

!".

c. Pre#are a %chedule of account% #ayable d. Mail confirmation for %elected account balance% An auditor% #ur#o%e in re$iewin' the renewal of a note #ayable %hortly after the balance %heet date mo%t li&ely i% to obtain e$idence concernin' mana'ement% a%%ertion% about a. .>i%tence c. Com#letene%% b. Pre%entation and di%clo%ure d. Laluation An auditor% #ro'ram to audit lon'Bterm debt %hould include %te#% that re@uire a. .>aminin' bond tru%t indenture% b. In%#ectin' the account% #ayable %ub%idiary led'er c. In$e%ti'atin' credit% to the bond intere%t income account d. Lerifyin' the e>i%tence of the bondholder%. In an audit of bond% #ayable an auditor e>#ect% the tru%t indenture to include the a. Auditee+% debtBtoBe@uity ratio at the %ame time of i%%uance b. .ffecti$e yield of the bond% i%%ued c. Aub%cri#tion li%t d. De%cri#tion on the collateral In auditin' lon'Bterm bond% #ayable an auditor mo%t li&ely will a. Perform analytical #rocedure% on the bond #remium and di%count account% b. .>amine documentation of a%%et% #urcha%ed with the bond #roceed% or lien% c. ComN#are intere%t with the bond #ayable amount for rea%onablene%% d. Confirm the e>i%tence of indi$idual bondholder% at yearBend )he audit #rocedure% u%ed to $erify accrued liabilitie% differ from tho%e em#loyed for the $erification of account% #ayable becau%e a. Accrued liabilitie% u%ually #ertain to %er$ice% of a continuin' nature while account #ayable are the re%ult of com#leted tran%action b. Accrued liability balance% are le%% material than account #ayable balance%. c. .$idence %u##ortin' accrued liabilitie% i% none>i%tent while e$idence %u##ortin' account #ayable i% readily a$ailable d. Accrued liabilitie% at year end will become account #ayable durin' the followin' year )he auditor i% mo%t li&ely to $erify accrued commi%%ion% #ayable in con<unction with the a. Aale% cutoff te%t. b. Lerification of contin'ent liabilitie%. c. Ce$iew of #o%tBbalance %heet date di%bur%ement%. d. .>amination of trade account% #ayable

Suggested Answers Problem 1 1. D 2. C 3. A 4. B 5. A Problem 2 1. B 2. A 3. C 4. D Problem 3 Ad ust!ng entr!es Problem 4 1. A 2. A 3. C Problem 5 1. A 2. B 3. C 4. A 5. B Problem 6 1. D 2. B 3. C 4. C 5. D 6. A 7. C Problem 7 1. C 2. D 3. 4. A 5. B Problem 8 1. C 2. B 3. C 4. C 5. D 6. A 7. C 8. B 9. B 10. B 11. A 12. A 13. D 14. C 15. D 16. A 17. D 18. C 19. A 20. A