I. Problems.

A. In connection with your examination, the Gorgy Company presented to you the following information
regarding its Cash in Bank account for the month of December, 2005:
a) Balances per bank statements: November 30, P107,800, and December 31, P115,200.
b) Balances of cash in bank account in company’s books: November 30, P82,725, and December 31,
P113,400.
c) Total receipts per books were P1,110,950 of which P6,050 was paid in cash to a creditor on December
24.
d) Total charges in the bank statement during December were P1,094,850.
e) Undeposited receipts were: November 30, P45,300 and December 31, P50,600.
f) Outstanding checks were: November 30, P13,375, and December 31, P9,650, of which a check for
P2,500 was certified by the bank on December 26.
g) NSF checks returned, recorded as reduction of cash receipts, were:
* Returned by bank on December, recorded also in December, P5,200.
* Returned by bank on December but recorded in January, P4,300
h) Collections by bank not recorded by Company were P60,750 in November and
P58,200 in December.
i) Bank service charges not entered in company’s books were: November 30, P3,750 and December 31,
P2,100.
j) A check for P4,750 of Found Company was charged to Pound Company in error.
k) A check drawn for P4,200 was erroneously entered in the books as P2,400.

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, 2005?
a. P107,800 b. P139,725. c. P75,875 d. P137,225
2. How much is the adjusted book receipts for December, 2004?
a. P1,102,350 b. P1,113,600 c. P1,056,950 d. P1,108,400
3. How much is the adjusted book disbursements for December, 2004?
a. P1,084,725 b. P1,078,675 c. P1,089,925 d. P1,084,725
4. How much is the adjusted cash balance as of December 31, 2004?
a. P158,650 b. P153,900 c. P165,200 d. P163,400
5. How much is the cash shortage of December 31, 2004?
a. P1,800 b. P9,500 c. P4,750 d. P0

B. BRAND CO. reported P9,000 of net income for 2007. The correct net income however was P11,000. It
was determined that the ending inventory was overstated by P1,000. The only other error was with the
beginning inventory which must have been:
a. Understated by P1,000
b. Understated by P3,000
c. Overstated by P1,000
d. Overstated by P3,000

C. On December 30, 2007, SWIFT CO. shipped to a customer merchandise with selling price of P37,500;
terms net 30, FOB Shipping Point. The sale which is 125% of cost was recorded in January 2007 when the
check was received from the customer. Ending inventory was determined by physical count on
December 31, 2007.
.As a result of the above transactions, SWIFT CO.’s cost of goods sold for the year ended December 31,
2007 was:
a. Understated by P3,000
b. Overstated by P30,000
c. Overstated by P37,500
d. Correctly stated

D. You are reviewing the notes payable and interest expense accounts of Cole Manufacturing Co. as of
December 31, 2007 and noted that the company regularly borrows from the bank in order to finance
working capital. The following schedule shows loans with 12% interest rate, with interest payable at
maturity. All loans are repaid at its scheduled maturity date and interest expense is 7recorded when the
loans are repaid.
DATE OF LOAN AMOUNT MATURITY DATE TERM OF LOAN

Nov. 01, 2006 P 500,000 Oct. 31, 2007 1 year

Feb. 01, 2007 1,500,000 July 31, 2007 6 months
May 01, 2007 800,000 Jan. 31, 2008 9 months
The client recorded interest expense of P150,000 for 2007. Compute for the correct amount of interest
expense that should be reported in the 2007 income statement.
a. P204,000 b. P212,000 c. P222,000 d. P214,000

E. Voltron Inc. reported inventory of P360,000 at December 31, 2006. The following data were gathered
to confirm the reported inventory figure.
Inventory, December 31, 2005 P 320,000
Purchases during 2006 1,410,000
Cash sales during 2006 350,000
Shipment received on December 26, 2006 included in physical inventory but not recorded as purchases
10,000
Deposit made with suppliers, entered as purchased goods were not received during 2006 20,000
Collections on accounts receivable during 2006 1,800,000
Accounts receivable, December 31, 2005 250,000
Accounts receivable, December 31, 2006 300,000
Gross profit percentage on sales 40%
What is the estimated inventory shortage at December 31, 2006?
a.P60,000 b.P50,000 c.P40,000 d.P 5,000

F. The balance sheet for the Dixie Corporation on December 31, 2007 includes the following receivables
balances:
Notes Receivable P365,000
Less notes discounted 155,000 P210,000
Accounts Receivable P856,000
Less allowance for doubtful accounts 41,500 814,500
Selected ransactions during 2008 included the following:
a. Notes received in settlement of accounts totaled P825,000.
b. Notes receivable discounted as of December 31, 2007, were paid at maturity with the exception of
one P30,000 note on which the company had to pay the bank P30,900, which included interest and
protest fees. It is expected that recovery will be made on this note early 2009.
c. Customers’ notes of P600,000 were discounted with recourse during the year, proceeds from their
transfer being P585,000. Of this total, P480,000 matured during the year without notice of protest.
d. Notes receivable collected during the year totaled P270,000 and interest collected was P24,500.

Determine the adjusted balances of the following accounts as of December 31, 2008:
1. Notes Receivable (including notes receivable discounted).
a. P320,000 b. P365,000 c. P165,000 d. P285,000
2.Notes Receivable Discounted
a. P155,000 b. P600,000 c. P120,000 d. P105,000

On December 31, 2004, Charming Company’s balance sheet showed the following
balances related to its securities accounts:
Trading securities P1,477,500
Available-for-sale securities (AFS) 1,180,000
Interest receivable-Mayniladlad water bonds 12,500
Unrealized gain - AFS 100,000

Charming securities portfolio on December 31, 2004, was made up of the following
securities:
Security Classification Cost Market
10,000 shares Yeye Bonel Corp. stock Trading P750,000 P762,500
8,000 shares Totoy Bibo Inc. stock Trading 550,000 528,250
10% Mayniladlad water bonds (interest
payable semiannually on Jan. 1 and Jul. 1) Trading 250,000 186,750 Security Classification Cost Market
10,000 shares Bulaklak Inc. stock Available for
sale 590,000 630,000
20,000 shares Jumbo Hotdog Unlimited Inc.
stock
Available for sale 490,000 550,000

During 2005, the following transactions took place:

Jan. 3 Receive interest on the Mayniladlad water bonds.
Mar. 1 Purchased 3,000 additional shares of Yeye Bonel Corp. stock for P229,500,
classified as a trading security.
Apr. 15 Sold 4,000 shares of the Totoy Bibo Inc. stock for P69 per share.
May 4 Sold 4,000 shares of the Bulaklak Inc. stock for P62 per share.
July 1 Received interest on the Mayniladlad water bonds.
Oct. 30 Purchased 15,000 shares of Pasaway Co. stock for P832,500, classified as a
trading security.
The market values of the stocks and bonds on December 31, 2005, are as follows:
Yeye Bonel Corp. stock P76.60 per share
Totoy Bibo Inc. stock P68.50 per share
Pasaway Co. stock P55.25 per share
Mayniladlad water bonds P205,550
Bulaklak Inc. stock P61.00 per share
Jumbo Hotdog Unlimited Inc. stock P27.00 per share

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of 4,000 Totoy Bibo Inc. shares on April 15, 2005
a. P1,000 gain b. P1,000 loss c. P11,875 gain d. P11,875 loss
2. Net realized gain or loss on sale of 4,000 Bulaklak Inc. shares on May 4, 2005
a. P12,000 gain b. P12,000 loss c. P4,000 gain d. P4,000 loss
3. Carrying value of Trading Securities as of December 31, 2005
a. P2,337,000 b. P2,287,800 c. P2,304,100 d. P2,297,400
4. Carrying value of Available for Sale Securities as of December 31, 2005
a. P844,000 b. P806,000 c. P906,000 d. P944,000
5. In 2005, what amount of unrealized gain or loss should be shown as component of
income and stockholders’ equity?
a. P28,725 gain P62,000 gain
b. P28,725 gain P22,000 loss
c. P32,900 loss P122,000 loss
d. P39,600 gain P78,000 gain
On July 1, 2005, Pir Carding Company acquired 25% of the outstanding shares of

common stock of Cinderela Corporation at a total cost of P7,000,000. The underlying

equity of the stock acquired by Pir Carding was only P6,000,000. Pir Carding is willing to

pay more than the book value for the following reasons:

a) Cinderela owned depreciable plant assets (10-year remaining economic life) with a

current fair value of P600,000 more than their carrying amount.

b) Cinderela owned land with current fair value of P3,000,000 more than its carrying
amount.

c) There are no other identifiable tangible or intangible assets with fair value in excess of

book value. Accordingly, the remaining excess, if any, is to be allocated to goodwill.

Cinderela earned net income of P5,400,000 evenly over the year ended December 31,

2005. On December 31, Cinderela declared and paid a cash dividend of P1,050,000 to

common stockholders. Market value of Pir Carding’s share of the stock at December 31,

2005 is P7,500,000. Both companies close their accounting records on December 31.

QUESTIONS:

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

1. Total amount of goodwill of Cinderela Corporation based on the price paid by Pir

Carding

a. P4,000,000 b. P400,000 c. P1,000,000 d. P100,000

2. Net investment income from Investment in Cinderela Corporation

a. P675,000 b. P667,500 c. P1,335,000 d. P662,500

3. Carrying value of Investment in Cinderela Corporation as of December 31, 2005

a. P7,412,500 b. P7,667,500 c. P7,405,000 d. P7,662,500

II. Theories.
1.Which of the following auditor concerns most likely could be so serious that the auditor concludes that
a financial statement audit cannot be performed?
a. Management fails to modify prescribed internal controls for changes in information technology.
b. Internal control activities requiring segregation of duties are rarely monitored by management.
c. Management is dominated by one person who is also the majority stockholder.
d. There is a substantial risk of intentional misapplication of accounting principles.
2.In assessing the objectivity of internal auditors, an independent auditor should:
a. Evaluate the quality control program in effect for the internal auditors.
b. Examine documentary evidence of the work performed by the internal auditors.
c. Test a sample of the transactions and balances that the internal auditors examined.
d. Determine the organizational level to which the internal auditors report.
3. Which of the following relatively small misstatements most likely could have a material effect on an
entity's financial statements?
a. An illegal payment to a foreign official that was not recorded.
b. A piece of obsolete office equipment that was not retired.
c. A petty cash fund disbursement that was not properly authorized.
d. An uncollectible account receivable that was not written off.
4. In auditing the financial statements of Star Corp., Land discovered information leading Land to believe
that Star's prior year's financial statements, which were audited by Tell, require substantial revisions.
Under these circumstances, Land should:
a. Notify Star's audit committee and stockholders that the prior year's financial statements cannot be
relied on.
b. Request Star to reissue the prior year's financial statements with the appropriate revisions.
c. Notify Tell about the information and make inquiries about the integrity of Star's management.
d. Request Star to arrange a meeting among the three parties to resolve the matter
5.To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely
would trace:
a. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors'
invoices.
b. Items listed in receiving reports and vendors' invoices to the inventory listing.
c. Inventory tags noted during the auditor's observation to items in the inventory listing.
d. Items in the inventory listing to inventory tags and the auditor's recorded count sheets.
1. A client has a large and active investment portfolio that is kept in a bank safe-deposit

box. If the auditor is unable to count the securities at the balance sheet date, the

auditor most likely will

a. Request the bank to confirm to the auditor the contents of the safe deposit box at

the balance sheet date.

b. Examine supporting evidence for transactions occurring during the year.

c. Count the securities at a subsequent date and confirm with bank whether securities

were added or removed since the balance sheet date.

d. Request the client to have a bank seal the safe-deposit box until the auditor can

count the securities at a subsequent date.

2. When an auditor is unable to inspect and count a client’s investment securities until

after the balance sheet date, the bank where the securities are held in a safe deposit

box should be asked to

a. Verify any differences between the contents of the box and the balances in the

client’s subsidiary ledger.

b. Provide a list of securities added and removed from the box between the balance

sheet date and the security count date.

c. Count the securities in the box so that the auditor will have an independent direct

verification.

d. Confirm that there has been no access to the box between the balance- sheet date

and the security-count date.

3. Which of the following is not one of the auditor’s primary objectives in an audit of

trading securities?

a. To determine whether securities are authentic.

b. To determine whether securities are the property of the client.

c. To determine whether securities actually exist.

d. To determine whether securities are properly classified on the balance sheet date.

4. Apol Boba, CPA, observes the count of securities on December 31. She records the

serial numbers of the securities and reconciles them and the number of shares with
company records. Which fraud should be detected by this procedure?

a. An investee company declared and paid a stock dividend on December 15. The

stock certificate for the additional shares was received directly by the treasurer who

made no record of the receipt and embezzled the shares.

b. The treasurer embezzled and sold securities on April 4. She speculated

successfully with the proceeds and replaced the securities on December 29.

c. The treasurer borrowed securities on July 15 to use as collateral for a personal

loan. He repaid the loan and returned the securities on December 2.

d. The treasurer embezzled interest receipts from bonds by having the payments

mailed directly to him.

5. Which of the following is the least effective audit procedure regarding the existence

assertion for the securities held by the auditee?

a. Examination of paid checks issued in payment of securities purchased.

b. Vouching all changes during the year to supporting documents.

c. Simultaneous count of liquid assets.

d. Confirmation from the custodian.

6. An auditee is holding equity securities as collateral for a debt. The auditor should

a. Determine from data published in the financial press that the auditee has recorded

dividend income from the collateral.

b. Ascertain the value of the securities.

c. Ascertain that the amount recorded for the collateral in the investment account is

equal to its fair value at the balance sheet date.

d. Verify that the client has taken title to the securities.

7. Which of the following is the most effective audit procedure for verification of dividends

earned on investments in equity securities?

a. Tracing deposited dividend checks to the cash receipts book.

b. Reconciling amount received with published dividend records.

c. Comparing the amounts received with preceding year dividends received.

d. Recomputing selected extensions and footings of dividend schedules and

comparing totals to the general ledger.

8. In confirming with an outside agent, such as a financial institution, that the agent is

holding investment securities in the client’s name an auditor most likely gathers

evidence in support of management’s financial statement assertions of existence and

a. Valuation c. Completeness

b. Rights and obligations d. Presentation and disclosure

9. In establishing the existence and ownership of an investment held by a corporation in

the form of publicity traded stock and auditor should inspect the securities or

a. Obtain written representations from management confirming that the securities are

properly classified as trading securities.

b. Inspect the audited financial statements of the investee company.

c. Confirm the number of shares held by an independent custodian.

d. Determine that the investment is carried at the lower of cost or market.

10.An auditor most likely to verify the interest earned on bond investment by
a. Verifying the receipt and deposit of interest checks.

b. Confirming the bond interest rate with the issuer of the bonds.

c. Recomputing the interest earned on the basis of face amount, interest rate, and

period held.

d. Testing controls relevant to cash receipts.

11.Which of the following provides the best form of evidence pertaining to the annual

valuation of an investment in which the independent auditor’s client owns a 30% voting

interest?

a. Market quotations of the investee company’s stock.

b. Current fair value of the investee company’s assets.

c. Historical cost of the investee company’s assets.

d. Audited financial statements of the investee company.

12.In verifying the amount of goodwill recorded by a client, the most convincing evidence

an auditor can obtain is by comparing the recorded value of assets acquired with the

a. Assessed value as evidenced by tax bills.

b. Seller’s book value as evidenced by financial statements.

c. Insured value as evidenced by insurance policies.

d. Appraised value as evidenced by independent appraisals.

13.The auditor can best verify a client’s bond sinking-fund transactions and year-end

balance by

a. Confirmation with individual holders of retired bonds.

b. Confirmation with the bond trustee.

c. Recomputation of interest expense, interest payable, and amortization of bond

discount or premium.

d. Examination and count of the bonds retired during the year.