AUDITING PROBLEMS

QUIZ NO. 1

“One of the most important keys to Success is having the discipline to do what you
know you should do, even when you don’t feel like doing it.”

PROBLEM 1
MARADONA CO. had the following bank reconciliation on June 30, 2018:
Balance per bank statement, June 30 3,200,000
Deposit transit 400,000
Total 3,600,000
Outstanding checks ( 900,000)
Balance per book, June 30 2,700,000

The bank statement for the month of July showed the following:
Deposits (including P200,000 note collected for the depositor entity) 9,000,000
Disbursements (including P140,000 NSF check and P10,000 service charge) 7,000,000
All reconciling items on June 30 cleared through the bank in July. The deposit in transit amounted to P1,000,000
and the outstanding checks totaled P600,000 on July 31.
1. What is the amount of cash in bank that should be reported on July 31, 2017?
a. 5,000,000
b. 5,400,000
c. 5,200,000
d. 5,600,000

2. What is the cash balance per ledger on July 31, 2017?

a. 5,350,000
b. 5,550,000
c. 4,500,000
d. 5,400,000

3. What is the amount of cash receipts for book for the month of July?
a. 9,800,000
b. 8,600,000
c. 9,400,000
d. 9,600,000

4. What is the amount of cash disbursements per book for the month of July?
a. 7,300,000
b. 6,700,000
c. 6,850,000
d. 6,550,000

SOLUTION – SITUATION PROBLEM I

Question 1 Answer D

Balance per bank – June 30 3,200,000

July bank deposits 9,000,000
July bank disbursements ( 7,000,000)
Balance per bank – July 31 5,200,000
July deposits in transit 1,000,000
July outstanding checks ( 600,000)
Adjusted bank balance 5,600,000

1
Question 2 Answer B

Balance per ledger – July 31 (SQUEEZE) 5,550,000

Note collected by bank in July 200,000
NSF check in July ( 140,000)
Service charge in July ( 10,000)
Adjusted book balance 5,600,000

The balance per book on July 31 is “squeezed” by working back from the adjusted balance.

Question 3 Answer C

Deposits per bank statement for July 9,000,000

Note collected by bank in July ( 200,000)
Deposit in transit – June 30 ( 400,000)
Deposit in transit – July 31 1,000,000
Cash receipts per book for July 9,400,000

Question 4 Answer D

Disbursements per bank statement for July 7,000,000

NSF check in July ( 140,000)
Service charge in July ( 10,000)
Outstanding checks – June 30 ( 900,000)
Outstanding checks – July 31 600,000
Cash disbursements per book for July 6,550,000

PROBLEM 2

From inception of operations, an entity provided for uncollectible accounts expense under the allowance method
and provisions were made monthly at 2% of credit sales. No year-end adjustments to the allowance account were
made. The balance in the allowance for doubtful accounts was P1,000,000 on January 1, 2015. During 2015, credit
sales totaled P20,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, P200,000 of
bad debts were written off, and recoveries of accounts previously written off amounted to P50,000. An aging of
accounts receivable was made for the first time on December 31, 2015 as follows:
Classification Balance Uncolletible
November – December 6,000,000 10%
July – October 2,000,000 20%
January – June 1,500,000 30%
Prior to January 1, 2015 500,000 50%

Based on the review of collectibility of the account balances in the “prior to January 1 2015” aging category,
additional accounts totaling P100,000 are to be written off on December 31, 2015. Effective December 31, 2015, the
entity adopted the aging method for estimating the allowance for doubtful accounts.

5. What is the required allowance for doubtful accounts on December 31, 2015?
a. 1,950,000
b. 1,650,000
c. 1,700,000
d. 1,450,000

2
 6. What amount should be reported as doubtful accounts expense in the income statement for 2015?
a. 1,200,000
b. 1,650,000
c. 950,000
d. 900,000

7. What is the year-end adjustment to the allowance for doubtful accounts on December 31, 2015?
a. 900,000 debit
b. 900,000 credit
c. 500,000 debit
d. 500,000 credit

8. What is the net realizable value of accounts receivable on December 31, 2015?
a. 9,900,000
b. 8,250,000
c. 8,350,000
d. 8,200,000

SOLUTION – SITUATION PROBLEM 2

Question 1 Answer B

6,000,000 x 10% 600,000

2,000,000 x 20% 400,000
1,500,000 x 30% 450,000
500,000 – 100,000 x 50% 200,000
Required allowance – December 31, 2015 1,650,000

Question 2 Answer D

Allowance for doubtful accounts – January 1 1,000,000

Recoveries of accounts written off 50,000
Doubtful accounts expense (SQUEEZE) 900,000
Total 1,950,000
Accounts written off (200,000 + 100,000) ( 300,000)
Allowance for doubtful accounts – December 31 1,650,000

The doubtful accounts expense is squeezed by working back from the ending allowance for doubtful accounts.

Question 3 Answer D

Correct doubtful accounts expense 900,000

Recorded doubtful accounts expense (2%) x 20,000,000 sales) 400,000
Increase in allowance – credit 500,000

Question 4 Answer B

November – December 6,000,000

July – October 2,000,000
January – June 1,500,000
Prior January 1, 2015 (500,000 – 100,000) 400,000
Accounts receivable – December 31, 2015 9,900,000
Allowance for doubtful accounts ( 1,650,000)
Net realizable value 8,250,000
3
PROBLEM NO. 3

Celtics Company had the following bank reconciliation on June 30, 2018:
Balance per bank statement, June 30, 2018 P3,000,000
Add: Deposit in transit 400,000
Total 3,400,000
Less: Outstanding checks 900,000
Balance per book, June 30 P2,500,000

The bank statement for the month of July 2018 showed the following:
Deposits (including P200,000 note collected for Celtics) P9,000,000
Disbursements (including P140,000 NSF check and P10,000
service charge) 7,000,000

All reconciling items on June 30, 2018 cleared through the bank in July. The outstanding checks totaled
P600,000 and the deposits in transit amounted to P1,000,000 on July 31, 2018.

REQUIRED:
Determine the following:

9. Cash receipts per books in July

10. Cash disbursement per books in July

11. Cash balance per books at July 31

12. Adjusted cash balance at July 31

PROBLEM NO. 12 – Proof of cash using bank to book method

1. Cash receipts per books in July P9,400,000

2. Cash disbursements per book in July P6,550,000
3. Cash balance per books at July 31 P5,350,000
4. Adjusted cash balance at July 31 P5,400,000

Problem No. 4

You obtained the following information on the current account of Paranaque Company during your
examination of its financial statements for the year ended December 31, 2010.

The bank statement on November 30, 2010 showed a balance of P306, 000. Among the bank credits in
November was customer’s note for P100, 000 collected for the account of the company which the company
recognized in December among its receipts. Included in the bank debits were cost of checkbooks amounting
to P1, 200 and a P40, 000 check which was charged by the bank in error against Paranaque Co, account.
Also in November you ascertained that there were deposits in transit amounting to P80, 000 and outstanding
checks totaling P170, 000.

The bank statement for the month of December showed total credits of P416, 000 and total charges of
P204, 000. The company’s books for December showed total debits of P735, 600, total credits of P407, 200
and a balance of P485, 600. Bank debit memos for December were: No. 121 for service charges, P1, 600
and No. 122 on a customer’s returned check marked “Refer to Drawer” for P24, 000.

On December 31, 2010 the company placed with the bank a customer’s promissory note with a face value of
P120, 000 for collection. The company treated this note as part of its receipts although the bank was able to
collect on the note only in January 2011.

A check for P3, 960 was recorded in the company cash payments books in December as P39, 600.

4
 Questions:

Based on the application of the necessary audit procedures and appreciation of the above data, you are to
provide the answers to the following:

13. How much is the undeposited collections as of December 31, 2010?

A. 339, 600 C. 219, 600
B. 179, 600 D. 139, 600

14. How much is the outstanding checks as of December 31, 2010?

A. 191, 960 C. 361, 960
B. 397, 600 D. 363. 160

15. How much is the adjusted cash balance as of November 30, 2010?
A. 216, 000 C. 176, 000
B. 256, 000 D. 157, 200

16. How much is the adjusted bank receipts for December?

A. 635, 600 C. 475, 600
B. 515, 600 D. 435, 600

17. How much is the adjusted book disbursements for December?

A. 395, 960 C. 225, 960
B. 431, 600 D. 397, 160

18. How much is the adjusted cash balance as of December 31, 2010?
A. 625, 640 C. 220, 000
B. 195, 640 D. 375, 640

19. An auditor would consider a cashier’s job description to contain compatible duties if the cashier
received remittance from the mailroom and also prepares the
A. Daily deposit slip
B. Prelist of individual checks
C. Remittance advices
D. Monthly bank reconciliation

20. Which of the following internal control procedures will most likely prevent the concealment of a cash shortage
resulting from improper write-off of a trade account receivable?
a. Write-offs must be supported by an aging schedule showing that only receivables overdue for several
months have been written off.
b. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in
fact, been collected.
c. Write-offs must be approved by a responsible officer after review of credit department
recommendations and supporting evidence.
d. Write-offs must be authorized by company field sales employees who are in position to determine
the financial standing of the customers.

PROBLEM 5
The Lou Co. sells direct to retail customers and also to wholesalers. Accounts receivable and an allowance for bad
debts are maintained separately for each division. On January 1, 2014 the balance of retail accounts receivable was
P 209, 000 while the bad debts with respect to retail customers was a credit of P 7, 600.

The following summary pertains only to retail sales since 2011:

Credit sales Bad debts written off Bad debts recoveries

2011 P1, 110, 000 P26, 000 P2, 150
2012 1, 225, 000 29, 500 3, 750
2013 1, 465, 000 30, 000 3,600
2014 1, 500, 000 31, 000 4, 200

5
Bad debts are provided for as percentage of credit sales. The accountant calculates the percentage annually by using
the experience of the three years prior to the current year. The formula is bad debts written off less recoveries
expressed as percentage of the credit sales for the same period. A cash receipt in 2014 from credit sales to retail
customers was P1, 380, 200.

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

21. The percentage to be used to compute the allowance for bad debts on December 31, 2014.2%
22. For 2014, the provision for bad debts with respect to credit sales.30, 000
23. The ledger balance of the accounts receivable after necessary adjustments on December 31, 2014. 297,
800
24. The ledger balance of the allowance for bad debts after necessary adjustments on December 31, 2014. 10,
800

PROBLEM 6
Efemela Company produces paints and related products for sale to the construction industry throughout Davao City.
While sale have remained relatively stable despite a decline in the amount of new construction, there has been a
noticeable change in the timeliness with which the company’s customers are paying their bills.

The company sells its products on payment terms of 2/10,n/30. In the past, over 75 percent of the credit customers
have taken advantage of the discount by paying within 10 days of the invoice date. During the year ended December
31, 2013, the number of customers taking the full 30 days to pay has increased. Current indications are that less than
60% of the customers are now taking the discount. Uncollectible accounts as a percentage of total credit saleshave
risen from the 1.5% provided in the past years to 4% in the current year.

In response to your request for more information on the deterioration of accounts receivable collections the
company’s controller has prepared the following report:

Efemela Company
Accounts receivable Collections
December 31, 2013

The fact that some credit accounts will prove uncollectible is normal. And annual bad debt wite offs had been 1.5%
of total credit sales for many years. However, during the year 2013, this percentage increased to 4%. The accounts
receivable balance is P1, 500, 000, and the condition of this balance in terms of age of collection is shown below:

Proportion to total Age of accounts Probability of collections

64% 1-10 days 99.0%
18% 11-30 days 97.5%
8% Past due 31- 60 days 95.0%
5% Past due 61-120 days 80.0%
3% Past due 121-180 days 65.0%
2% Past due over 180 days 20.0%

At the beginning of the year, the allowance for doubtful accounts had a credit balance of P27, 300. The company
has provided for a monthly bad debt expense accrual during the year based on the assumption that 4% of total credit
sales will be uncollectible. Total credit sales for the year 2013 amounted to P8, 000, 000, and write-offs of
uncollectible accounts during the year totaled P292, 500.

Required:

25. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2013? P77,
100
26. The necessary adjusting entry to adjust the allowance for doubtful accounts as of December 31, 2013?

Doubtful accounts expense 22, 300

6
 Allowance for doubtful accounts 22, 300

27. An aging analysis of accounts receivable would provide an indication as to the

a. Validity of the accounts
b. Integrity of the credit grantors
c. Collectability of the accounts
d. Solvency of the customers

28. Which account balance is most likely to be misstated if an aging of accounts receivable is not performed?
a. Allowance for bad debts
b. Accounts receivable
c. Sales returns and allowances
d. Sales revenue

29. An auditor selects a sample from the file of shipping documents to determine whether invoices were
prepared. This test is performed to satisfy the audit objective of
a. Accuracy
b. Control
c. Completeness
d. Existence

PROBLEM NO. 7
During your audit of the December 31, 2014 financial statements of MEEMEE, INC. you were able to obtain the following information:

CASH
a. Cash balance per General Ledger of P924,050 consists of the following:
Petty Cash P 10,000
BPI Savings Account (S.A.) # 0150680558 280,250
BPI Current Account (C.A.) # 01553354865 60,800
BPI Current Account (C.A.) # 01552743360 170,000
Security Bank Savings Accounts (S.A.) # 0141731929 403,000

b. A count of petty cash on Jan. 5, 2015 reveals

 Coins and currencies P5,640
 Unreplenished vouchers for various expenses amounting to P2,360. P1,100 of the unreplensihed vouchers pertain to
expenses incurred in 2015 and disbursed in 2015.
 IOUs amounting to P2,000. P500 of the IOUs were made in December, 2014 while the rest were made in 2015.

c. The BPI S.A. # 0150680558 IS A DEPOSITORY ACOUNT FOR RECEIPTS. Transfers are made to BPI C.A. #01553354865 – Payroll
Account and CA #01552743360 – general Disbursing as necessary. Security Bank S.A. 30141741929 is a replacement fund for factory
equipment.

d. Bank confirmation replies give the following balances:

BPI S.A. #0150680558 (depository) P 227,069
BPI C.A. #01553354865 (PAYROLL) 101,350
BPI C.A. # 01552743360 (Gen. Disbursing) 297,650
Security Bank S.A. # 0141741929 400,625

e. The difference in the Security Bank S.A. was interest for the 4 th quarter of 2014 credited on December 31, 2014 but was recorded by the
company in January, 2015.

An examination of bank statements, cash receipts journal, cash disbursements journal and other books and documents reveal:

BPI S.A. #015680558 (depository):

Interest for 4th quarter of 2014 P 394
Check of customer dated 12.28.14 in payment for merchandise
Sold on 10.30.14 was returned due to insufficient funds 12,800
Deposits in Transit 35,275
Post-dated check (dated January 2015) in payment for merchandise
Sold on 11.20.14 included in deposits in transit 4,550
Bank debit on Dec. 31, representing charge for dishonored note of City
Co. plus protest fees of P250 5,500

BPI C.A. # 01553354865 (payroll):

Outstanding checks as of Dec. 31 P 40,700
Included in the outstanding checks are the following:
7
 Checks issued and dated prior to May 2014 (staled) 5,200
Unreleased as of December 31, 2014 10,400
Bank charges for December 150

BPI C.A. #01552743360 (general disbursing):

Outstanding checks as of Dec. 31 inclusive of unreleased checks P 45,200 P 132,700
A check of MEME, Inc, charged to MEEMEE in error 4,000
A check for P6,500 was recorded in the books as P5,600
Bank charges for December 150

ACCOUNTS RECEIVABLE

a. Balance per general ledger of P724,674 consists of the following:

Current (n/30) P 362,412
1-30 days overdue 202,895
31-60 days overdue 130,480
61-90 days overdue 17,500
91 days and above overdue 11,387

b. Included in the Receivables are credit balances as follows:

Current P 9,000
31-60 days overdue 4,800

c. Included in the Receivables are Due from Officers and Employees:

Current P 2,000

d. Bad debts expense per General Ledger is P24,000

e. Allowance for Bad Debts per general Ledger is P27,000
f. Of the 91 days and above overdue, P5,000 is deemed uncollectible and should be written off.
g. Allowance for Bad Debts per aging is computed as:
½ of 1% for Current
1% for 1-30 days overdue
3% for 31-60 days overdue
10% for 61-90 days overdue
50% for 91 days and above overdue

NOTES RECEIVABLE

a. Notes receivable per general ledger amount to P31,800.

b. Examination of documents reveal that the corporation as of December 31, 2014 is holding the following notes:
Creative Co. 24%, 90-day noted dated 10.28.14 P 10,000
Diamond Co. 20%, 30-day noted dated 11.20.14 (dishonored at maturity) 15,000
25%, 30-day note dated 12.12.14 from the company’s president 6,800

c. Further examination reveals that there were two (2) notes discounted at BPU in November
Infra Co. 18%, 60-day note dated 11.15.14 P 8,000
City Co. 30%, 2-month note dated 10.30.14 5,000

d. The company recorded the proceeds as Debit to Cash and corresponding credit to Notes Receivable. Difference between the face
value of the note and the amount of the proceeds was either charged to Interest Expense or Credited to Interest Income.
e. All discounting transactions with BPI are on a with recourse basis. Protest fees are charged by the bank on dishonored notes.
f. All notes not yet due are considered as faulty collectible. Past experience indicates that dishonored notes have an 80% chance of
being collected after dishonor (to be included in the Aging of receivables as 20% uncollectibility)
g. No accrued interest was recorded at the end of the year. The account interest receivable has no balance as of December 31, 2014.
h. Interest Income has a balance of P2,800 per general ledger.

REQUIRED:
Determine the adjusted balance of the following as of December 31, 2014:

30. Petty cash

31. BPI S.A. # 0150680558 (depository)
32. BPI C.A. # 01553354865 (PAYROLL)
33. BPI C.A. # 01552743360 (Gen. Disbursing)
34. Security Bank S.A #0141741929
35. Cash
36. Accounts Receivable (Gross)
37. Allowance for Bad Debts
38. Bad Debt Expense
39. Notes Receivable
40. Interest Receivable
41. Interest Income
42. Receivable from Officers and Employees (Advances and Notes)
8
 43. Customer Credit Balances

MEEMEE, Inc.
Adjusting Entries:
1. Miscellaneous Expenses 1,260
Receivables from Officers and Employees 500
Cash – Petty Cash Fund 1,760

2. Other Non-Current Financial Assets 400,625

Cash in Bank 400,000
Interest Income 625
Reclassified Security Bank SA

3. Cash in Bank – BPI SA 394

Interest Income 394

4. Accounts Receivable – 31 – 60 days overdue 12,800

Cash in Bank – BPI SA 1 2,800

5. Accounts Receivable – Dishonored Notes 5,500

Cash in Bank – BPI SA 5,500

Notes Receivable Discounted 5,000

Notes Receivable 5,000

6. Cash in Bank – BPI CA Payroll 15,600

Accrued Payroll 15,600
(5,200 + 10,400)

7. Miscellaneous Expenses 150

Cash in Bank – BPI CA Payroll 150

8. Cash in Bank – BPI CA General 45,200

Accounts Payable 45,200

9. Accounts Payable 900

Miscellaneous Expenses 150
Cash in Bank _ BPI CA General 1,050

10. Accounts Receivable – Current 9,000

Accounts Receivable – 31- 60 days overdue 4,800
Customers’ Credit Balances 13,800

11. Receivables from Officers and Employees 2,000

Accounts Receivable – Current 2,000

12. Allowance for Bad Debts 5,000

Accounts Receivable – over 90 days 5,000

13. Accounts Receivable – Overdue Notes 15,250

Notes Receivable 15,000
Interest Income 250

14. Receivable from Officers and Employees 6,800

Notes Receivable 6,800

15. Interest Receivable 517

Interest Income 517
Creative: P10,000 x 24% x 64/360 = 427
President: P 6,800 x 25% x 19/360 = 90
Total 517

16. Allowance for Bad Debts 4,543

Bad Debts Expense 4,543

ANALYSIS OF ACCOUNTS RECEIVABLE

Age Class Per Client Adjustment Per Audit % Uncollectible Required Allowance
Current P362,412 9,000
(2,000) 369,412 ½% 1,847
1-30 days past due 202,895 4,550 207,445 1% 2,074
31 – 60 days past due 130,480 12,800
4,800 148,080 3% 4,442
61 – 90 dayspast due 17,500 -- 17,500 10% 1,750
Over 90 days past due 11,387 (5,000) 6,387 50% 3,194

9
Dishonored notes -- 5,500
15,250 20,750 20% 4,150
Total required allowance P17,457
Balance of allowance 22,000
Adjustment (4,543)

Answers:
30. Petty Cash P8,240
31. BPI SA depository 257,794
32. BPI CA Payroll 76,250
33. BPI CA Gen Disb. 214,150
34. Security Bank SA 400,625
35. Cash 556,434
36. Accounts Receivable (Gross) 769,574
37. Allowance for Bad Debts 17,457
38. Bad Debts Expense 19,457
39. Notes Receivable 18,000
40. Interest Receivable 517
41. Interest Income 4,586
42. Receivables from Officers and Employees 9,300 (6,800+2000+500)
43. Customer Credit Balances 13,800

----END----

10