Audit problem with actual errors.

Enumerate and present your audit notes and analysis for each and every problem.

At least 8 audit findings per problem.

Audit findings (please be specific on describing the error and on presenting your justification)

e.g

a. There is an understatement in the presentation of cash receipts because……..

B. Incorrect footing of the accounts receivable balance due to …….

C. The inventory was understated for the year December 31, 20xx because it was not

included in the count. But, it should be included because it was shipped FOB shipping

point.

D. Etc.

DO NOT EXPLAIN THE PROBLEM, JUSTIFY YOUR AUDIT FINDINGS!!!

PROBLEM 1

You are examining the financial statements of Softnyx Corporation for 2008. The company’s accountant provided you the following unadjusted trial balance.

Softnyx CorporationUnadjusted Trial Balance

December 31, 2010Debit Credit Adjustments Audited Balances

Cash 1,442,500 (126,000) (1,316, 500)Marketable Securities

1, 200,000 1, 200,000

Accounts Receivable

1,300, 000 (51,000) 1, 249,000

Other Receivables 25,000 25,000Inventories 1,400,000 1,400,000Prepayments 120,000 (60,000) 60,000Land 1,800,000 (180,000) 1,620,000Building(20 years life, no salvage value)

2,300,000 200,000 2,500,000

Accumulated Depreciation-Building

525,000 (525,000)

Machineries and Equipment (10 years, no salvage value)

2,200,000 2,200,000

Accumulated Depreciation- Machineries and equipment

1,100,000 1,100,000

Goodwill 250,000 (250,000)Investment and funds

100,000 100,000

Other AssetsAccounts Payables 900,000 (16,000) (916,000)Other Payables 360,000 140,000 (220,000)Long term Debt 2,000,000 2,000,000Share Capital 2,500,000 (100,000) (2,600,000)Share premium 1, 250,000 (40,000) (1,290,000)Accumulated profits, beg

2,492,000 370,000 (2,122,500)

Sales 3,000,000 86,500 (2,913,000)Service Revenue (160,000) (160,000)Cost of sales 950,000 950,000Commission 300,00 30,000 330,000

ExpenseAdvertising Expense

150,000 2,000 152,000

Delivery Expense 45,000 45,000Office Salaries Expense

450,000 (30,000) 420,000

Supplies Expense 195,000 75,000 270,000Legal and Professional Expense

50,000 (12,000) 38,000

Other Income 75,000 16,500 (58,500)Other Charges 50,000 (20,000) 30,000Adjusted Balances 14,202,500 14,202,500 13,905,500

In the course of your examination you discover several errors. Prepare the necessary adjusting Journal entries ignoring income tax effects and determine the correct balances of the client’s balance sheet and income statement accounts.

1. On December 29, 2010, the company issued checks to creditors totalling P20, 000. These checks were released on January 4, 2011.

2. A customer’s deposit of P10, 000 for goods to be delivered in January 2011 was deducted from Accounts Receivable.

3. A P15, 000 collection of Accounts Receivable on December 31, 2010 was not recorded until January 14, 2011.

4. A check for P25, 000 from a customer to apply his account was erroneously credited to Accounts Payable when received on December 24, 2010.

5. The building under lease was renovated at a cost of P200, 00 on December 30, 2010. This was recorded by a debit to land.

6. Softnyx Corporation issued 1,000 shares of P100 par value capital stock for P120, 000 on January 14, 2010. The proceeds were credited to Retained Earning Account.

7. Trade accounts receivable includes P25, 000 advances to officers due in six months.8. A customer’s check for P12, 000 deposited with but returned by the bank NSF on December 27,

2010. The return was not recorded in the books.9. On December 31, 2010, goodwill estimated by the Board of Directors at P250, 000 was set up by

a credit to Retained Earnings.10. Credit Balances in customer’s account amounting P10, 000 was presented as a net from

accounts receivable with debit balances.11. A P15, 000 collections from Glenn Corporation was correctly recorded in the general ledger but

was erroneously credited to the subsidiary ledger account of Glenda Company.12. The cash account at December 31, 2010 includes P100, 000 set aside by the Board of Directors

for the purchase of a computer.13. A check for P10, 000 from a customer to apply to his account was received on December 30,

2010 but was not recorded until January 4, 2011.

14. A stale check of P12, 000 which has been outstanding for more than six months was included in the list of outstanding checks. This was in prepayment of accounts payable.

15. Softnyx Corporation maintains current accounts in two banks: PNB and DBP. A transfer of fund from DBP to PNB amounting to P30, 000 was not recorded as of year end.

16. A check was cleared by the bank as P12, 000 but was recorded by the bookkeeper as P21, 000. This was in payment of Accounts Payable.

17. An examination of cash transactions revealed that Cash Voucher Number 341 for P5, 000 dated December 28, 2010 for advertising expenses was debited to Other Changes.

18. In 2010, salesmen’s commission of P30, 000 was erroneously debited to office salaries.19. Cash expenditures for advertising expenses in the amount of 12, 000 was erroneously charged

to legal expenses.20. Interest collection from a Note Receivable amounting to P3, 500 which was received on

December 30, 2010 was deposited and recorded on the same date by a credit to Sales.21. Advertising expenses for 2010 includes P15, 000 cost of printing sales brochures for a special

promotional campaign which will start in January 2011.22. On December 3, 2010, cash of P8, 000 collected on account from a customer and deposited in

the bank in the next day, was recorded on the books as a credit to sales.23. Other income includes gain on sale of treasury stock in the amount of P20, 000.24. The sales book was left upon up to January 4, 2011. January 2011 cash sales of P75, 000 were

recorded as sales on December 2010.25. Unrecorded bank charges for December 2010 amounted to P5, 000.26. Attorney’s fees and Brokers Commissions amounting to P20, 000 applicable to the purchase of

land was recorded in the books as other charges on December 30, 2010.27. On October 24, 2010, the staff-in-charge bought office supplies worth P120, 000 and included

the same in the prepaid expenses. No adjustment was made at year end. As of December 31, 2010, unused office supplies amount to P45, 000.

28. Softnyx Corporation also offered maintenance contracts on an annual basis. Cash receipts from such contracts amounted to P360, 000 were credited to Other Payables-Unearned Service Contract. Of the total amount, P120, 000 is effective from May 1, 2010 to May 1, 2011, and the balance is effective from September 1, 2010 to September 1, 2011. No adjustment was made at year end.

SOLUTION:

ENTRY MADE CORRECT ENTRY ADJUSTED JOURNAL ENTRY1.Accounts Payable 20,000 Cash 20,000

No Entry Cash 20,000 Accounts Payable 20,000

2.Cash 10,000 Accounts Payable 10,000

Cash 10,000 Other Payable 10,000

Accounts Receivable 10,000 Other Payable 10,000

3. No Entry Cash 15,000 Cash 15,000

Accounts Receivable 15,000

Accounts Receivable 15,000

4.Cash 25,000 Accounts Payable 25,000

Cash 25,000 Accounts Receivable 25,000

Accounts Payable 25,000 Accounts Receivable 25,000

5.Land 200,000 Cash 200,000

Building 200,000 Cash 200,000

Building 200,000 Land 200,000

6.Cash 120,000 Retained Earnings 120,000

Cash 120,000 Capital Stock (Ordinary Share) 100,000 Share premium 20,000

Cash 120,000 Capital Stock (Ordinary Share) 100,000 Share premium 20,000

7.Accounts Receivable 25,000 Cash 25,000

Other Receivable 25,000 Cash 25,000

Other Receivable 25,000 Accounts Receivable 25,000

8.No Entry Accounts Receivable 12,000

Cash 12,000Accounts Receivable 12,000 Cash 12,000

9.Goodwill 250,000 Retained Earnings 250,000

No Entry Retained Earnings 250,000 Goodwill 250,000

10.Cash 10,000 Accounts Receivable 10,000

Cash 10,000 Other Payable 10,000

Accounts Receivable 10,000 Other Payable 10,000

11.Cash 15,000 Accounts Receivable -Glenda 15,000

Cash 15,000 Accounts Receivable -Glenda 15,000

Accounts Receivable -Glenda 15,000 Accounts Receivable -Glenda 15,000

12.No Entry Investment

and Funds 100,000 Cash 100,000

Investmentand Funds 100,000 Cash 100,000

13.No Entry Cash 10,000

Accounts Receivable 10,000Cash 10,000 Accounts Receivable 10,000

14.Prepayment:Accounts Payable 12,000 Cash 12,000

Other Receivable 12,000 Cash 12,000

Cash 12,000 Accounts Payable 12,000

Stale Check:No Entry Cash 12,000

Other Receivable 12,00015.No Entry Cash-PNB 30,000

Cash-DBP 30,000Cash-PNB 30,000 Cash-DBP 30,000

16.Accounts Payable 21,000 Cash 21,000

Accounts Payable 12,000 Cash 12,000

Cash 9,000 Accounts Payable 9,000

17.Other Charges 5,000 Cash 5,000

Advertising Expense 5,000 Cash 5,000

Advertising Expense 5,000 Other Charges 5,000

18.Office Salaries 30,000 Cash 30,000

Commission Expense 30,000 Cash 30,000

Commission Expense 30,000 Office Salaries 30,000

19.Legal expense 12,000 Cash 12,000

Advertising Expense 12,000 Cash 12,000

Advertising Expense 12,000 Legal expense 12,000

20.Cash 3,500 Sales 3,500

Cash 3,500 Other Income 3,500

Sales 3,500 Other Income 3,500

21.Advertising Expense 15,000 Cash 15,000

Prepayments 15,000 Cash 15,000

Prepayments 15,000 Advertising Expense 15,000

22.Cash 8,000 Sales 8,000

Cash 8,000 Accounts Receivable 8,000

Sales 8,000 Accounts Receivable 8,000

23.Cash 20,000 Other Income 20,000

Cash 20,000 Share Premium -Treasury Share 20,000

Other Income 20,000 Share Premium -Treasury Share 20,000

24.Cash 75,000 Sales 75,000

No Entry Sales 75,000 Cash 75,000

25.No Entry Other Charges 5,000

Cash 5,000Other Charges 5,000 Cash 5,000

26. Other Charges 20,000 Cash 20,000

Land 20,000 Cash 20,000

Land 20,000 Other Charges 20,000

27. Acquisition:Prepayments 120,000 Cash 120,000Adjustment:No Entry

Prepayments 120,000 Cash 120,000

Supplies Expense 75,000 Prepayments 75,000

Prepayments 120,000 Cash 120,000

Supplies Expense 75,000 Prepayments 75,000

28.Cash 360,000 Other Payable 360,000No Entry

Cash 360,000 Other Payable 360,000Other Payable 160,000 Service Revenue 160,000

Cash 360,000 Other Payable 360,000Other Payable 160,000 Service Revenue 160,000

AUDIT FINDINGS:

PROBLEM 2

Clippers Corporation asked you to review its records and prepare corrected financial statements. The books of accounts are in agreement with the following balance sheet:

Clippers CorporationBalance Sheet

December 31, 2012AssetsCash P40, 000Accounts Receivable 80,000Notes Receivable 24,000Inventories 200,000Total Assets P344, 000

Liabilities and Owners’ EquityAccounts Payable P16, 000Notes Payable 32, 000Capital Stock 80, 000Retained Earnings 216,000Total liabilities and owners’ equity P344, 000

A review of the company’s books indicates that the following errors had not been corrected during the applicable years:

2009 2010 2011 2012Ending inventory-overstated P - P56, 000 P 64,000 P-Ending inventory-understated 48,000 - - 72,000Prepaid Expense 7,200 5,600 4,000 4,800Unearned Income - 3,200 - 2,400Accrued Expense 1,600 600 800 400Accrued Income - 1,000 - 1,200

No dividends were declared during the years 2009 to 2012 and no adjustments were made to retained earnings. The company’s books reported the following net income:

2009 P60, 000 2011 P52, 0002010 44,000 2012 60,000

REQUIRED:

Based on the above and the results of your audit, determine the adjusted amounts of the following: (Disregard tax implications)1. Net income in 20092. Net income (loss) in 20103. Net income (loss) in 20114. Net income (loss) in 20125. Retained earnings as of December 31, 2012

SOLUTION:

2009 2010 2011 2012Net income- unadjusted 60,000 44,000 52,000 60,000Ending Inventory-overstated20102011

(56,000) 56,000(64,000) 64,000

Ending inventory-understated20092012

48,000 (48,000)72,000

Prepaid Insurance-outrightly expensed2009201020112012

7,200 (7,200)5,600 (5,600)

4,000 (4,000)4,800

Unearned Income20112012

(3,200) 3,200(2,400)

Accrued Income20102012

1,000 (1,000)1,200

Accrued Expense2009201020112012

(1,600) 1,600(600) 600

(800) 800400

Net Income (Net Loss) Adjustment P113,600 P(62,800) P 44,400 P 196,000

Retained earnings, unadjusted P 21, 600

Current Errors:

Inventory end, understated 72,000

Prepaid Insurance 4, 800

Unearned Income (2, 400)

Accrued Income 1,200

Accrued expense (4,000)

Retained earnings- Adjusted- 12/31/12 P291, 200

AUDIT FINDINGS:

PROBLEM 3

An entity reported net income as follows:

2010 1, 500, 000

2011 2, 000, 000

2012 2, 800, 000

During your audit the following transactions were noted

1. Accounts receivable instead of notes receivable was debited in 2012 20,0002. Purchases account was debited in 2012 instead of office supplies 5,0003. The physical inventory on December 31, 2010 was overstated 10,0004. The physical inventory on December 31, 2011 was understated 15, 0005. Advances to supplier were recorded as purchases but the merchandise was received in the

subsequent year2010 30,0002011 40,000

6. Advances from customers recorded as sales but the goods were delivered in the following year

2010 25, 0002011 50,000

7. Insurance premium for three years paid in 2010 was charge entirely to expense in 2010 15000

8. Salaries accrued not recorded2010 25, 0002011 60,000

9. Rent for two years received in 2011 was entirely credited to income10,000

10. Unrecorded accrued interest receivable2011 10,0002012 25,000

11. Improvements on building had been charged to expense on January 1, 2011. Improvements have a life of 5 years. 100,000

12. On January 1, 2011, an equipment costing P40, 000 was sold for P20, 000. At the date of sale, the equipment had an accumulated depreciation of P25, 000. The cash received was recorded as other income in 2011.

REQUIRED:What is the correct Net Income for 2010, 2011, and 2012?

SOLUTION2010 2011 2012

Unadjusted Net Income1, 500,000 2,000,000 2,800,000

1. 1. No effect2. 2. No effect3. 3. 2010 inventory

overstated(10,000) 10,000

4. 2011 inventory understated

15, 000 (15, 000)

5. Advances recorded as purchase

20102011 30,000 (30,000)

40,000 (40,000)6. Advances recorded as sales

20102011 (25,000) 25,000

(50,000) 50,0007. Insurance

premium for 3 years charged to expense in 2010 10,000 (5,000) (5,000)

8. Salaries not recorded

20102011

(30,000) 30,000(60,000) 60,000

9. Rent income for 2 years recorded as income in 2011

5,000 (5,000)10. Improvements

debited to expenseDepreciation (100, 000/5)

100, 000(20,000) (20,000)

11. Interest receivable unrecorded

20112012 10,000 (10,000)

25,00012. Overstatement of other income (15,000)

CORRECTED NET INCOME

1, 475, 000 2, 045, 000 2, 850, 000

AUDIT FINDINGS:

PROBLEM 4Before the accounts of Goey Corporation are closed for the annual fiscal period ended December 31, 2012, an examination of the company records by the auditor discovered the following facts:

1. Store supplies inventories had been overlooked in adjusting the accounts in the current and previous years. Store supplies on hand were; 2010 P450; 2011 P9, 000. Store supplies on hand at the end of 2012 are 14, 500.

2. Accrued sales commissions due to salesmen had been overlooked in adjusting the accounts. Accrued amounts were: 2010, P6, 750; 2011, P7, 300. Accrued commissions at the end of 2012 are P9, 700.

3. Checks totalling P6, 500 issued to former employees in 2010 are still outstanding. Present whereabouts of such employees are unknown, and it is doubtful whether the checks will be presented for payment.

4. Raw materials, costing P8, 000, received on December 31, 2011, had been included in the physical inventory taken on that date; however, the purchase was recorded when the invoice was received on January 4, 2012.

5. On March 2011, the company received a 25% ordinary share dividend on 100 ordinary shares of Brooks, Inc. acquired in 2010 at P150. The shares received as share dividend were sold for cash in April 2011, at 170 each and a revenue account credited for the full proceeds.

6. Office equipment purchased January 2, 2011 at a cost of P22, 000, having an estimated salvage value of P2, 000 and an estimated useful life of 5 years, now is estimated to have a total life of 10 years from January 1, 2011; the estimated salvage value remains unchanged, straight line method of depreciation is used.

7. Interest deducted in advance on notes payable amounts to P5, 000. The Interest expense account has a debit balance of P 7, 500. The company failed to record interest deducted in advance at the end of 2010, P3, 000; and at the end of 2011, P3, 100. All original entries were made to the Interest Expense Account.

8. Merchandise in transit, December 31, 2012, FOB Shipping Point of P 15, 000 was not included in the inventory as of December 31, 2012, but was recorded in the purchase account in 2012.

9. Merchandise costing P 6, 000 was included in the inventory as of December 31, 2011 but was not entered in the purchase account until January 10, 2012.

REQUIRED:

A. Prepare all correcting and adjusting entries called for by the given information. Disregard effects of corrections on Income Tax.

B. What is the total adjustment to the Retained Earnings Account?

SOLUTION:

ENTRY MADE CORRECTING ENTRY ADJUSTED JOURNAL ENTRY1. 1.2. 2010

No Entry

2011No Entry

No Entry

2012No Entry

No Entry

Supplies 450 Supplies Expense 450

Supplies 450 Supplies Expense 450Supplies 9,000 Supplies Expense 9,000

Supplies 9,000 Supplies Expense 9,000Supplies 14,500 Supplies Expense 14,500

Supplies 450 Supplies Expense 450

Retained Earnings 450 Supplies 450Supplies Expense 9,000 Retained Earnings 9,000

Supplies 9,000 Supplies Expense 9,000Supplies 14,500 Supplies Expense 14,500

2. Salaries expense 2,400Retained earnings 7,300 Accrued Salaries Payable 9,700

3.Salaries Expense/Advances fromEmployees 6,500 Cash 6, 500

Salaries Expense 6,500 Miscellaneous Income 6,500

Cash 6,500 Miscellaneous Income 6,500

4.2011 No Entry

2012Purchases 8,000 Cash 8,000

Purchases 8,000 Accounts Payable 8,000

Accounts Payable 8,000 Cash 8,000

Retained Earnings 8,000 Accounts Payable 8,000

Accounts Payable 8,000 Cash 8,000

6.2011Depreciation Expense 4,000 Depreciation Expense 4,000 Depreciation Expense 4,000

Accumulated Depreciation 4,0002012Depreciation Expense 4,000 Accumulated Depreciation 4,000

Depreciation Expense 1,778 Accumulated Depreciation 1,778

2013Depreciation Expense 1,500 Accumulated Depreciation 1,500

Accumulated Depreciation 4,000

Depreciation Expense 4,000 Accumulated Depreciation 4,000

Depreciation Expense 1,778 Accumulated Depreciation 1,778

Depreciation Expense 1,500 Accumulated Depreciation 1,500

Accumulated Depreciation 4,000

Depreciation Expense 4,000 Accumulated Depreciation 4,000

Depreciation Expense 1,778 Accumulated Depreciation 1,778

Depreciation Expense 1,500 Accumulated Depreciation 1,500

7.2010No entry

2011No Entry

No Entry

2012No Entry

No Entry

Prepaid Interest 3,000 Interest Expense 3,000

Interest Expense 3,000 Prepaid Interest 3,000Prepaid Interest 3,100 Interest Expense 3,100

Interest Expense 3,100 Prepaid Interest 3,100Prepaid Interest 5,000 Interest Expense 5,000

Prepaid Interest 3,000 Retained Earnings 3,000

Retained Earnings 3,000 Retained Earnings 3,000Prepaid Interest 3,100 Retained Earnings 3,100

Interest Expense 3,100 Prepaid Interest 3,100Prepaid Interest 5,000 Interest Expense 5,000

8. Inventory 15,000 Cost of Sales 15,000

9.2011No Entry

2012Purchases 6,000 Cash 6,000

Purchases 6,000 Accounts Payable 6,000

Accounts Payable 6,000 Cash 6,000

Retained Earnings 6,000 Accounts Payable 6,000

Accounts Payable 6,000 Purchases 6,000

ADJUSTED RETAINED EARNINGS:

(9,000)--------17, 300----------2

8,000-----------43,000-----------5(3,100)---------7 6,000-----------9P12, 200 (balance adjusted)

AUDIT FINDINGS:

PROBLEM 5

PATRIOT Co.’s net income for 2009, 2010, and 2011 were P100, 000, P145, 000 and P185, 000; respectively. The following items were not handled properly.

a. Rent of P6, 500 for 2012 was received from a lessee on December 23, 2011, and recorded as outright income in 2011.

b. Salaries payable at the end of the following years were omitted;December 31, 2008 2,500December 31, 2009 5, 500December 31, 2010 7, 500December 31, 2011 4, 700

c. The following unused office supplies were omitted in the accounting records:December 31, 2008 3,500December 31, 2009 6,500December 31, 2010 3, 700December 31, 2011 7,100

d. On January 1, 2009, the company completed major repairs on the company’s machinery and equipment totalling P220, 000, which was expensed outright. The said equipment is 5 years old as of January 1, 2009. As of December 31, 2011, the equipment had an original cost of P500, 00 and a carrying value of P 250, 000.

REQUIRED:

1. The correct 2011 depreciation expense is?2. The correct 2009 net income is?3. The correct 2010 net income is?4. The correct 2011 net income is?5. The effect of the above errors on the 2011 beginning retained earnings is?6. The effect of the above errors on 2011 working capital is?7. The effect of the 2009 errors on 2011 working capital is?8. The effect of the 2010 errors on 2011 net income is?

SOLUTION:

1. Correct 2011 depreciation expenseDepreciation expense-Unadjusted (500, 000/16 years) 31, 250

Additional Depreciation (220, 000/11 years) 20,0002011 Correct Depreciation Expense P51, 250

2009 2010 2011 Retained Earnings Beginning 2011

Working Capital 2011

Net income P 100, 000 P 145, 000 P185, 000Rent Income received on 2011 (6, 500) (6, 500)Salaries Payable- not recorded2008200920102011

2,500(5,500) 5, 500

(7, 500) 7, 500(4,700)

(7, 500)(4, 700)

Unused Supplies2008200920102011

(3, 500)6, 500 (6, 500)

3, 700 (3, 700)7, 100

(3, 700)7, 100

Repairs- expensed-should be capitalized 220,000 220,000Depreciation- Additional (20,000) (20,000) (20,000) (20,000)Net Income –AdjustedEffect on 2011- Retained Earnings, beginning and Working Capital

100,000(2)

120, 200(3)

164, 700(4)

196, 200(5)

4, 100(6)

6. Accrued Salaries Payable2008 CB on 2009 2,5002009 error (5, 500)Overstatement of Accrued Salaries Payable (3, 000)

Unused Office Supplies

2008 effect on 2009-CB (3, 500)

2009 error 6, 500

Understatement of Unused office Supplies 3,000

Total effect of 2009 errors on 2011 Working Capital 0

7. Effect of 2010 errors on 2011 Net Income2010 Accrued Salaries Payable (7, 500)2011 Unused Office Supplies 3,700Total effect of 2010 errors on 2011 Net Income 3, 800

AUDIT FINDINGS:

PROBLEM 6

You were engaged by PUFFER INC. to audit its financial statements for the first time. In examining the company’s books, you discovered that certain adjustments had been overlooked at the end of 2011 and 2012. Moreover, you also discovered that other items had been erroneously recorded. The said omissions and other failures for each year are noted below:

2011 2012

Prepaid Insurance 256, 000 205,000

Accrued Salaries and Wages 582, 400 520,000

Accrued Interest Income 172, 800 142, 000

Advances from Customers 313, 600 374, 000

Capital Expenditures charged as repairs expense 376,000 348, 000

Audit notes:

a. Collections from customers had been recorded as sales but should have been recognized as advances from customers because goods were not shipped until the following year.

b. Capital expenditures had been recorded as repairs but should have been charged to the Machinery Account; the depreciation rate is 10% per year, but depreciation in the year of expenditure is to be recognized at 5%.

REQUIRED:

a. The total effect of the errors on the 2012 net income.b. The total effect of the errors on the company’s working capital as of December 31, 2012.c. If remained unadjusted, the effect of the errors to the company’s December 31, 2012

Accumulated Profits.

SOLUTION:

2011 2012 Working Capital-2012

Retained Earnings-2012

Prepaid Insurance20112012

256,000 (256,000)205,200 205,200 205,200

Accrued Salaries and Wages20112012

(582, 400) 582,400(520,000) (520,000) (520,000)

Accrued Interest Income20112012

172, 800 (172,800)142,000 142,000 142,000

Advances from Customers20112012

(313, 600) 313,600(374,000) (374,000) (374,000)

Capital Expenditures20112012

376,000348,000

376,000348,000

Depreciation Expense2011(376,000X5%)2012(376,000x10%)

(18,800)(37,600)(17, 400)

(18,800)(37,600)(17, 400)

Total effects of errors

(110,000)overstated

212,400understated

546,800overstatement

103,400understated

AUDIT FINDINGS:

PROBLEM 7

Net income for IBM Co, for the year 2011 and 2012 is shown below. An audit disclosed the following information:

2011 2012

Net Income P24, 650 P31, 250

a. Inventory understatement at year-end 2,500

b. Typewriter purchased at year-end

Charged to expense (10 year life) 4,000

c. Merchandise purchased not recorded as Liability but included in the inventory 5,000d. Unearned rent taken up as income 1,800e. Unrecorded accrued taxes 3,000

REQUIRED:

1. The correct net income for 2011.2. The correct net income for 2012.3. The effect on the above errors to the 2012 beginning retained earnings.4. The effect of the above errors to the 2012 working capital.5. The effect of the 2011 errors to 2012 net income.

SOLUTION:

Net Income 20122011 2012 Working

CapitalRetained Earnings, Beginning

2011 Errors –Net Income

Net Income 24, 650 31, 250a.Ending Inventory-

understated 2,500 2,500 - (2,500)b.Purchase of typewriterDepreciation- 10 years

4,000 -

(400)

-

-

4,000

-

-

400c.Unrecorded merchandise (5,000) 5,000 5,000 (5,000) (5,000)d.Unearnedrent (1,800) (1,800) - 1,800e.Unrecorded accrued taxes (3,000) (3,000) - 3,000Total P23,650 P33,550 P2,700 P(1,000) P(2,300)

AUDIT FINDINGS:

PROBLEM 8

Vayne Company’s December 31, year end financial statements contained the following errors:

December 21, 2011 December 31, 2012

Ending Inventory 2,000 understated 1, 800 overstated

Depreciation Expense 400 understated

Insurance premium of P1, 500 was paid in 2011 covering the years 2011, 2012 and 2013 and charged to insurance expense. In addition, on December 31, 2012, a fully depreciated machinery was sold for 3,200 cash, but the sale was not recorded until 2012. There were no other errors during 2011 and 2012 and no corrections have been made for any errors. Ignore income tax considerations.

REQUIRED:

A. Total effect of the errors on the 2012 net income.B. The total effect of the errors on the amount of Vayne’s working capital at December 31, 2012.C. The total effect of the errors on the balance of Vayne’s retained earnings at December 31, 2012.

SOLUTION:

Net Income 20122011 2012 Working Capital Retained Earnings

2011 error ending inventory-understated 2,000 (2,000)2012 error ending inventory-overstated (1,800) (1,800) (1,800)2011 Depreciation Expense-understated (400) (400)Insurance expense 1,000 (500)Prepaid Insurance (500) (500)Gain on sale 3,200 3,200 3,200Total effect 20,000

understated(1,100)overstated

1,900understated

1,500understated

AUDIT FINDINGS:

PROBLEM 9

FEG Corporation is negotiating a loan for expansion. Its book s had never been audited and the bank requested an audit. FEG then prepared the following comparative financial statements for the years ended December 31, 2011 and 2010:

FEG CorporationBALANCE SHEET

As of December 312011 2010

AssetsCurrent AssetsCash 163,000 82,000Accounts Receivable 392,000 296,000Allowance for uncollectible accounts (37,000) (18,000)Marketable securities, at cost 78,000 78,000Merchandise Inventory 207,000 202,000

Total Current Assets 803,000 640,000

Fixed AssetsProperty, plant and equipment 167,000 169,500Accumulated Depreciation (121,600) (104,600)

Total Fixed Assets 45,400 63,100Total Assets 848,400 703,100

Liabilities and Shareholders’ EquityLiabilitiesAccounts Payable 121,400 196,100

Shareholders’ EquityOrdinary Shares (P10 par value, 50,000Shares authorized, 20,000 shares issued and Outstanding) 260,000 260,000Retained Earnings 467,000 247,000

Total Shareholders’ Equity 727,000 507,000Total Liabilities and Shareholders’ Equity 848,400 703,100

FEG CorporationINCOME STATEMENT

For the years ended December 312011 2010

Sales 1,000,000 900,000Cost of Sales 430,000 395,000Gross Profit 570,000 505,000Operating Expenses 210,000 205,000Administrative Expenses 140,000 105,000

350,000 310,000Net Income 220,000 195,000

Additional Information:After auditing FEG’s books and records, the auditor wrote down the following information:

1. An analysis of collections and losses on account receivable during the past two years indicates a drop in anticipated losses due to bad debts. After consultation with management it was determined that the bad debts loss should be reduced by P10, 000 in the year ended 2011.

2. An analysis of marketable securities revealed that this investment portfolio consisted entirely of short-term available for sale investments in marketable equity securities that were acquired in 2010. The total market valuation for these investments as of the end of each year was as follows:

December 31, 2010 81,000December 31, 2011 62,000

3. The merchandise inventory at December 31, 2010 was overstated by P4,000 and the merchandise inventory at December 31, 2011, was overstated by P6, 100.

4. On January 2, 2010, equipment costing P12,000 (estimated useful life of 10 years and residual value of P1,000) was incorrectly charged to operating expenses. FEG records depreciation on the straight-line method. In 2011 fully depreciated equipment (with no residual value) that originally cost P17, 500 was sold as scrap for P2, 500. FEG credited the proceeds of P2, 500 to property and equipment.

5. An analysis of 2010 operating expenses revealed that FEG charged to expense a three year insurance premium of P2, 700 on January 15, 2010.

REQUIRED:A. Prepare the journal entries to correct he books at December 31, 2011. (Assuming the books

have not been closed).B. Assuming that any adjustments will be reported on comparative statements for the two years,

prepare a schedule showing the corrected net income for the years ended December 31, 2011 and 2010.

SOLUTION:A. ADJUSTING JOURNAL ENTRIES1. Allowance for Doubtful Accounts 10,000

Bad Debts Expense 10,0002. Unrealized Holding Loss-OCI 16,000

Available for Sale 16,0003. Retained Earnings, beginning 4,000

Cost of Sales 2,100Inventory 6,100

4. Accumulated Depreciation 15,300

Depreciation Expense 1,100Property and Equipment 3,000Retained Earnings 10,900Gain 2,500

5. Prepaid Insurance 900Insurance Expense 900

Retained Earnings 1,800

B. SCHEDULE

2011 2010Unadjusted Balances 220,000 195,000

1. Allowance for Doubtful Accounts 10,0003. Merchandise Inventory-overstated 4,000 (4,000)

Merchandise Inventory-overstated (6,100)4. Equipment incorrectly charged to operating 12,000

Expenses (1,100) (1,100)5.3 year Insurance Premium charged 1,800

To operating expense (900)Adjusted Balances-Net Income P228,400 P203,700

Additional Correction (Reclassifying Entry)Ordinary Shares 60,000 Share Premium 60,000

AUDIT FINDINGS: