Page 1 of 6
CEBU CPAR CENTER M an da ue C It y
AUDITING PROBLEMS COMPREHENSIVE PROBLEM You were assigne assigned d to audit audit the financial financial statements statements of LARES LARES Company Company for the year ended December December 31, 2005. The fieldwork fieldwork has been comleted comleted and you are now going o!er your audit audit findings to summari"e summari"e your otential otential ad#ustments. ad#ustments. The client is willing willing to accet all the necessary necessary ad#ustments in order for the financial statements to be resented resented fairly in conformity with generally acceted accounting rinciles. The following data were taken from your current working aers. $ash account consists of the following items% &etty cash fund &'$om checking account &*' current account Total er -
& 10,000 (15,000) 13+,+00 & 132,+00
a. The The coun countt of the the cash cashie iers rs acco accoun unta tabi bili lity ty on /anu /anuar ary y 2, 200 200,, re!e re!eal aled ed tota totall currency currency and coins of &3,00. &3,00. nrele nrelenis nished hed !ouchers !ouchers for !arious !arious eenses eenses totaled &,00, of which &1,200 ertains to /anuary 200. b. 4n December December 2, 2, 2005, a check check for &35,000 &35,000 was drawn drawn against against &'$om &'$om current current account resulting resulting in bank o!erdraft o!erdraft of &15,000. &15,000. The check check was icked u by the the sulier on /anuary 3, 200. c. 'ank reconciliat reconciliation ion statement statement reared reared by the cashier cashier for the the &*' account account follows% follows% 'ank balance 6dd% Deosit Deosit in transit transit 'ank ser!ice charges Total -ess% 4utstanding checks $heck *o. 5+ 57 57 1 1+ 2 'ook balance @
& 12,200 & 2,500 2,500 500
6mount & 1,000 7,300 2,00 3,00
25,000 1,200
@
11,500 & 13+,+00
$heck certified by the bank in December 2005.
6ll reconciling reconciling items were traced to the bank statement. statement. 8urther in!estigation in!estigation indicated indicated that the deosits in transit include a customers ost9dated check amounting to &1,000. The check reresents a collection from account customer for sales made in the middle of 4ctober 2005. Your re!iew of the clients internal control oints out many weaknesses. weaknesses. 6ccordingly, you did not erform tests of controls and you relied hea!ily on substanti!e rocedures.
AP-!"#
Page 2 of 6
$onfirmation relies recei!ed directly from customers disclosed the following ecetions% $onfirmation *o. 5 (:ang 'ert)
$ustomers $omments The goods sold on December 1 were returned on December 1, 2005.
6udit 8indings The client failed to record credit memo no. 23 for &12,000. The merchandise was included in the ending in!entory at cost.
15 (:ang /ess)
;e do not owe this amount < =>? (bad word). ;e did not recei!e any merchandise from your comany.
@n!estigation re!ealed that goods sold for &1,000 were shied to :ang /ess on December 2, 2005, terms 84' shiing oint. The goods were lost in transit and the shiing comany has acknowledged its resonsibility for the lost of the merchandise.
21 (Aercules)
@ am entitled to a 10= emloyee discount. Your bill should be reduced by &1,200.
Aercules is an emloyee of -6BC. tarting *o!ember 2005, all comany emloyees were entitled to a secial discount.
23 (Cric)
;e ha!e not yet sold the goods. ;e will remit the roceeds as soon as the goods are sold.
:erchandise billed for &17,000 were consigned to Cric on December 30, 2005. The goods cost &13,000.
3 (:ancio)
;e do not owe you &20,000. ;e already aid our accounts as e!idenced by 4B > 123.
The sale of merchandise on December 17, 2005 was aid by :ancio on /anuary , 200.
+ (/immy)
Beduce your bill by &1,500
This amount reresents freight aid by the customer for the merchandise shied on December 1+, 2005, terms, 84' destination9collect.
8rom the schedule of accounts recei!able as of December 31, 2005, you determined that this account includes the following% 6ccounts with debit balances% 0 days old and below 1 to 0 days 4!er 0 days 6d!ances to officers 6ccounts with credit balance 6ccounts recei!able er -
& 237,500 11+,200 75,00
& 1,100 1,00 (15,000) & 2,500
The credit balance in customers account reresents collection from a customer whose account had been written9off as uncollectible in 200. 6ccounts recei!able for more than a year totaling &21,000 should be written off.
AP-!"#
Page 3 of 6
'ased on your discussion with Cddie, -6BC $redit :anager, you both agreed that an allowance for doubtful accounts should be maintained using the following rates% 0 days old and below 1 to 0 days 4!er 0 days
1= 2= 5=
The client determines its ending in!entory by conducting a hysical count at December 31 of each year. $omilation of hysical in!entory disclosed that tag numbers 13, 1, and 15 were not included in the in!entory list. 8urther in!estigation re!ealed the following% Tag *o. 13 1 15
200 units costing &7 er unit 700 units costing &15 er unit. oods are held on consignment from -areng $o. $ancelled tag
Your re!iew of urchase transactions made a few days before and after December 31, 2005 re!ealed the following% a. :erchandise costing &7,000 was recei!ed on /anuary 3, 200. The related in!oice was recei!ed and recorded on /anuary 5, 200. The in!oice showed that the shiment was made by the !endor on December 2+, 2005E 84' destination. b. :erchandise with a cost of &1,000 was recei!ed on December 31, 2005 and the in!oice was not recorded. The in!oice was disco!ered at the &urchasing 4fficers desk and was stamed F4n $onsignmentG from Holokoy $omany. c. :erchandise recei!ed on /anuary 3, 200 costing &1+,000 was entered in the !oucher register on the same day. himent was made by the !endor 84' shiing oint on December 31, 2005. 6n analysis of 2005 transactions affecting the 6!ailable9for9ale ecurities and related accounts follows% 6!ailable9for9sale ecurities /an. 01 /an. 02 /uly 01 et. 07 Dec. 31
'alance &urchased 10,000 uer $o. common shares &urchased &100,000,12= face !alue :ighty $o. bonds &urchased 500 -6BC $o.s shares 'alance
& 20,000 250,000 100,000 ,000 & 5,000
a. The /anuary 1 balance reresents the cost of 10,000 shares of uer $o.s common stock acIuired on /anuary 2, 200. b. 4n /anuary 2, 2005, -6BC urchased 10,000 additional shares of uer $o.s common stock for &250,000 when the book !alue of uers stockholders eIuity was &2,500,000. c. 8rom uer $omanys financial statements, you were able to obtain the following information% *et income Di!idends
200 100,000 9
2005 250,000 1+0,000
AP-!"#
Page 4 of 6
There are no other stockholders eIuity transactions that transired in 200 or 2005 for uer $omany other than the abo!e information. 6t the end of 2005, the uer $o.s common share was selling at &2 er share while -6BC $o.s stock was selling at &15 er share. d. 4ther income includes di!idend of &3,000 recei!ed from uer $o. in 2005. e. The client does not intend to hold :ighty bonds to maturity. The bonds ay interest semi9annually on /uly 1 and /anuary 1. :aturity date is years from the date of urchase. The :ighty bonds were selling at ar at December 31, 2005.
Camination of the eIuiment and related accumulated dereciation account re!ealed the following% CJ@&:C*T 01K01K2005 0K01K2005 0+K01K2005 0K30K2005 12K31K2005
'alance &roceeds from sale of eIuiment $ash aid to acIuire new eIuiment Beair of eIuiment 'alance
& 0,000 (10,000) +0,000 5,000 & +05,000
6ccumulated Dereciation 01K01K2005 12K31K2005 12K31K2005
'alance Dereciation L 2005 'alance
& 30,000 11,000 & 71,000
a. 4n 6ril 1, an eIuiment costing &50,000, with a carrying !alue of &20,000 on the date of sale was sold for &10,000. b. 4ld eIuiment was traded9in for new eIuiment with a market !alue of &+5,000. The old eIuiment was bought for &0,000. The carrying !alue of this eIuiment on /anuary 1, 2005 was &5,000. c. 6nnual dereciation is comuted at 20=. immaterial.
al!age !alues of eIuiment are
Camination of subseIuent disbursements re!ealed that eenses for telehone, electricity, and water in 2005 totaling &32,000 were not recorded in the books. 4n *o!ember 2, 2005, -6BC $omany issued &00,000 face !alue bonds. The bonds, which will mature on /anuary 1, 2010, ay interest of 12= e!ery /anuary 1. The bonds were issued to gi!e the bondholders a 1= yield. 8rom the minutes of the board of directors meetings, you gathered the following information% a. During the year 2005, the comany issued 10,000 shares of its &10 ar !alue common stock for &12 each. The entire amount was credited to the common stock account. b. 4n December 31, 2005, the board of directors declared a 10= stock di!idend to stockholders on record as of /anuary 1, 200 distributable on /anuary 31, 200. &resented on the net age are the unad#usted balances taken from the working trial balance.
AP-!"#
Page 5 of 6
LARES Company De$em%e& '() *"" De%+t $ash 6ccounts recei!able 6llowance for doubtful accounts @nterest recei!able 6d!ances to officers and emloyees @n!entory 6!ailable9for9sale securities @n!estment in 6ssociate CIuiment 6ccumulated dereciation 6ccounts ayable 6ccrued eenses 'ank o!erdraft $ustomers credit balance @nterest ayable 'onds ayable Discount on bonds ayable $ommon stock, &10 ar tock di!idends distributable 6dditional aid9in caital Betained earnings Treasury stocks *et sales $ost of sales 4ther income @n!estment income 4erating eenses 4ther eenses 8inance cost
C&ed+t
&132,+00 2,500 &15,000 9 9 3+,200 5,000 9 +05,000 71,000 17,1+5 27,00 9 9 9 1,000 9 +0,000 9 70,000 0,+5 9 1,053,500 525,00 2,50 9 2+,00 9 9 &3,05,+00
. &3,05,+00
AP-!"#
Page 6 of 6
INSTRUCTIONS, elect the best answer from choices% 6, ', $, and D that corresonds to the audited balance of the account or account classification. Disregard ta imlications.
1 2 3 5 + 7 10 11 12 13 1 15 1 1+ 17 1 20 21 22 23 2 25 2 2+ 27 2 30 31 32 33 3 35 3 3+ 37 3
$ash 6ccounts recei!able 6llowance for doubtful accounts @nterest recei!able 6d!ances to officers and emloyees
@n!entory 6!ailable9for9sale securities @n!estment in associate CIuiment 6ccumulated dereciation Total assets 6ccounts ayable 6ccrued eenses 'ank o!erdraft $ustomersM credit balance @nterest ayable 'onds ayable Discount on bonds ayable Total liabilities $ommon stock, &10 ar tock di!idends distributable 6dditional aid9in caital Betained earnings, 1K1K2005 Betained earnings, 12K31K2005 Treasury stock Total stockholders eIuity *et sales $ost of sales 4ther income @n!estment income 4erating eenses 4ther eenses 8inance cost *et income $ash shortage &etty cash fund Dereciation eense 'ond discount amorti"ation @mlied goodwill
A B C 1,000 1,00 1+,00 2,00 37+,00 17,00 12,52 7,57 ,000 12,000 5,+5 11,+5 20,000 1,00 2,00 3+,700 353,200 3+1,700 9 10,000 50,000 9 0,000 50,000 +00,000 00,000 +05,000 51,000 01,000 31,000 1,+75,57 1,++,57 1,+3,57 17,1+5 212,1+5 175,1+5 32,000 27,00 2,700 35,000 15,000 20,000 15,000 1,00 10,000 7,0 7,700 7,++3 3+,000 1,000 3+,0 9 2,000 23,00 +0,57 +,57 5+,57 +0,000 5,000 550,000 5,000 +,500 ,+50 100,000 70,000 122,250 111,+5 112,+5 0,+5 22,30 23,30 233,30 9 ,500 5,000 1,077,110 1,070,110 1,0+,110 1,023,500 1,03,300 1,00,300 523,700 53+,700 510,00 ,50 13,50 7,50 9 ,000 7,000 317,715 321,100 27,52 9 17,++3 0,000 7,000 7,++3 7,000 235,135 22,135 23,135 1,200 3,00 9 ,00 3,00 5,200 122,000 11,000 123,500 9 700 0 0,000 10,000 20,000
D 13,00 03,00 +,2 ,000 1,000 37,700 100,000 51,000 05,000 3+1,000 1,+7,57 220,1+5 0,00 9 9 7,000 00,000 23,22+ +05,57 50,000 ,500 132,250 100,+5 252,30 ,000 1,03,110 1,022,300 52,700 1,50 50,000 300,02 10,000 7,++3 27,135 2,00 ,700 121,000 ++3 9
0. 'ased on the abo!e and the result your audit, you will most likely issue a. nIualified oinion with elanatory aragrah b. Jualified or disclaimer of oinion c. Jualified or ad!erse oinion d. nIualified oinion.
- End o AP-!"# -
AP-!"#
