Sample problems in the audit of inventories with solutions PDF

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Problem 1In auditing the books of Sta. Monica, Inc. for 2017, you find that a petty cash fund of P25,000 is maintained on the imprest basis, but the company has failed to replenish the fund on December 31. Replenishment was made and recorded on January 15, 2018 when a check for P18,500 was drawn to ...

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Problem 1 In auditing the books of Sta. Monica, Inc. for 2017, you find that a petty cash fund of P25,000 is maintained on the imprest basis, but the company has failed to replenish the fund on December 31. Replenishment was made and recorded on January 15, 2018 when a check for P18,500 was drawn to petty cash for expenses paid. Your analysis discloses that P12,500 had been spent out of petty cash in 2017. What audit adjustment would you propose relating to the above?

Answer - Problem 1 Expenses Petty Cash Fund

10,500 10,500

Correct balance of petty cash fund = P20,000 – P10,500 = P9,500 Problem 2 You examined the petty cash fund of the Victor Company immediately after the close of business on August 31, 2017, the end of the company’s fiscal year. Your audit showed the following fund composition: Currencies Coins Petty cash vouchers: Gasoline payments for delivery vehicle Office supplies Medicines for employees Transportation Office equipment repairs Loans to employees A check drawn by the company payable to the order of the petty cash custodian, representing her salary An employee’s check returned by the bank because of insufficient funds A piece of paper with names of several employees together with a contribution for a wedding gift for an employee. Attached to the sheet of paper is a currency of

P2,900 400 250 160 240 400 400 800

3,800 1,200

500

The petty cash general ledger account has an imprest balance of P10,000. Based on the above data, 1. Determine the amount of petty cash fund that should be shown on the balance sheet as of August 31, 2017. 2. Determine the amount of cash shortage or overage. 3. Prepare the necessary audit adjusting entries.

Answer - Problem 2 1. Correct amount of petty cash fund Currencies and coins 2.

Per count Currencies and coins Paid petty cash vouchers Employee’s NSF check Wedding gift contribution Total per count Cashier’s accountability: Petty cash fund, per ledger Wedding gift contribution

P7,100

P 7,100 2,250 1,200 ,500 P11,050 P10,000 500

10,500

Cash Overage 3.

Delivery Expense Office Supplies Expense Employees Medicine Transportation Expense Repairs and Maintenance Receivables from Employees Cash Shortage (or Misc. Expenses or Receivables) Petty Cash Fund

P 550 250 160 240 400 400 2,000 550 2,900

Problem 3 You counted the petty cash fund balance of Rainbow Corporation at 9:00 o’ clock in the morning of January 2, 2018, and you obtained the following details: Bills and coins Paid vouchers (all dated December 2017) for Telephone Water Office supplies Postage stamps IOU’s signed by employees Envelope containing contributions for a wedding gift to a co-employee Company check for fund replenishment Unused postage stamps Unused office supplies

P2,50 0 1,500 1,600 3,700 2,800 3,900 1,000 15,00 0 1,800 1,200

You ascertained that Rainbow Corporation established a petty cash fund for P35,000. Required: 1. Compute for the amount of the petty cash fund shortage as at January 2, 2018. 2. Prepare the adjusting journal entries as at December 31, 2017. 3. Compute for the correct amount of petty cash fund to be shown in the balance sheet as of December 31, 2017.

Answer - Problem 3 1. Fund per Ledger Petty Cash as Accounted for: Bills, Coins and Check Paid Voucher IOU Cash shortage 2.

Telephone Expense Water Expense Office Supplies Expense (3,700 – 1,200) Office Supplies Postage Expense (2,800 – 1,800) Prepaid Expenses (Postage)

P 35,000 P17,500 9,600 3,900 1,500 1,600 2,500 1,200 1,000 1,800

31,000 P 4,000

Receivables from Employees (3,900 + 4,000) Petty Cash Fund 3.

7,900 17,500

Correct amount of petty cash fund = P35,000 – P17,500 = Cash items in the petty cash fund: Bills and Coins Replenishment check Total

P17,500

P 2,500 15,000 P17,500

Problem 4 You are making an audit of the Erap Sales Company for the year ended December 31, 2017. The balance of the petty cash account on December 31, 2017 was P10,000. Your count of the imprest cash fund, made at 9:00 a.m. on January 3, 2018, in the presence of Ms. G. Arroyo revealed:

Bills and Coins: Denomination P500 100 50 20 10 5 1 0.50 0.25 Checks: Date 12-28-17 12-29-17 12-31-17 01-02-18 01-10-18

Maker L. Legarda, employee Cayetano, employee L and M, customer Pimentel, customer Barbers, employee (check received 12-2817)

Quantity 4 14 16 10 19 17 25 21 28

Bank PNB Security Bank AsiaTrust FEBTC Union Bank

Amount P3,000.00 500.00 1,281.70 1,011.30 500.00

(These checks were all considered good when deposited after dates shown on the checks. The first four checks were actually deposited January 3; the Barbers check was deposited January 11; all five checks proved to be good.) Vouchers: 12-11-17 12-28-17 12-29-17 12-31-17 01-02-18 IOU: 12-21-17

Vo.#151 #183 #184 #189 # 001

Freight bill on merchandise sold Supplies Freight bill on merchandise purchased Freight bill on cabinets purchased Freight bill on merchandise purchased

J. Osmena, employee

P500.00 100.00 394.20 741.10 244.70

P300.00

Sales Invoices (for cash sales; collections handled by the petty cashier) Inv. # 118 December 30 P1,000.40 # 129 December 31 1,281.70 # 133 January 2 1,011.30 (As a general rule, the petty cashier endeavored to turn over the proceeds of cash sales to the general cashier on the 10th, 20th, and last day of each month. Proceeds on these sales were recorded and deposited by the general cashier.) Unused office supplies

P 50.00

(These supplies represent the unused stamps purchased on Voucher # 183.) Required: 1. Cash count sheet 2. Audit adjusting entries Answer - Problem 4

Bills and Coins (show details of denomination and pieces per denomination) P4,717.50 Checks: Date Maker Amount 12-28-17 L. Legarda, employee P3,000.00 12-29-17 Cayetano, employee 1,500.00 12-31-17 L & M , customer 1,281.70 1,011.30 01-02-18 Pimentel, customer 01-10-18 Barbers, employee (check received 12-28-17) 500.00 7,293.00 Vouchers Date Voucher No. Particulars 12-11-17 151 Freight out 12-28-17 183 Supplies 12-29-17 184 Freight In 12-31-17 189 Freight on cabinet 01-02-18 001 Freight in IOUs 12-21-10 Osmena Total per count Cashier’s accountability: Petty cash fund, per ledger Unremitted cash sales Inv. # 118 December 30 P1,000.40 Inv. # 129 December 31 1,281.70 Inv. # 133 January 2 1,011.30 Cash Overage

Amount P 500.00 100.00 394.20 741.10 244.70

300.00 P14,290.50 P10,000.00

3,293.40

Audit Adjusting Entries: Receivables from Employees (500.00 + 300.00) Freight out

1,980.00

800 500

13,293.40 P 997.10

Supplies Expense (100 – 50) Prepaid Expenses Furniture and Equipment Freight in Cash Short and Over Petty Cash Fund

50 50 741.10 394.20 997.10 1,538.20

Cash in Bank (1,000.40 + 1,281.70) Sales

2,282.10 2,282.10

Correct balance of petty cash fund (P10,000 – 1,538.20)

P8,461.80

Composed of the following cash items at December 31, 2017 Bills and coins ( 4,717.50 ) Checks dated December Petty cash vouchers dated January (undisbursed as of December 31) Total cash items as of December 31 Less: unremitted cash sales as of December 31 (1,281.70 + 1,000.40) Petty cash fund, per audit, December 31

P4,717.50 5,781.70 244.70 P10,743.90 (2,282.10) P8,461.80

Problem 5 The Sunshine Corporation engaged your services to audit its accounts. In your examination of cash, you find that the Cash account represents both cash on hand and cash in bank. You further noted that there is very poor internal control over cash. Your audit covers the period ended December 31, 2017. You made a cash count on January 15, 2018, and cash on hand on this date was determined to be P4,900. Examination of the cashbooks and other evidences of transaction disclosed the following: 1. January 2018 collections per duplicate receipts, P18,900. 2. Total of duplicate deposit slips, all dated January 2 through 15, P11,000, includes a deposit representing collections of December 31. 3. Cash book balance on December 31, 2017 is P46,500, representing both cash on hand and cash in bank. 4. Bank statement for December shows a balance of P42,400. 5. Outstanding checks at December 31: November checks: December checks:

Number 183

P

450

198 Number 252

1,650 600

254 280 301 319

400 5,000 900 2,500

6. Undeposited collections at December 31, P5,000. 7. An amount of P900 representing proceeds of a customer’s note was credited by bank, but is not yet taken up in the company’s books. 8. Bank service charge for December, P700. The company cashier presented to you the following reconciliation statement for December 2017 which he has prepared: Balance per books, December 31, 2017 Add: outstanding checks Number 252 254 280 301 319 Total Bank charges Undeposited collections Balance per bank

P 45,600

P

600 400 500 700 1,500

3,600 P 49,200 (700) (5,100) P43,300

Required: 1. 2. 3. 4.

Determine the amount of cash shortage as of December 31, 2017. Submit a schedule showing how the cashier attempted to conceal his shortage. Determine the amount of additional shortage in January 2018. Prepare the necessary audit adjusting entries as at December 31, 2017.

Answer - Problem 5 1. Unadjusted Balances Outstanding checks Undeposited collections Customer’s note collected by bank Bank service charge Adjusted balances Cash shortage Cash balance, December 31, per audit 2.

Understated book balance 45,600 – 46,500 Overstated bank balance 42,400 – 43,300 Omitted outstanding checks 183 198 Understated outstanding checks 5,000 – 500 900 – 700 2500 – 1,500 Overstated undeposited collections Omission of bank credit memo

Per Bank P 42,400 (11,500) 5,000

P35,900 P35,900

Per Books P46,500 900 (700) P46,700 (10,800) P35,900 P 900 900 450 1,650 4,500 200 1,000 100 900

Underfooting of listed outstanding checks Underfooting of bank balance Total cash shortage

100 100 P10,800

3.

Undeposited collections, December 31 Collections, January 1 – 15 Total amount available for deposit Amount deposited, per deposit slips Undeposited collections, January 15 Cash on hand, January 15 Additional cash shortage in January

P 5,000 18,900 P23,900 (11,000) P12,900 4,900 P 8,000

.4.

Adjusting Entries Bank Charges Receivable from Employees (or Loss) Cash Notes Receivable

700 10,800 10,600 900

Problem 6 You are auditing the cash in bank account of Ryan Manufacturing Company for the year ended December 31, 2017. After a brief discussion with the owner, you agree to reconcile the bank account of the company. The bank statement shows the following: Balance, December 1, 2017 Deposits (20) Checks (64) plus debit memos Service charges for new checks Balance, December 31, 2017

P 901,250 9,153,760 (8,514,150) ( 440) P 1,540,420

The cash account on the books of the Ryan Manufacturing Company is as follows:

Nov. 1 Nov. 30 CR Dec. 31 CR

CASH 641,920 Nov. 30 CD 6,824,290 Dec. 1 – Bank reconciliation 9,198,720 Dec. 31 CD

6,654,410 3,750 8,564,460

CD – Cash disbursements CR – Cash receipts Your review of last month’s bank reconciliation and the current bank statement reveals the following: a. Outstanding checks: November 30, 2017 December 31, 2017

P254,720 335,610

b. Deposits in transit : November 30, 2017 December 31, 2017

164,220 209,180

c. Check no 359 for Office Furniture was written for P6,950 but recorded in the cash disbursements journal as P9,650. The bank deducted the check as P6,950. The error happened in November and is not yet corrected as of December 31. d. A check written on the account of the Ray Ann Company for P5,830 was deducted by the bank from the Ryan’s account. e. Included with the bank statement was a debit memorandum dated December 31 for P24,750 for interest on a note taken out by the Ryan Manufacturing Company on November 30. f.

The service charge for the new checks has not been recorded.

g. The November 30 bank reconciliation showed as reconciling items a service charge of P260 and an NSF check for P3,490. Required: 1. Prepare a four-column proof of cash reconciling bank balance and balance per books to the correct balance. 2. Prepare the necessary audit adjusting entries.

Answer - Problem 6

Unadjusted bank balance Outstanding checks November 30 December 31 Deposits in transit November 30 December 31 Check of Ray Ann Company Adjusted Balances

Balance per books Error in recording check no. 359 Bank service charge November December NSF check returned in November Interest charged by the bank Unaccounted difference Adjusted Balances 

Nov. 30 901,250

Receipts 9,153,760

(254,720) 164,220

Disb. 8,514,590

Dec. 31 1,540,420

(254,720) 335,610

(335,610)

209,180 5,830 1,419,820

(164,220) 209,180

810,750

9,198,720

(5,830) 8,589,650

Nov. 30 811,800 2,700

Receipts 9,198,720

Disb. 8,568,210

(260) (3,490)

810,750

9,198,720

Dec. 31 1,442,310 2,700

(260) 440 (3,490) 24,750

(24,750)

8,589,650

1,419,820

(440)

Explain to the students that this difference may be due to a check issued in November, subsequently cancelled due to technical defect and reissued in December.

Audit adjusting entries:

Cash in Bank Office Furniture

2,700 2,700

Bank Service Charge Cash in Bank

440

Interest Expense Cash in Bank

24,750

440 24,750

Problem 7 Your client, Golden Bells Company, presented you with the following data: Bank balances November 30 December 31 Bank receipts in December Deposits in transit November 30 December 31 Outstanding checks November 30 December 31 NSF checks returned by bank (recorded by client in the month following the return) November 30 December 31 Bank service charges (recorded by client in the month following the month the charge) November December Note collected by bank (recorded by the client in the following month) November December Erroneous bank charges (corrected by the bank in the following month) November 30 December 31 Erroneous bank credits (corrected by the bank in the following month) November December

P1,500,00 2,100,000 2,300,000 58,000 47,000 97,000 46,000

15,000 25,000

10,000 18,000

76,000 84,000

25,000 37,000

45,000 50,000

Required: 1. Prepare a proof of cash for the month of December using the adjusted balances method. 2. Prepare the adjusting entries as at December 31, 2017.

Answer - Problem 7 Golden Bells Company

Unadjusted bank balance

Nov. 30 1,500,000

Receipts 2,300,000

Disb. 1,700,000

Dec. 31 2,100,000

Deposits in transit November 30 December 31 Outstanding checks November 30 December 31 Erroneous bank charges November 30 December 31 Erroneous bank credit November 30 December 31 Adjusted balances

58,000

(58,000) 47,000

(97,000) 25,000

(97,000) 46,000

(46,000)

(37,000)

37,000

(25,000)

(45,000)

Unadjusted book balances (squeezed) NSF checks returned by bank November 30 December 31 Bank service charges November December Note collected by bank November December Adjusted balances

47,000

(45,000)

1,441,000

(50,000) 2,214,000

1,567,000

(50,000) 2,088,000

Nov. 30 1,390,000

Receipts 2,206,000

Disb. 1,549,000

Dec. 31 2,047,000

(15,000) 25,000

(25,000)

(10,000) 18,000

(18,000)

1,567,000

84,000 2,088,000

(15,000)

(10,000) 76,000 1,441,000

(76,000) 84,000 2,214,000

Problem 8 You found out that the cash account of your client, Contronics Company, consists of the following on December 31, 2017; Cash in bank Petty cash fund (last replenished November 30, 2017) Purchasing fund (last replenished November 30, 2017) Balance per general ledger

P134,500 15,000 35,000 P184,500

You also found the following information: 1. January 7, 2018 replenishment of petty cash fund amounted to P10,000. composition of which is as follows: Date of supporting documents 2017 2017 2017

Nature

Amount

Gasoline Miscellaneous Transportation

P4,500 500 1,000

The

2018

Repairs

4,000 P10,000

2. The January 4, 2018 replenishment of the purchasing fund amounting to P29,000 includes 2017 purchases of indirect materials, P20,000, to be used in the production process of the company in the year 2018. 3. The following are the bank reconciling items that you noted: -

a bank credit memo representing collection by bank from one of Contronic’s customers, P58,000.

-

2017 issued checks cleared by bank in January 2018, P52,000.

Required: 1. Compute for the correct amount of petty cash fund as of December 31, 2017. 2. Compute for the correct amount of purchasing fund as of December 31, 2017. 3. Compute for the correct cash in bank as of December 31, 2017. 4. How much cash should be shown on the December 31, 2017 balance sheet? 5. Prepare all the adjusting entries as at December 31, 2017. Answer - Problem 8

1. 2. 3. 4. (5)

P 15,000 -6,000 = 9,000 P 35,000 – 29,000 = 6,000 P134,500 + 58,000 = 192,500 P 9,000 + 6,000+ 192,500 = 207,500

Adjusting entries: Gas Miscellaneous Transportation Petty Cash Fund

4,500 500 1,000

Raw Materials Work In Process Purchasing Fund

20,000 9,000

Cash in bank Accounts Receivable

58,000

6,000

29,000

58,000

Problem 9 The “Cash” account in the ledger of Fortune Company on December 31, 2017 had a balance of P1,750,000. An examination of the account however disclosed the following: 1. The sales book was left open up to January 10, 2018 and cash sales totaling P18,200 were considered as cash sales in 2017.

2. Checks of P9,300 in payment of utilities were prepared before December 31, 2017 and recorded in the books on the same date, but mailed or delivered only on January 5, 2018. 3. Checks with January, 2018 dates totaling P 17,800 are being held by the cashier and were included as part of cash on December 31, 2017. The company’s experience shows that postdated checks are eventually realized. 4. Customer’s check for P 11,500 deposited with the bank on December 15, 2017 was returned on December 18, 2017. The return was not recorded in the books. 5. The cash account includes P 230,000 set aside for payment of dividends. 6. The cash account includes a check received from a customer in May, 2017 for P3,500, which the company failed to deposit. Verification from the customer reveals that the amount will eventually be realized. 7. The cash account includes change fund am...