Solution Manual Auditing by Espenilla Macariola PDF

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AUDITING 2016 EDITION

SOLUTION GUIDE ! ! ! ! ! ! ! ! ! ! ! !

CHRISTOPHER T. ESPENILLA, CPA MBA FACULTY – SAINT LOUIS UNIVERSITY, BAGUIO CITY REVIEWER – REVIEW SCHOOL OF ACCOUNTANCY, MANILA !

AUDITING (2016 EDITION) CTESPENILLA

SOLUTIONS GUIDE 1 of 155

CHAPTER 1: THE AUDIT PROCESS PROBLEM 1: CLIENT ACCEPTANCE AND CONITINUANCE 1D 11 B 2D 12 C 3D 4A 5D 6B 7B 8A 9D 10 D

PROBLEM 2: UNDERSTANDING THE BUSINESS AND THE INDUSTRY 1D 11 C 2D 12 B 3C 13 B 4D 14 D 5D 15 D 6D 16 B 7A 8D 9C 10 E

PROBLEM 3: INTERNAL CONTROL 1C 11 E 2D 12 B 3C 13 D 4C 14 C 5A 15 C 6D 16 C 7C 17 C 8D 18 D 9D 19 D 10 A 20 A

21 B 22 A 23 C 24 B 25 C 26 A

PROBLEM 4: RISK BASED AUDIT PLANNING 1D 11 C 2C 12 B 3D 4B 5B 6B 7C 8A 9D 10 C

CHAPTER 1: THE AUDIT PROCESS

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PROBLEM 5: SUBSTANTIVE TESTING 1B 21 B 2A 22 D 3C 23 B 4C 24 D 5C 25 C 6D 26 C 7C 27 B 8D 28 B 9C 29 B 10 C 30 B 11 A 31 D 12 B 32 A 13 B 33 A 14 A 15 A 16 B 17 A 18 A 19 D 20 A

PROBLEM 6: AUDIT REPORTING 1C 2B 3B 4B 5B 6C 7A 8B 9C 10 C 11 A 12 C

CHAPTER 1: THE AUDIT PROCESS

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CHAPTER 2: AUDIT OF CASH DISCUSSION PROBLEMS CHAPTER 2-PROBLEM 1 1B 2D 3A 4B 5D 6D 7D 8D 9D 10 D 11 D 12 B 13 C 14 B 15 B 16 C 17 B 18 D 19 D 20 B 21 C 22 D 23 C 24 D 25 B

AP02-PROBLEM 2: MAPERA CORPORATION 1. Ans. P3,445,000 Current account at Metrobank Post-dated disbursement check - adjusted to AP Undelivered disbursement check - adjusted to AP Adjusted current account at Metrobank

3,250,000 75,000 120,000 3,445,000

2. Ans. P2,250,000 Savings account at Rural Bank Compensating balance - legally restricted Adjusted savings account at Rural Bank

2,750,000 (500,000) 2,250,000

3. Ans. Zero The bank overdraft balance with BDO shall be presented as a current liability since there is no right of offset, that is the company has no bank account with BDO. 4. Ans. P738,000. Undeposited collections, unadjusted balance Customer stale check - adjusted to AR Customer post-dated check - adjusted to AR Customer DAUD check - Adjusted to AR Officer's NSF check - Adjusted to AR-nontrade Adjusted undeposited collections

1,278,000 (180,000) (125,000) (155,000) (80,000) 738,000

5. Ans. P18,500 Bills and coins Replenishment check Adjusted petty cash fund as of 12/31/14

7,000 11,500 18,500

6. Ans. P613,500 Travel fund Interest and dividend fund Payroll fund Change fund Petty cash fund Adjusted cash fund - Cash and cash equivale

50,000 120,000 400,000 25,000 18,500 613,500

7. Ans. P900,000 Debt security investment due 3/31/15 purchased 12/31/14 Preference shares redeemable on 2/28/15 purchased 12/1/14 Debt and equity securities - Cash and cash equivalent 8. Ans. P7,946,500 Adjusted current account at Metrobank Adjusted savings account at Rural Bank Adjusted undeposited collections Adjusted cash fund - Cash and cash equivalent Debt and equity securities - Cash and cash equivalent Cash and cash equivalents, adjusted balance

600,000 300,000 900,000

3,445,000 2,250,000 738,000 613,500 900,000 7,946,500

CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

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9. Ans. P1,874,500 Customer stale check - adjusted to AR Customer post-dated check - adjusted to AR Customer DAUD check - Adjusted to AR Officer's NSF check - Adjusted to AR-nontrade Petty cash fund shortage - Adjusted to AR-custodian Postage stamps - Office supplies IOU from a key officer - AR-nontrade Investment in debt security due 1/31/15 purchased 1/1/14 Ordinary shares - Trading securities/FA at FMV through P&L Current assets (other than cash and cash equivalents)

180,000 125,000 155,000 80,000 1,500 3,000 30,000 900,000 400,000 1,874,500

10. Ans. P1,700,000 Rural bank - compensating balance - Adjusted to Other assets Pension fund - Adjusted to Long-term Investment Bond sinking fund - Adjusted to Long-term Investment Cash in closed bank at recoverable value - Adjusted to Other assets Ordinary shares - Available-for-sale security/FA at FMV through OCI/L Non-current assets 11. Ans. P495,000 Current account at BDO - Bank overdraft Post-dated disbursement check - adjusted to AP Undelivered disbursement check - adjusted to AP Credit memo for a purchase return - adjusted to AP Current liabilities

CHAPTER 2-PROBLEM 3: MANNY CO. Accountability: Petty Cash Fund, Imprest balance Return of an expense advance (a) Total Accountability Valid supporting items: Bills and coins Unreplenished paid vouchers Accomodated checks Dated 12/30 Dated 11/30 - marked NSF Replenishment check Petty cash fund shortage (a) Should be subsequently deposited to the bank. Cash items as of December 31, 2014 Bills and coins Return of excess travel expense advance (a) Unreplenished paid voucher dated 1/2 Accomodated check 12/30 Replenishment check Adjusted petty cash fund (a) Should be subsequently deposited to the bank. 4. Adjusting entries: 1 Transportation expense Repairs and maintenance expense Entertainment, amusement and representation ex Due to employees Petty cash fund To record unreplenished paid vouchers. 2 Receivable from employee Petty cash fund To record NSF accomodated check. 3 Receivable from employee Petty cash fund To record petty cash fund shortage. Petty cash fund, imprest balance AJE 1. AJE 2. AJE 3. Adjusted petty cash fund

*alternatively, this can be charged to other expense

*classified as short-term investment

500,000 250,000 500,000 150,000 300,000 1,700,000

240,000 75,000 120,000 60,000 495,000

40,000 900 40,900

1. Ans.

13,400 3,700 2,000 1,000 10,000

13,400 (900) 1,000 2,000 10,000 25,500

30,100 10,800 2. Ans.

3. Ans.

500 300 900 1,000 2,700

1,000 1,000

10,800 10,800

40,000 (2,700) (1,000) (10,800) 25,500

CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

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CHAPTER 2-PROBLEM 4: MAKWARTA COMPANY Ans. P1,630 Accountability: Total collections, 10/1-10/11 (per OR) Total bank credits, 10/1-10/11 (per bank statement) September deposit in transit September bank charge error (corrected in October) Undeposited collections as of October 11 Valid supporting items: Currency and coins Customer collection checks 9/30/14 - Baguio Corp. 10/3/14 - L. Reyes 10/4/14 - La. Union Corp. Unused postage (adjusted to supplies) Vouchers paid out of receipt (adjusted to expense) Overage

CHAPTER 2-PROBLEM 5: BETTY CO. Accountability Petty cash fund, imprest balance Undeposited collections Cash collections (per cash sales invoices) Customer collection checks (depositable only) Total Accountability Valid supporting items Currencies and coins Customer collection checks (depositable only) 12/30 Errol Corp., Customer 1/2 R. Rarr, Customer Accomodated checks (whether depositable or not) 12/30 D. Dong, Vice President 1/2 Junior, Employee Unreplenished Vouchers Employee IOU's Petty Cash Shortage

28,840 16,550 (4,500) (1,400)

12,310 2,350 1,960 1,590

(c)

Receivable from employee Petty Cash fund To record employee . Receivable from employee Petty Cash fund To record the petty cash fund shortage. Imprest balance AJE (a) AJE (b) AJE (c) Adjusted Petty Cash Fund as of Dec. 31

5,900 110 1,500

19,820 1,630

10,000 1,670 2,500

4,170 14,170

1. Ans.

11,562 2,608

2. Ans.

5,980 1,300 1,200 1,220 312 850 700

AJEs to the Petty Cash Fund: (a) Expenses 730 Petty Cash Fund To record unreplenished expense vouchers as of Dec. 31 only. (b)

10,650 18,190

730

700 700

2,608 2,608

10,000 (730) (700) (2,608)

CHAPTER 2-PROBLEM 6: DATUNG MANUFACTURING CO. Bank Reconciliation Statement 10/31/2014 BANK Unadjusted Balance, per Bank Statement 144,975 Undeposited collections, excluding missapprop. 10,770 Oustanding checks (50,550) Bank error (unrecorded bank charge) (1,250) Correct cash in bank balance (2. Ans. ) 103,945

(4,038) 3. Ans. 5,962 4. Ans.

BOOK 125,245 8,000 (2,300) (1,250) 129,695 (25,750) 103,945

Unadjusted Balance per Books Unrecorded Bank Credits Unrecorded Bank Debits: NSF Check Unrecorded Bank Debits: Bank Service Charge Adjusted balance per books Cash shortage (1. Ans. ) Correct cash balance

CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

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3 Adjusting Entries: (a) Cash in bank Accounts receivables

8,000

(b)

Accounts receivables Cash in bank

2,300

Bank service charge/Other expenses Cash in bank

1,250

(c)

8,000

2,300

1,250

CHAPTER 2-PROBLEM 7: JADE CORPORATION Bank Reconciliation 12/31/2014 Unadjusted balance Deposit in transit Outstanding check Bank error Correct cash balance (1. Ans. )

Unadjusted balance per books Correct cash balance Net adjustement to cash (12/31)

BANK 792,285 10,500 (75,975) 2,250 729,060

726,600 729,060 (2,460)

Accountability as of January 15 Unrecorded credit as of 12/31 Book errors in Janaury (audit note b and c) Adjusted accountability January deposits from January collections Januray bank credits Correction of Dec. bank charge error Dec. deposit in transit Cash on hand Expense vouchers Cash shortage from Jan. 2 - Jan. 15 Add: Cash shortage as of Dec. 31 Total cash shortage as of Jan. 15, 2015

BOOK 726,600 20,000 (5,000) 31,500 773,100 (44,040) 729,060

Unadjusted balance Unrecorded credit Unrecorded debit Book errors (audit note a.) Shortage (3. Ans. ) Adjusted balance

2. Ans.

180,500 (20,000) 19,500 180,000

143,895 (2,250) (10,500)

131,145 10,125 1,125 37,605 44,040 81,645

4. Ans.

CHAPTER 2-PROBLEM 8: PIRA CO. Proof of Cash, 6/30/2014 May 31, Unadjusted balances per bank statement 1,836,000 Deposit in transit, May 480,000 Deposit in transit, June (SQUEEZE) 4. Ans. Outstanding checks, May (1,020,000) Outstanding checks, June (SQUEEZE) 5. Ans. Bank error, May Overstated disbursement 240,000 Adjusted balances 1,536,000 2. Ans.

Receipt Disbursement 2,496,000 1,224,000 (480,000) 1,317,600 (1,020,000) 2,171,760 (240,000) 3,093,600 2,375,760

May 31, 538,200 600,000 (7,200)

Receipt Disbursement 4,818,600 2,443,200 (600,000) (7,200) 9,600 144,000 (405,000) (720,000) (213,840) 3,093,600 2,375,760

Unadjusted balances per book (1. Ans. ) Unrecorded bank credit: May Unrecorded bank debits: BSC, May Unrecorded bank debits: BSC, June Unrecorded bank debits: NSF Check June Bank error, May Overstated disbursement Book error, June Overstated collection Book error, June Overstated disbursement Adjusted balances

405,000

1,536,000

June 30, 3,108,000 1,317,600 (2,171,760) 2,253,840 6. Ans. June 30, 2,913,600

(9,600) (144,000) (720,000) 213,840 2,253,840

3. Ans. No shortage. CHAPTER 2-PROBLEM 9: KRAME INC. Proof of Cash Unadjusted balances, per bank Undeposited collections - Aug Undeposited collections - Sept Outstanding checks - Aug Outstanding checks - Sept Bank error - Aug

Unadjusted balances, per book Unrecorded credit - Aug Unrecorded credit - Sept Unrecorded debit - Aug Unrecorded debit - Sept Book Error - Aug Book Error - Sept /Correction - Sept Shortage/Overage

Augsut 31: 485,000 450,000

Receipt Disbursemen September 30: 1,955,000 1,655,000 785,000 (450,000) 240,000 240,000 (180,000) (180,000) 220,000 (220,000) (80,000) (80,000) 675,000 1,745,000 1,615,000 805,000 1. Ans. 4. Ans. Disbursemen July 31: June 30: Receipt 640,000 1,795,000 1,800,000 635,000 200,000 (200,000) 250,000 250,000 (120,000) (120,000) 80,000 (80,000) (45,000) (45,000) (100,000) (100,000) 675,000 1,745,000 1,615,000 805,000 -

2. Ans. 3. Ans.

CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

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CHAPTER 2-PROBLEM 10: MANGO COMPANY Proof of Cash, 4/30/2014 Unadjusted balances per bank statement Undeposited receipts, March Undeposited receipts, April Outstanding checks, March Outstanding checks, April (excluding certified check) Bank error, April Overstated disbursement Adjusted balances

Unadjusted balances per book Book receipts used to pay creditors in cash Unrecorded bank credit: March Unrecorded bank credit: April Unrecorded bank debits: NSF check, returned in April recorded in April NSF check, returned in April not yet recorded Unrecorded bank debits: BSC, March Unrecorded bank debits: BSC, April Bank error, April Understated disbursement Adjusted balances

March 31, 21,560 9,060 (2,675)

27,945 March 31, 16,545 12,150

Receipt Disbursement 220,450 218,970 (9,060) 10,120 (2,675) 1,430 (950) 221,510 216,775

April 30, 23,040

Receipt Disbursement 222,190 216,055 (1,210) (1,210) (12,150) 11,640

April 30, 22,680

1,040 (750)

27,945 1. Ans.

221,510 2. Ans.

10,120 (1,430) 950 32,680

11,640

1,040 860 (750) 420 360 216,775 3. Ans.

(860) (420) (360) 32,680 4. Ans.

MULTIPLE CHOICE EXERCISES CHAPTER 2-EXERCISE 1: ILANG-ILANG COMPANY Unadjusted cash balance 1. January 5 collection recorded in December 2. Undelivered check disbursements 3. Post-dated customer collection check 4. NSF customer collection check 5. Cash fund for non-current purpose Adjusted cash balance - current asset

105,600 (15,000) 9,300 (7,800) (1,500) (40,000) *classifed as LT Fund Investment 50,600 Ans. B.

CHAPTER 2-EXERCISE 2: BIG BROTHER CORP. Current account at Bank of the Philippine Islands Current account at Equitable PCI Bank Payroll account Foreign bank account – restricted (in USD) ** Postage stamps Employee’s post dated check IOU from a key officer Credit memo from a vendor for a purchase return Traveler’s check Customer’s not-sufficient-funds check Money orders Petty cash fund, currencies only Treasury bills, due 3/31/15 (purchased 12/31/14) Treasury bills, due 1/31/15 (purchased 1/1/14) Change fund Bond sinking fund

6,000,000 (300,000) 1,500,000 60,000 3,000 12,000 30,000 60,000 150,000 45,000 90,000 12,000 600,000 900,000 10,000 1,000,000

Equivalent 6,000,000

*no right of off-set, classified as current liab 1,500,000 3,000,000 *Other Asset at current exchang price *prepaid expense *other receivables *other receivables *debited to accounts payable 150,000 *accounts receivable 90,000 12,000 600,000 *current investment 10,000 8,362,000 1. Ans .C.

CHAPTER 2-EXERCISE 3: UHAWSAIYO COMPANY Accountability: Petty cash fund, imprest balance Undeposited collections Cash sales invoices (17903-18112) Official receipts Customer collection check, not yet included Other collections: Return of expense advance Other collections: Contribution for Christmas Party Total Accountability Valid supporting items: Bills and coins Customer collection checks 12/30 T. Otis 12/26 R. Eyes 1/2 O. Liever 12/21 F. Rancisco Accomodated check 12/29 O. Camp (return of expense advance) Expense vouchers and IOUs Petty cash shortage

Asset

1,000,000 *LT fund investment 4,000,000 2. Ans. B.

15,000 100,500 39,537 5,707

145,744 260 9,500 170,504

105,174 11,920 12,505 5,707 13,350 310 260 6,775

156,001 14,503

1. Ans. B.

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Cash on hand as of January 5, 2015 Bills and coins Customer collection checks Accomodated check Return of expense advance check Cash that does not belong to the petty cash fund Undeposited collections: Collection checks Cash collections (100,500+560+1,202) Return of expense advance Excess collection from Christmas Party (9,500-6,290) Cash on hand as of January 5, belonging to the Petty Cash Vouchers paid after December 31: 1/2/15, PNR Petty cash fund as of December 31, 2015

105,174 43,482 310 260

149,226

43,482 102,262

(145,744) (260) (3,210) 12 35 47 3. Ans. B.

AJEs: (a) Office supplies expense (150-80) 70 Unused office supplies 80 Receivable from employee 300 Petty cash fund To record unreplensihed expense vouchers as of December 31. (b) Receivable from employee Petty cash fund To record petty cash shortage

450

14,503 14,503

Reconciliation: Petty cash fund, imprest balance AJE (a) AJE (b) Petty cash fund, adjusted balance

15,000 (450) (14,503)

(14,953) 2. ans. B. 47 3. Ans. B.

Notes: 1. The unused portion of the collection from the Christmas Party does not belong to the company and should not be reflected in the books of the company. Should it be recorded as part of the cash of the company, the same shall be regarded as a payable to whoever owes the excess collectoins (e.g. the employees who made the contribution). 2. The unreplenished voucher dated 1/2/15 shall still be considered as valid cash as of December 31, 2014 since the disbursement was made only on 1/2, thus the same was not included among the adjustments to petty cash as of December 31. 3. The return of expense advance amounting to P260 shall be included as part of accountability, and since it is still in check the same was also part of the valid supporting items. As an additional audit procedure, return of expense advance shall

be traced to eventual deposit to the bank after the count date since the amount no longer belongs to the fund and should be returned back to the general cash of the company.

CHAPTER 2-EXERCISE 4: SILVER COMPANY Bank Reonciliation Statement 12/31/2014 Unadjusted balance per Bank Statement Undeposited collections (as being reported) Outstanding checks (as per complete list) Correct cash balance per audit (4. Ans. B.)

BOOK BANK 12,300 15,000 Unadjusted balance per books 3,000 150 Unrecorded bank credit (850) 14,450 15,150 Unadjusted balance per books (700) Shortage 1. Ans. D. 14,450 Adjusted balance per books

2. Ans. D. Undeposited collections (as being reported) Shortage Accountability for cash on hand

3,000 700 3,700

3. Ans. B. Correct cash balance per audit Cash on hand/Undeposited collection Cash in Bank (excluding Cash on Hand)

14,450 (3,000) 11,450

CHAPTER 2-EXERCISE 5: HOME CORP. Bank Reconciliation 12/31/2014 Unadjusted balance Deposit in transit Outstanding check Bank error Correct cash balance (16. Ans. D)

BANK 1,548,570 21,000 (151,950) 4,500 1,422,120

Accountability as of January 10 Unrecorded credit as of 12/31 Book errors in Janaury (audit note a and b) Adjusted accountability January deposits from January collections Januray bank credits Correction of Dec. bank charge error Dec. deposit in transit Cash and Checks on hand (Depositable) Expense vouchers Cash shortage from Jan. 2 - Jan. 10

BOOK 1,239,200 Unadjusted balance 200,000 Unrecorded credit (10,000) Unrecorded debit 63,000 Book errors (audit note) 1,492,200 (70,080) Shortage (17. Ans. C ) 1,422,120 Adjusted balance 521,000 (200,000) 39,0...