AUDITING PROBLEMS LECTURE NOTES {by John Be S. Cayetano} Topic 1: Cash and Cash Equivalents Expected question(s}: 1, What is the amount of cash and cash equivalents te be presented in the Enancial statements? 1) What is the amount of cash and cash equivalents? Answer ee ee 2 yeas f rensssco fs (some age included as cash same are Sane Included aa Cash G ponteated check ;eeest Checks dean by the company: wc atoms ca . entry for payment should be reversed Entry to reverse ance the ch fe 288m your exCash in Bank: —+ Included as Cash Excluded romcash = ——» 1 the question is: How much is Cash? Not legally restricted Silent - included a: Legally restricted ~ Excl. treated as non cure Not legally restricted ~ inciux ‘Silent - included as Cash Excluded from cash er ea thor co Different Ban! Same Bank = included as Cast ‘Silent - Excluded Page 2 of 24Cash in Fund: oper Included as Cash ‘Within 12 mantha ~ | When is the Beyond 12 months disbursement? Stent excluciod tror Always excluded fram Cash Within 3 months ~ Beyond 3 months Silent ~ ix 6 within 12 months. beyond 12 months Gate of acquisition » the date of maturity of CE Usual distractions (items that are NOT considered as cash) Page 3 of 24Topic 2 Petty Cash Fund Expected question(s): 1. What is the correct jouma’ entries atfecting petty cash fund (PCFI? 2. What is the amount of shortage or overage of petty cash fund? 3, What Is the adjusted balance of petty cash fund at the end of year? 2) Whatis the correct journal entries affecting petty cash fund? or: 3) What is the amount of shortage Answer Accountability Accounted * izt . ‘ , [ 4) What is the adjusted petty cash fund at the end of the year? 1 Answer: Page 4 of 24Topic 3: Bank Reconciliation Expected question(s): 1. What is the adjusted balance of cash in bank? 2. What is the unadjusted balance of cash in bank per book or per bank statement? 3. What is the amount of the missing reconciling item? [ 5) What is the adjusted balance of cash in bank? Answer: ) very (x) Jobit agreement eo it s «) Adjusted balance — Ans, 6) What is the unadjusted balance of cash in bank per book or per bank statement? Answer: id om cu x) v s 9 A ag) nt ) Adjusted balance (x) ent (x) Ans. x) Page 5 of 247) What is the amount of the missing reconciling item’? Answer: Perbook if p gat x T Ans. ; x fiyyt t x A by bar x x t standin f SQUEEZE Topic 4: Proof of Cash Expected question(s): 2 3 How much is the unadjusted receipt and disbursement per book? Cash in Bank lection trom cus x cit meno of peor micntti x not error x “MO Unadjusted receipt per book How much is the unadjusted receipt and disbursement per bank? Bank Statement x x { of current month x x 2} Cre of current month sf error x x 3) Correction c Unadjusted disbursement per bank % % Unadjusted receipt per bank Page 6 of 24et, Oe h, corrected | reno not yal corrected it nonth, corrected at current prior month, net yet corrected at curr: [Overs i _corrected rf yel corrected al curre corrected rent month, net yet corrected 3 ir corrected a! nol yel corrected at cur receypt. prior “corrected at curren not yet corrected 4 imonth, corrected i . ne | oe i disbursement, current month, not yet corrected at currer if = fecepl. current month, corrected at 1 meanth : cute hat yet corrected: i jh ANS aaa a | not yat corrected : z | +} { | corrected at Current |= | th, not yet corrected a! it | + | - | q corrected | ent | [el } feath not yet corrected a! current month | = nth, comected al current mantt y z =} t month, not yet corrected ai Current month oo nol, — price month, comected 1 Lmont p===1 = prior month, nat yet corrected at current manth j_- | = i corrected at Cures J } a not yet corrected ai currar | { 1 + [—_Tungerst rn nth, corrected | none | none | mt I : i month, not yet corrected thy | 1 |= 4 [[ TTinderstared receipt, cunent month, eorreeted at current J none [pone | none [ none | CT tated receipt, currer th. not yet corrected at curr I | | + | Page 7 of 24Topic 5: Trade Receivable and Allowances Expected question(s): 6. What is the baiance of aces vable at year end’? 7. is the balance of allon wnts at year end? 8 @ amount of bad debt expense for the year? 9. is the net real ble Value of accounts feceiwabie at year 8) Whats the balance of accounts receivable at year end? Answer; if what is given is tt n __Accounts receivable x x eon x xe ‘Ending balance x Answer: if what is given is the unav Adjusted balance x 9) What is the balance of allowance for doubtful accounts at year end? | 10) What is the amount of bad debt expense for the year? Answer: USING PERCENTAGE OF AR METHOD First the allowance for doubtful accounts WS: Second. for the bad debt expense by sque: pnning ti Bad debt expense SQUEEZE Bx |e oe Page 8 of 24USING PERCENTAGE OF SALES METHOD First, solve for the bad debt expense as f _Allowance for doubtful accounts, Second, for the bad debt expense t eezing the bad debt Allowance for doubtful accounts Bad debtexpense SQUEEZE 12. 11] What is the net realizable value of accounts receivable? Answer: the percentage of unc = % of uncollectability Total amount of credit sales Page 9 of 24Topic 6: Notes Receivable Expected question(s): Sst 8H eepo What is the initial measurement of nates receivable (fair value at the date received)? What is the gain or loss on sale of property, plant and equipment? What is the amount of revenue or sales where the consideration received is in a form of notes? What is the subsequent measurement of notes receivable (carrying amount at year end)? What is the interest income for the year? What is the interest receivable a8 of year end? What is the current portion of the notes receivable? What is the non current portion of the notes receivable? 12) What is the Initial measurement (fair value) of the notes receivable at the date received? | Answer: METHOD 1 [ii the METHOD 2 Type of note ipa 13} What is the gain or loss on sale of property, plant and equipment? | = J Answer: Carrying amaunt of the property, plant and equipment sold xs 14) What is the revenue or sales when the considaration received is in a form of notes receivable? be | Page 10 of 2415) What is the subsequent measurement ol notes receivable (carrying amount at year end)? Answer: Type of note | Carrying amount at year end Carrying amount at year end Carrying amount at year end 16] What is the amount of interest income for the your? Answe: Type of note [ Interest Income Interest Income interest income 17] What is the amount of interest receivable as of the year end? Answer: [Type of note | Interost Receivable i Re Interest Incama Page 11 of 24 L bo18} What is the current portion of the nates receivable? 19} What is the non current portion of the note receivable? | Answar: I! the note © a note (principal is payable one tne), ine whale NR will be classified # the Current portion of notes receivable X Non current portion of N & Principal payment next year Gurrent portion of NR a Non current portion of NR x nt pr otr Current portion of NR x Non current portion of NR x Topic 6: Loans Roceivable (LA) Expected question(s): What is the initial measurement of joans receivable (fair value at the date received)? What is the subsequent measurement of loans receivable (carrying amount as of year end)? What is the interest income for the year before impairment? What is the impairment loss for the year? What is the carrying amount of the loans receivable subsequent to the date of impairment? What is the interest income for the year after impairment? omaep 20) What is the initial measurement (fair value) of the notes receivable at the date received? Answer: METHOD 1 Initial measurement of LR x METHOD 2 Page 12 of 2421) What is the subsequent measurement af LA (carrying amount as of year end)? Answer: Type of note Carrying amount at year end Carrying amount at year end x [ 22) What is the interest income for the year? Answer Type of note Interest Income x x x x 24) What is the carrying amount of LR subsequent to impairment? Answer: Carrying amount of LR at year end x 25) What is the interest income subsequent to impairment? ] Interest income subsequent to impairment Page 13 of 24Topic 7: Receivable Financing Expected question(s): Assignment 1. Whatis the balance of accounts receivable - assigned? 2. What is the balance of ioans payable? 3. Whats the equity to be disclosed in th notes to financial statement? Factoring 4. Wh 5. What the net proceeds from factaring of receivable? the cost of factoring? Discounting 6 What is the net proceeds from discounting of NA? 7. What is the gain or loss trom discounting of NR? 6 Whatis the journai entry for discounting of NR? 26) What is the balance of accounts receivable - assigned? Answer Accounts Receivable - Assigned x tt x OK OK ‘Ending balance 27) What is the bolance of accounts receivable - assigned? Answer: Balance of loan payable at yo 26) What is the equity of the accounts receivable - assigned to be disclosed in the nates ta FS? Answer: 29) What is the net proceeds trom factoring? ] Answer: Net proceeds trom tactor bx Page 14 of 2430) What is the cost of factoring? Answer: Fair val obi Total cost of factoring x 31] What is the net proceeds trom discounting of NR? Anawer: Nat proceeds from discounting x 32) What is the net gain or loss from discounting of NR? ] Answer: x Total receivable sold x Total receivable sold (ster x Less: Net jar question 31) re8] Gain oF loss from discounting x Page 15 of 2433) What is journal entry for discounting of NR? Answer: [Type of discounting | dournal Entry nat pr Topic 8: Inventory Composition Expected question(s) What is t @ amount of inventory as of year end? Answer; 1, Inventorion supplies, included as } EXCLUDED from inventory 2. Inventories under consignment ‘Consignor —— > Include (lip: sent out. shipped out, out on) Consignee > Exclude (tip: held on, received on) 3. Goods in transit | Shipping terms Page 16 of 244. Goods under special term of sale 5. Inventoriable expenditures Expenditure Treatment entoniabie i hot inwentonmbs Page 17 of 24Topic Expected question(s): inventory System, inventory Discounts and Inventory Errors 1. What is the correct journal entry for inventory related transactions? 2. What is the affect of the inventory error t 34) What is the correct journal entry lor inventory related transactions? Answer: Periodic inventory system Purchase transaction Sale transaction Sale return transaction (Gross method inventory related accounts? Perpetual inventory system Purchase transaction Sale return transaction Year-end adjusting entry Net method Page 18 of 2435) What is the correct journal entry for inventory reiated transactions? Answer: Inventory AR" & Sales = AP" A Purchases CostofSale = Income Erroneous beg Inventory h ' Erroneous net purchases Erroneous net sales Erroneous end inventory Topic 10: Subsequent Measurement of Inventory and Inventory Impairment Expected question(s): 1, What is the carrying value (LONAY) of ir ear end? 2. What is the amount of impairment (or re ment) for the year? 3 Ww the amount of cost of goods sold du 36) What is the carrying value (LCNAV) of inventory at year end? Answer; Lower x 4 x + & «+ & x Page 19 of 2427) What is the amount of impairment (or reversal of impairment) for the year? Answer: 38) What is the cost of goods sold during the year? Answer: Allowance method Direct method CGS, including impairment Topic 11: Inventory Cost Flow Expected question(s}: 1. is t! @iue of the endi cost flow hod? ent cast flaw method? ry using differs year using di 39] What is the value of the ending inventory using different cost flow method? Answer: 1. FIRST IN, FIRST OUT (FIFO) 00K . 10K hase Ox 10% Total cost of ending inventory ox Page 20 of 2440) What is the cost of goods sold during the year uaing different cost flow method? Cost of goods sold x 2 WEIGHTED AVERAGE METHOD Ending inventory in units x ‘Total eoods available for ante in pasa Total goods avaliable for sale, in units = Average unit cost ing invent units (step 7 x rage unit Ending inventory in peso x Cost of goods sold & 3. MOVING AVERAGE METHOD Partict Number of units (A) Cost per unit (8) Tatal cost (AxB) = © Beginning, inventory x Giver x Purchase Add: =X Given id: X Total, updated ost x (cra) x updated average unit cost by dividing total goods Every * purchase transaction, you st Particulars Number of units (A) Cost per unit (B) Beginning, inven x Given Purchase Add: Xx Given Add T updated unit cost x (c/a) Sale re] Fe Updated Unt cost (Units sold X Upd Unit cast) Ending, inventory x x Page 21 of 24Topic 12: Inventory Estimation Expected question(s): Gross Profit Method 1. What is the estimated cest of ending inventory (or cost of missing inventory}? Retail Method 2. Whatis the estimated cost of ending inwentary (er cost of missing inventory]? 3. Whatis the estimated cost af goods sold? timated cost of ending inventory (or cost of missing inventory) using gross profit method? | Gross purchases x Add: Freight in x Less: Purchase discount ~ Less: Purchase returns. oo Net purchases & In case the gross purchase Is not given, solve it by squeezing in accounts payable T-account Accounts payable Retums and discounts x |X Beginning, AP Payments x |x Purchases, SQUEEZE x Ending, AP Gross credit saies Cash sales Total sales. x x x Less: Sales returns (or sales return and aliowances) Net sales x receivable T-account: In case the gross credit sates is not in, solve it by squeezing in accou Accounts receivable Beginning, AR Gross sales, SQUUEZE Collection of AR Recovery of AR White off Sales return Sales discounts ding, AR Gross profit based on sale Gross profit based on cost Net saies (step 3 x Net sales (step 3) x Multiply: (100% - GPR) x% Divide: (100% + GPR) xt Cost of goods sold x Cost of goods sold x 49 sold (step 44) 4 ending Cost af missing inventory (inventory lost) _X Page 22 of 24[ 42] What Is the oatimated ending Inventory (or cost of anding inventory) using retail method? 43) What i Answer: the estimated cost of goods sold using retail inventory method? ‘Abnormal losses Less ark up | Mark up cancel += | Mark down i Mark down cance! ‘[1GAs Gross sales Less: Sales retums (“sales retum and allowances” is deducted as well) Add: Employee discounts Add: Normal losses (i¢., shrinkage. sho: Net s es. ing, Spoiiage) ‘TGAS at cost (Sten 1 TGAS at retail TGAS at retail (Step = Cost ratio IGAS at cost = = Cost ratio + net mark down = Cost ratio AVERAGE METHOD LCNRV (CONSERVATIVE) METHOD FIFO METHOD TGAS at | Step 1) x Less Net sales ( ris Ending inventory at retail x Multiply: ‘Cost ratio (Step 3) 4% Ending inventory at cost x pu ¥ ] TGAS at cost (Step 1) x Less: Ending inventory at cost (Step 4) oO Cost of goods sold a Page 23 of 2444) What is the cost of goods sold tor a manufacturing entity? End of Lecture Notes do not modify the Page 24 of 24