AUDITING PROBLEMS - MOCK CPA BOARD
PROBLEM NO. 1
You were asked by Something Corporation to audit its financial statements for the years ended December 31, 2012 and 2013. While reviewing the entity’s records for 2012 and 2013, you discover that no adjustments have yet been made for the items listed below.
Item No. 1 - Insurance premiums of P300,000 for the three-year period beginning January 1, 2012, had been paid and fully expensed in 2012.
Item No. 2 - The merchandise inventories at the end of 2012 and 2013 did not include merchandise that was then in transit and to which the company had title. These shipments of P50,000 and P30,000 were recorded as purchases in January 2013 and 2014, respectively.
Item No. 3 - Rental of P60,000 on an equipment, applicable for six months, was received on November 1, 2012. The entire amount was reported as income upon receipt.
Item No. 4 - The entity purchased a machine on January 2, 2012, at a cost of P120,000. An additional P50,000 was spent for installation, but this amount was charged erroneously to repairs expense. The machine has a useful life of five years and a residual amount of P20,000.
Item No. 5 - The entity received P360,000 from a customer at the beginning of 2012 for services that it is to perform evenly over a 3-year period beginning in 2012. None of the amount received was reported as unearned revenue at the end of 2012.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. In relation to Item No. 1, which of the following is correct?
a. The 2012 profit is overstated.
b. The 2013 profit is overstated.
c. The December 31, 2012 retained earnings is correctly stated.
d. The December 31, 2013 retained earnings is correctly stated.
2. In relation to Item No. 2, which of the following is incorrect?
a. The 2012 profit is understated
b. The 2013 profit is correctly stated.
c. The December 31, 2012 retained earnings is correctly stated.
d. The
You were asked by Something Corporation to audit its financial statements for the years ended December 31, 2012 and 2013. While reviewing the entity’s records for 2012 and 2013, you discover that no adjustments have yet been made for the items listed below.
Item No. 1 - Insurance premiums of P300,000 for the three-year period beginning January 1, 2012, had been paid and fully expensed in 2012.
Item No. 2 - The merchandise inventories at the end of 2012 and 2013 did not include merchandise that was then in transit and to which the company had title. These shipments of P50,000 and P30,000 were recorded as purchases in January 2013 and 2014, respectively.
Item No. 3 - Rental of P60,000 on an equipment, applicable for six months, was received on November 1, 2012. The entire amount was reported as income upon receipt.
Item No. 4 - The entity purchased a machine on January 2, 2012, at a cost of P120,000. An additional P50,000 was spent for installation, but this amount was charged erroneously to repairs expense. The machine has a useful life of five years and a residual amount of P20,000.
Item No. 5 - The entity received P360,000 from a customer at the beginning of 2012 for services that it is to perform evenly over a 3-year period beginning in 2012. None of the amount received was reported as unearned revenue at the end of 2012.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. In relation to Item No. 1, which of the following is correct?
a. The 2012 profit is overstated.
b. The 2013 profit is overstated.
c. The December 31, 2012 retained earnings is correctly stated.
d. The December 31, 2013 retained earnings is correctly stated.
2. In relation to Item No. 2, which of the following is incorrect?
a. The 2012 profit is understated
b. The 2013 profit is correctly stated.
c. The December 31, 2012 retained earnings is correctly stated.
d. The