FATHER SATURNINO URIOS UNIVERSITY

QUIZ-AP-005
AUDITING PROBLEMS REVIEW

Elvin D. Chatto, CPA, MPA

Problem No. 1
Vintar Company has the following transactions in 2010 involving notes receivable:
May 1
May 1
July 30
August 1
September
1
September
28
October 1
November 1
December
30
December
31

Received a P1,000,000, 90-day, 12% interest bearing note from A

Company in settlement of account.
Received a P1,500,000, six-month, 12% interest bearing note from B
Company in settlement of account.
A Company defaulted on the P1,000,000 note.
Discounted the B Company note at a bank at 15%.
Received a one-year noninterest bearing note from C Company in
settlement of a P600,000 account receivable. The face value of the
note was P660,000.
Collected the defaulted A Company note plus accrued interest at
12% per annum on the total amount due.
Received a P2,500,000, 90-day note from D Company. The note is
for the payment goods purchased and bears interest at 12%.
B Company defaulted on the P1,500,000 note. Vintar Company paid
the abnk the total amount due plus P60,000 for protest fee and
other bank charges.
Collected D Company note in full.
Collected from B Company in full including interest on the total
amount due at 12% since default date.

Based on the above and the result of your audit, answer the following:
1. The proceeds from discounted B Company note on August 1, 2010 is
a. 1,530,375
b. 1,487,062
c. 1,542,300
d. 1,000,000
2. The amount collected on September 28, 2010 on the defaulted A Company
note is
a. 1,030,000
b. 1,050,600
c. 1,050,000
d. 1,081,500
3. The amount collected on December 31, 2010 on defaulted B Company note is
a. 1,683,000
b. 1,650,000
c. 1,681,800
d. 1,680,000
4. The interest income to be recognized in 2010 related to these transactions is
a. 268,600
b. 238,780
c. 223,600
d. 193,600
5. An aging analysis of accounts receivable would provide an indication as to
the
a. Validity of the accounts
b. Integrity of the credit grantors
c. Collectability of the accounts
d. Solvency of customers
6. Which account balance is most likely to be misstated if an aging of accounts
receivable is not performed?
a. Allowance for bad debts
b. Accounts receivable
c. Sales returns and allowances
d. Sales revenue
7. An auditor selects a sample from the file of shipping documents to determine
whether invoices were prepared. This test is performed to satisfy the audit
objective of
a. Accuracy
b. Control
Audit of Accounts Receivable and Investments

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FATHER SATURNINO URIOS UNIVERSITY

QUIZ-AP-005
AUDITING PROBLEMS REVIEW

Elvin D. Chatto, CPA, MPA

c. Completeness
d. Existence
Problem No. 2
Supporting records of Mayon Company trading securities portfolio show the
following debt and equity securities:
Security
400 ordinary shares Concave
Company
P800,000 Tipo Company, 7%
bonds
P1,200,000 Turkey Company
7.5% bonds
Totals

Cost
254,500

Fair
Value
243,000

796,500

774,000

1,207,5
00
2,258,5
00

1,218,90
0
2,235,90
0

Interest dates on the bonds are January 1 and July 1. Mayon Company uses the
income approach to record the purchase of bonds with accrued interest. During
2014 and 2015, Mayon completed the following transactions related to trading
securities:
201
4
Jan. 1
April 1
May 21
July 1
Aug 15
Nov. 1
Dec. 31

2015
Jan. 2
Feb. 1

Received semiannual interest on bonds. Assume that the

appropriate adjusting entry was made on December 31, 2013.
Sold P600,000 of 7.5% Turkey bonds at 102 plus accrued interest.
Brokerage fees were P2,000.
Received dividend of P1.25 per share on the Concave ordinary share
capital. The dividend has not been recorded on the declaration
date.
Received semiannual interest on bonds and then sold the 7% Tipo
bonds at 97.5. Brokerage fees were P2,500.
Purchased 200 shares of Newman, Inc. ordinary share capital at
P580 per share plus brokerage fees of P500
Purchased P500,000 of 8% Toll Company bonds at 101 plus accrued
interest. Brokerage fees were P1,250. Interest dates are January
1 and July 1
Market prices of securities were:
Concave ordinary shares
P550
7.5% Turkey bonds
101.75
8% Toll bonds
101
Newman ordinary shares
P583.75
Recorded the receipt of semiannual interest on bonds
Sold the remaining 7.5% Turkey bonds at 101 plus accrued interest.
Brokerage fees were P3,000

8. What is the total interest and dividend income for 2014?

a. 125,166
b. 164,416
c. 91,417
d. 98,804
9. What amount should be reported as gain on sale of trading securities in
2014?
a. 4,050
b. 12,752
c. 8,550
d. 9,375
10.What amount of unrealized gain or loss should be reported in the income
statement for the year ended December 31, 2014?
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FATHER SATURNINO URIOS UNIVERSITY

QUIZ-AP-005
AUDITING PROBLEMS REVIEW

Elvin D. Chatto, CPA, MPA

a. 21,200 unrealized gain

b. 21,200 unrealized loss
c. 6,150 unrealized gain
d. 6,150 unrealized loss
11.What is the carrying amount of the remaining trading securities on December
31, 2014?
a. 1,481,000
b. 1,450,450
c. 1,473,450
d. 1,452,250
12.What is the loss on the sale of the remaining Turkey bonds on February 1,
2015?
a. 7,500
b. 10,500
c. 13,500
d. 750
13.An auditee is holding equity securities as collateral for a debt. The auditor
should
a. Determine from data published in the financial press that the auditee
has recorded dividend income from the collateral
b. Ascertain the value of the securities
c. Ascertain that the amount recorded for the collateral in the investment
account is equal to its fair value at the balance sheet date.
d. Verify that the client has taken title to the securities
14.Which of the following is the most effective audit procedure for verification of
dividends earned on investments in equity securities?
a. Tracing deposited dividend checks to the cash receipts book.
b. Reconciling the amounts received with published dividend records.
c. Comparing the amounts received with preceding year dividends
received.
d. Re-computing selected extensions and footings of dividend schedules
and comparing totals to the general ledger.
15.In confirming with an outside agent, such as a financial institution, that the
agent is holding investment securities in the clients name, an auditor most
likely gathers evidence in support of managements financial statement
assertions of existence and
a. Valuation
b. Rights and obligations
c. Completeness
d. Presentation and disclosure
16.In establishing the existence and ownership of an investment held by a
corporation in the form of publicly traded stock, an auditor should inspect the
securities and
a. Obtain written representations from management confirming that the
securities are properly classified as trading securities
b. Inspect the audited financial statements of the investee company
c. Confirm the number of shares held by an independent custodian
d. Determine that the investment is carried at fair value
17.An auditor is most likely to verify the interest earned on bond investment by
a. Verifying the receipt and deposit of interest checks
b. Confirming the bond interest rate with the issuer of the bonds
c. Re-computing the interest earned on the basis of face amount, interest
rate, and period held
d. Testing controls relevant to cash receipts
18.Which of the following provides the best form of evidence pertaining to the
annual valuation of an investment in which the independent auditors client
owns a 30% voting interest?
a. Market quotations of the investee companys stock
b. Current fair value of the investee companys assets
c. Historical cost of the investee companys assets
d. Audited financial statements of the investee company

Audit of Accounts Receivable and Investments

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FATHER SATURNINO URIOS UNIVERSITY

QUIZ-AP-005
AUDITING PROBLEMS REVIEW

Elvin D. Chatto, CPA, MPA

19.In verifying the amount of goodwill recorded by a client, the most convincing
evidence an auditor can obtain is by comparing the recorded value of assets
acquired with the
a. Assessed value as evidenced by tax bills
b. Sellers book value as evidenced by financial statements
c. Insured value as evidenced by insurance policies
d. Appraised value as evidenced by independent appraisals
20.The auditor can best verify a clients bond sinking fund transactions and yearend balance by
a. Confirmation with individual holders of retired bonds
b. Confirmation with the bond trustee
c. Recomputation of interest expense, interest payable, and amortization
of bond discount or premium
d. Examination and count of the bonds retired during the year
21.An auditor who physically examines securities should insist that a client
representative be present in order to
a. Detect fraudulent activities
b. Lend authority to the auditors directives
c. Coordinate the return of securities to the proper locations
d. Acknowledge the receipt of securities returned
22.In testing long-term investments, an auditor ordinarily would use analytical
procedures to ascertain the reasonableness of the
a. Classification between current and noncurrent portfolios
b. Valuation of marketable equity securities
c. Existence of unrealized gains or losses in the portfolio
d. Completeness of recorded investment income
Problem No. 3
On January 1, 2012, U2 Company purchased P1,000,000 10% bonds designated as
held to maturity. The bonds were purchased to yield 12%. Interest is payable
annually every December 31. The bonds mature on December 31, 2016. On
December 31, 2012, the bonds were selling at P99. On January 2, 2014, U2 sold
500,000 face value bonds at 101. The bonds were selling at 103 on December 31,
2014.
23.The purchase price of the bonds on January 1, 2012 is
a. 927,880
b. 1,075,796
c. 946,480
d. 939,230
24.The carrying amount of the investment in bonds on December 31, 2012 is
a. 1,063,376
b. 960,058
c. 951,938
d. 939,226
25.How much is the realized gain on sale of the investment in bonds on January
2, 2014?
a. 41,060
b. 35,387
c. 29,034
d. 10,000
26.How much should be reported as component of equity on December 31,
2014?
a. 39,034
b. 31,918
c. 29,034
d. 0
Problem No. 4
You are assigned to audit GMA Company for the year ending June 30, 2012. Prior to
any adjustments you were able to extract the following balances from the clients
records:
Accounts receivable, control account
P 221,250
Audit of Accounts Receivable and Investments

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FATHER SATURNINO URIOS UNIVERSITY

QUIZ-AP-005
AUDITING PROBLEMS REVIEW

Elvin D. Chatto, CPA, MPA

Allowance for doubtful accounts

( 7,500)
Accounts receivable, subsidiary records
60 days old and below
P110,625
61 to 120 days
66,375
Over 120 days
51,750
Credit balance
( 7,500)
The credit balance in the accounts receivable represents collection from a customer
whose account had been written off as uncollectible in the previous year.
The Accounts Receivable were circularized as at June 30, 2012 and the following
exceptions/replies have not been disposed off at the date of your examination:
Customer

Balances

Comments from
Customers
This balance for invoice
dated June 5, 2012 was
paid in June 29, 2012
The balance for invoice
dated June 1 was offset
by
our
June
10
shipment
The above balance for
invoice dated April 20
has been paid
The records show a
bigger balance, please
check

Angel

P 4,000

Baby

13,800

Sunshine

16,600

Dan

20,000

Edward

11,600

We do not owe GMA

Corp.
anything
as
goods were received
July
2012,
FOB
Destination

Efren

18,000

Our deposit of P18,000

should
cover
this
balance

Jen

6,000

Amount okay. Since this

is on consignment, we
will
remit
payment
upon selling the goods

Elrich

1,200

CM No. 8118 cancels

this balance

Audit Findings
GMA
Corp.
received
mailed check on July 2,
2012.
GMA
Corp.
credited
accounts
payable
for
P13,800
to
record
purchase of tires
The
payment
was
credited to customer Dan
A new confirmation was
mailed. All outstanding
invoices to Dan are dated
June
The shipment costing
P8,000 was made on June
29, 2012 and the goods
were not included in
recording the June 30,
2012 inventory summary
GMA
Corp.
had
previously credited the
deposit to sales. The
P18,000 balance was for
a June shipment
Goods cost P4,400 and
were
appropriately
included in the GMA
Corp.s inventory. The
amount is included in
below
60
days
receivables
The CM dated April 31,
2012 was recorded by
GMA Corp. in July 2012.
The amount is for an
April 15 sales invoice

Based on your discussion with the client, the following estimated rates are
appropriate for computing the uncollectible accounts:
60 days and below
2%
61 to 120 days
10%
More than 120 days
20%
27.What is the adjustment to the controlling account appropriated customers
Sunshine account?
a. Debit AR for 16,000
b. Credit AR for 16,000
c. Credit to AR for 20,000
d. No adjustment to the control account
Audit of Accounts Receivable and Investments

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FATHER SATURNINO URIOS UNIVERSITY

QUIZ-AP-005
AUDITING PROBLEMS REVIEW

Elvin D. Chatto, CPA, MPA

28.What is the adjusted accounts receivable account balance?

a. 170,650
b. 174,150
c. 178,150
d. 194,750
29.What is the required allowance for bad debts as of June 30, 2012?
a. 15,524
b. 16,668
c. 16,764
d. 18,188
30.Assuming that were no other entries affecting the allowance account during
the fiscal year, how much is the bad debt expense?
a. 1,764
b. 9,264
c. 10,688
d. 16,688
End of the Quiz!!!
God Bless!!!

Audit of Accounts Receivable and Investments

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