College of Business Administration

ACTG 109A – APPLIED AUDITING

Audit of Property, Plant and Equipment

NAME:_____________________________________________COURSE & YEAR: __________SCORE:______

1. Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance
that additions to the equipment account are not understated?
a. Repairs and maintenance expense. b. Depreciation expense.
c. Gain on disposal of equipment. d. Accounts payable.

2. The most significant audit step in substantiating additions to the office furniture account balance is
a. Examination of vendors' invoices and receiving reports for current year's acquisitions.
b. Review of transactions near the balance sheet date for proper period cutoff.
c. Calculation of ratio of depreciation expense to gross office equipment cost.
d. Comparison to prior year's acquisitions.

3. An auditor is verifying the existence of newly acquired fixed assets recorded in the accounting records.
Which of the following is the best evidence to help achieve this objective?
a. Documentary support obtained by vouching entries to subsidiary records and invoices.
b. Physical examination of a sample of newly recorded fixed assets.
c. Oral evidence obtained by discussions with operating management.
d. Documentary support obtained by reviewing titles and tax returns.

4. When there are few property and equipment transactions during the year, the continuing auditor usually
makes a
a. Complete review of the related internal controls and assesses control risk relative to them.
b. Complete review of the related internal controls and performs analytical review tests to verify
current year additions to property and equipment.
c. Preliminary review of the related internal controls and performs a thorough examination of the
balances at the beginning of the year.
d. Preliminary review of the related internal controls and performs extensive tests of current year
property and equipment transactions.

5. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit
assertion that all
a. Non-capitalizable expenditures for repairs and maintenance have been properly charged to
expense.
b. Expenditures for property and equipment have not been charged to expense.
c. Non-capitalizable expenditures for repairs and maintenance have been recorded in the proper
period.
d. Expenditures for property and equipment have been recorded in the proper period.

Problem 1
Aliaga Corporation was incorporated on January 2, 2017. The following items relate to the Aliaga’s property and
equipment transactions:

Cost of land, which included an old apartment building

appraised at ₱300,000 ₱ 3,000,000
Apartment building mortgage assumed, including
related interest due at the time of purchase 80,000
Deliquent property taxes assumed by Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
Proceeds from sale of salvaged materials 10,000
Architects fee for new building 60,000
Building permit for new construction 40,000
Fee for title search 25,000
Survey before construction of new building 20,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Assessment by city for drainage project 15,000
Cost of grading and levelling 50,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new
building more energy efficient 90,000
Interest cost on specific borrowing incurred during construction 360,000
Payment of medical bills of employees accidentally
injured while inspecting building construction 18,000
Cost of paving driveway and parking lot 60,000

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Cost of installing lights in parking lot 12,000
Premium for insurance on building during construction 30,000
Cost of open house party to celebrate opening of new building 50,000
Cost of windows broken by vandals distracted by the celebration 12,000

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Cost of land
a. ₱2,980,000 b. ₱3,270,000 c. ₱3,185,000 d. ₱3,205,000

2. Cost of building
a. ₱10,810,000 b. ₱10,895,000 c. ₱10,875,000 d. ₱11,110,000

3. Cost of Land Improvements

a. ₱12,000 b. ₱72,000 c. ₱122,000 d. ₱0

4. Amount that should be expensed when incurred

a. ₱80,000 b. ₱110,000 c. ₱62,000 d. ₱50,000

5. Total depreciable property and equipment

a. ₱11,182,000 b. ₱10,967,000 c. ₱10,947,500 d. ₱10,882,000

Problem 2
The property, plant and equipment section of Zaragosa Corporation’s statement of financial position at
December 31, 2009 included the following items:
Land ₱2,100,000
Land improvements 560,000
Buildings 3,600,000
Machinery and equipment 6,600,000
During 2010 the following data were available to you upon your analysis of the accounts:

Cash paid on purchased of the land ₱10,000,000

Mortgage assumed on the land bought, including interest at 16% 16,000,000
Realtor’s commission 1,200,000
Legal fees, realty taxes and documentation expenses 200,000
Amount paid to relocate persons squatting on the property 400,000
Cost of tearing down and old building on the land 300,000
Amount recovered from the salvage of the building demolished 200,000
Cost of fencing the property 440,000
Amount paid to a contractor for the building erected 8,000,000
Building permit fees 50,000
Excavation expenses 250,000
Architect’s fees 100,000
Interest that would have been earned had the money used during
the period of contraction been invested in the money market 600,000
Invoice cost of machinery acquired 8,000,000
Freight, unloading, and delivery charges 240,000
Customs duties and other charges 560,000
Allowances, hotel accommodations, etc., paid to foreign technicians
during installation and the test run of machines 1,600,000
Royalty payment on machines purchased
(based on units produced and sold) 480,000

QUESTIONS:

Based on the above and the result of your audit, compute for the following as of December 31, 2010:

1. Land
a. ₱30,000,000 b. ₱14,000,000 c. ₱29,900,000 d. ₱29,600,000

2. Land Improvements
a. ₱1,300,000 b. ₱1,000,000 c. ₱1,250,000 d. ₱560,000

3. Building
a. ₱12,300,000 b. ₱11,750,000 c. ₱12,000,000 d. ₱11,700,000

4. Machinery and equipment

a. ₱14,840,000 b. ₱16,440,000 c. ₱15,400,000 d. ₱17,000,000

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