PRELIM EXAM

Select the best answer. Use the answer sheet provided below:
SET B

Name: ______________________________ Year/Course/Section:

____________________

PROBLEM NO. 1

In connection with your examination, the Pound Company presented to you the following
information regarding its Cash in Bank account for the month of December, 2015:
a) Balances per bank statements: November 30, P107,800, and December 31, P115,200.
b) Balances of cash in bank account in company’s books: November 30, P82,725, and
December 31, P113,400.
c) Total receipts per books were P1,110,950 of which P6,050 was paid in cash to a creditor
on December 24.
d) Total charges in the bank statement during December were P1,094,850.
e) Undeposited receipts were: November 30, P45,300 and December 31, P50,600.
f) Outstanding checks were: November 30, P13,375, and December 31, P9,650, of which a
check for P2,500 was certified by the bank on December 26.
g) NSF checks returned, recorded as reduction of cash receipts, were:
 Returned by bank on December, recorded also in December, P5,200.
 Returned by bank on December but recorded in January, P4,300
h) Collections by bank not recorded by Company were P60,750 in November and P58,200 in
December.
i) Bank service charges not entered in company’s books were: November 30, P3,750 and
December 31, P2,100.
j) A check for P4,750 of Found Company was charged to Pound Company in error.
k) A check drawn for P4,200 was erroneously entered in the books as P2,400.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted cash balance as of November 30, 2015?
a. P107,800 b. P139,725 c. P75,875 d. P137,225
2. How much is the adjusted book receipts for December, 2015?
a. P1,102,350 b. P1,113,600 c. P1,056,950 d. P1,108,400
3. How much is the adjusted book disbursements for December, 2015?
a. P1,084,725 b. P1,078,675 c. P1,089,925 d. P1,084,725
4. How much is the adjusted cash balance as of December 31, 2015?
a. P158,650 b. P153,900 c. P165,200 d. P163,400
5. How much is the cash shortage of December 31, 2015?
a. P1,800 b. P9,500 c. P4,750 d. P0’
6. The most important balance-related audit objectives in the audit of cash include all but
which of the following?
a. Existence b. Accuracy c. Completeness d. Occurrence

PROBLEM NO. 2

In connection with your audit of Caloocan Corporation for the year ended December 31,
2006, you gathered the following:

a. Current account at Metrobank P2,000,000

b. Current account at BPI (100,000)
c. Payroll account 500,000
d. Foreign bank account –restricted (in equivalent pesos) 1,000,000
 e. Postage stamps 1,000
f. Employee’s post dated check 4,000
g. IOU from controller’s sister 10,000
h. Credit memo from a vendor for a purchase return 20,000
i. Traveler’s check 50,000
j. Not-sufficient-funds check 15,000
k. Money order 30,000
l. Petty cash fund (P4,000 in currency and expense receipts for P6,000) 10,000
m. Treasury bills, due 3/31/07 (purchased 12/31/06) 200,000
n. Treasury bills, due 1/31/07 (purchased 1/1/06) 300,000

7. Based on the above information and the result of your audit, compute for the cash and cash
equivalent that would be reported on the December 31, 2006 balance sheet.
a. P2,784,000 b. P2,790,000 c. P3,084,000
d. P2,704,000

8. Which of the following misstatements is most likely to be uncovered during an audit of a

client’s bank reconciliation?
a. Duplicate payment of a vendor’s invoice.
b. Billing a customer at a lower price than indicated by company policy.
c. Failure to record a collection of a note receivable by the bank on the client’s behalf.
d. Payment to an employee for more than the hours actually worked.

9. Which of the following cycles does not affect cash in bank?

a. Capital acquisitions cycle.
b. Inventory and warehousing.
c. Payroll and personnel cycle.
d. Acquisitions and disbursements.

10.The audit objective of determining that cash in bank, as stated on the reconciliation, foots
correctly and agrees with the general ledger can be tested by which of the following
procedures?
a. Performing tests for kiting.
b. Receiving and testing a cutoff bank statement.
c. Footing the outstanding checks list and the list of deposits in transit.
d. Examining the minutes of the board of directors for restrictions on the use of cash.
11.The auditor uses a proof of cash to determine whether:
All recorded cash disbursements All amounts that were paid by the
were paid by the bank. bank were recorded.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
12.Because cash is the most desirable asset for people to steal, it has a higher:
a. control risk.
b. inherent risk.
c. detection risk.
d. liquidity risk
13.The process of transferring money from one bank account to another and improperly
recording the transaction is referred to as:
a. kiting.
b. lapping.
c. scamming.
d. embezzling.
 PROBLEM NO. 3

Your audit client, Help Corporation, provided for uncollectible accounts receivable under the
allowance method since the start of its operations to December 31, 2005. Provisions were
made monthly at 2 percent of credit sales; bad debts written off were charged to the
allowance account; recoveries of bad debts previously written off were credited to the
allowance account; and no year-end adjustments to the allowance account were made. Help's
usual credit terms are net 30 days.

The credit balance in the allowance for doubtful accounts was P260,000 at January 1, 2005.
During 2005, credit sales totaled P18,000,000, interim provisions for doubtful accounts were
made at 2 percent of credit sales, P180,000 of bad debts were written off, and recoveries of
accounts previously written off amounted to P30,000. Help installed a computer system in
November 2005 and an aging of accounts receivable was prepared for the first time as of
December 31, 2005. A summary of the aging is as follows:

Balance in Estimated %
Classifications by Month of Sale Each Category Uncollectible
November-December 2005 P2,280,000 2%
July-October 2005 1,200,000 15%
January-June 2005 800,000 25%
Prior to January 1, 2005 260,000 80%

Based on the review of collectibility of the account balances in the "prior to January 1, 2005"
aging category, additional receivables totaling P120,000 were written off as of December 31,
2005. Effective with the year ended December 31, 2005, Help adopted a new accounting
method for estimating the allowance for doubtful accounts at the amount indicated by the
year-end aging analysis of accounts receivable.

QUESTIONS:

Based on the above and the result of your audit, answer the following:
14.How much is the adjusted balance of the allowance for doubtful accounts as of December
31, 2005?
a. P537,600 b. P350,000 c. P633,600 d. P753,600
15.How much is the doubtful accounts for the year 2005?
a. P427,600 b. P577,600 c. P547,600 d. P457,600
16.The recorded allowance for doubtful accounts should be increased by
a. P283,600 b. P187,600 c. P67,600 d. P0
17.An auditor most likely would review an entity’s periodic accounting for the numerical
sequence of shipping documents and invoices to support management’s financial statement
assertion of
a. Existence c. Valuation or allocation
b. Rights and obligations d. Completeness
18.Which of the following strategies most likely could improve the response rate of the
confirmation of accounts receivable?
a. Including a list of items or invoices that constitute the account balance.
b. Restricting the selection of accounts to be confirmed to those customers with relatively
large balances.
c. Requesting customers to respond to the confirmation requests directly to the auditor by
fax or e-mail.
d. Notifying the recipient that second requests will be mailed if they fail to respond in a
timely manner.
 PROBLEM NO. 4

Don’t Let Me Down, Inc. estimates its doubtful accounts by aging its accounts receivable. The
aging schedule of accounts receivable at December 31, 2005 is presented below:

Age of accounts Amount

0 – 30 days P1,264,800
31 – 60 days 691,500
61 – 90 days 288,600
91 – 120 days 114,975
over 120 days 59,100
P2,418,975

Don’t Let Me Down, Inc.’s uncollectible accounts experience for the past 5 years are
summarized in the following schedule:

A/R Balance 0 – 30 31 – 60 61 – 90 91 – 120 Over120

Year Dec. 31 Days Days Days Days Days
2004 P1,968,750 0.3% 1.8% 12% 38% 65%
2003 1,500,000 0.5% 1.6% 11% 41% 70%
2002 697,500 0.2% 1.5% 9% 50% 69%
2001 1,224,000 0.4% 1.7% 10.2% 47% 81%
2000 1,865,500 0.9% 2.0% 9.7% 33% 95%

The balance of the allowance for doubtful accounts at December 31, 2005 (before
adjustment) is P126,750.

QUESTIONS:

Based on the foregoing, answer the following:

19.How much is the adjusted balance of the allowance for doubtful accounts as of December
31, 2005?
a. P126,750 b. P13,894 c. P140,644 d. P630,675
20.The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of
December 31, 2005 would include:
a. No adjusting journal entry is necessary.
b. A debit to retained earnings of P13,894.
c. A debit to doubtful accounts expense P140,644.
d. A credit to allowance for doubtful accounts of P13,894.