The'ReviewStfioof of

fTel' No. 735-9tO7 &

AUDITING.PROBTEMS |REilEofisPtffittryrAi,US

ANDERROR
PAS8: ACCOIftlTlNGCHATGES CORRECTK)ilS

prior:PehiodErrors- The entity shallcorrectmatefialprior perioderrors retrospefiive in the first

set of financialstatementsauthorizedfor issue.aftertheir discoveryby restatingthe net income
andretainedearnings of priorperiod.

Two types of prior pariod erfiont:

A. Couilirbalancing er,rors- errorsthat affect both th€ net incomt of the year wften the error
was'.iornmitted and.,tfie ifnnrediate year thereafter in opposite directions. Counterbalancing
err6rs affectpe cr* rcal *ounts only.in the year of the comm*rsionof error. Real,acq,or,rnts
subsegnentltothe year of errof are alreadycorrccifyct$d. Examples,of counterbalancing errors
afe:

r omission Expenses
of Accrued n
. omission Income
df unearned (h ) Tir --> Infur
. Omissionof AccountsPayabb/Purchases \7
r Omissionsof Prtpaid expenses -
,A '.,
. omissionoJAgcquqd Income -{'t n -d .. a- 7; } , r-
' Omissionof AccountsReceivables/Seles (
q Wfd€rsr,*te*ndnt'ofEndirg lnventorirc \-/

'
, m:H:H;- #3"-,f::;i;:,"T,,,re e*.,
vea*he
wai commltted. Ttre net'lncome of the subsequentyear is alreadycoffeCtlystated. Non-
counterhifgrgtstgerforssffCct pcrtin6t{t'le*-1e$Su}fti$i the year the errOFwascommitted and
all the strbseq.pntY€as,urrhssadiusted. ^,,r', :

,J *., ,. .
. . .,- , 1,,...t.
p8g[il.ss l:T'tr,e wasrnadefor the yearended
tu# Rdirlot di' airoksof A#*t Compcny
Decandni Sf" t013. ln rsyicryingthe books,the auditor discoveredthat certqinadiuStmentshad
either beenoverlsql€dor improperlyrecordedat the enil of 2011,2012and 2013. 6rossprofit
is 2o%,ofsahc--Omierlsmaadother failuresfor eachyearare sumrnarized'below.

December31
rarl m12 20r3
omissionsof ttrefoflowingaccounts: (U^lvtl"'kt -V
.a. Accruedinterestincome i,oo()' A,o0o '3,ooo
" 4,000 / 5,ooo 6,000
Ivl.,lui4hh1e-d-J
AT c. AccountsReceivable V ail Vt !,rwvt lyl - I 7,000 8,00o i g,ooo
d. PrepaidExpenses 10,0@ 11,000.,12,0@
e. Advancesto suppliers 13,@ x4,000, q ftfm
F."t' qf:
of the followingaccounts:
Over-recordine \(
f. Sales 15"00€ 17;qm 18.Om
:g. Metchandise
lfiventory L9,ffi 2o;m0-2X;000
qiroP ,?t'D \q@
 RsSA:

r)rnic<inn< nf the followine accounts:

h. Accrued rent e i-d",, &r,(\ 22,OOO23.000 24,m0
27;Affi
Lt i. AccountsPayable
i. Unearnedcom11!!!!gn'!n!erng
25,ffi) 16,000
28,0O0 29,000 30,000
L k. Advances
frorncustomers 31,0m 32,0@ 33,0@
l6t/(\P dodlD till@
ffiioi expenditureshad beenrecognizedasrepairs,but shouldhave
beencapitalized annual
asco;[of equipment; on
depreciationrate
such'equipment isPO%,bu! depreciationin the yearof the -t

,341000 35^@ 36,000

expenditureis at lMo.

Required:
assumingthat the errorswere discoveredin your audit
I. preparethe audit adjustrnents
, periodendedDecernber3L,2013.

. 2. *ssumingthe unadjustednet incornefor the yearszAl.L,2012and 2013were P90,000;

'' computefor the adjustednet income.
respectivelv,
, P87;OOO;"dP78,@O,
l40rD,[oror q;(fr
3, Assumingthat ttre unadjustedretainedearningsbalanceat the end of 2011, 2OL2and
. 2013 were P9g,OOO , PL77,W and 2J3lA0, respectively,compute {or the adjusted
balancesof retainedearnings. Jq4fr,t1;ilti,rlrr;5l
'
4. What arethe effectsof the errorson the 20X1,2012and 2013workingcapital?
(rorur)
(l*fr) (roroo)
r, fJr ,r"t pnr,
pnOBEM ?: TheDeiember31year-endfinancidlstatementsof SamCo.containedthe following
errors:
ffiffiFruFUro* *- fficr3${Ol*
Endlnglnv.entory. 48,O0O understateci 40,500overstated
Accruedexpenses . 16,000understated 22,WOunderstated
DepreciatiimExp€nse 11,5m understated -G

An insuranceixemiumof p24,Ofr)waspaidin advancein 2010coveringthe years2010,2011and

ZA1:Z.The entire ameuntwaschargedto experac tn 2010. In addition,on December31, 2010,a
cash,but the salewas not recordeduntil 2011-
futd deprdeified machi*eryrrvassold for PL6,0oO
Therewere no ofher eff€rs dunng 1010and z0lt1' and no correctionshavebeen madefor any of
tha err6rs. Enote taxe{fms
. -
Hota 1. Whatis the totalleffect of the erbrs on Sain's201trnet income? l1,05F tb^'
on Sam'sworkingcapitalat December31, 2f/LX?ffffi'edt'^tlhd
$te@ 2, What is the total cffiectof thd errors
at December3L, 201,1?fffrp Wdet'd
hb0a0 3. What is the total effectof the errorson Sam'sretainedearnings

m&[EM'iti 8e" Co.'snet inconrefor 2009, 2010 and ?0tr1were P1@,@0,P145,000and

respectively.Thefollowingitemswere not handledproperly.
P1851000;

a. Rent of p9,000forZOilwas receivedfrom-a lesseeon DeCember2?,2010; and recordedas

outright Incomein 2010. ('r'u.tt\1,,a| )

b. Salariespayableat the end of the followingyearswere omitted:

31, 2008
Decernber
December31, 2OO9
 December
31, 20L0 4,500
December3L, 2011 5,500

c. Thefollowingunusedofficesupplieswereomittedin the accounting

records:

December
31, 2008 2.800
December31, 2009 4,too
December31.,2010 3,300
December3L, 20tl 6,70A

d. On January7,20W, the companycorhpletedlnajor reB*lrson the qornpan/smachineryand

' equipmenttotalingiP88,00O, Whichwasexpensedoutright.Thesaidequipmentis 5 yearsold
as of January1, 2q09:"frs bf December/39IOLL, the equipmenthad an originalcost of
p5-00,000 ofp2s0o0oT.
andacfrilfrEvatue t
$1n of Euv dn{
b,
tn ' Ut6
v- '
- rrt'
A. corprt" for the adjustedbalancesof the following:
bqao rl aorrOepreciatbn
e_xpenseSqAO Jr*. I l*1 7lt{t h^I.L CV
lY#,3:, iff3ffilil::il:
f'f;:; t',",twq
"'s.
I eott aru$
,eryw4. zn1tiiqtrincome
r $s@ dr^t r.r, t 1V' ;
J$l?10
t dl-'to
B. computefortheeffectsoftheerrorsontherom,rine,'F"'uf-
"o' r ".' L Srtttt--t f Uftn
(,, t'l s. 2011begfining g1gD
retaiiedearnings A&-" tqp
- ;
'ir'*r' 6. zorr workine
capit"l ,tn dc. J ,rqlr"?(
*t/ )rrnq
h*,
r.
?FOFtEf,!4:Youare auditingthe financialstat€rnentr,ofArt hrc.for the yer 2011. :

Thedetaifso{ the company'sAccumulated

Proftticount, beforeanyadjustments,
are asfollows:

D.at Pfftkdr|| e$u Cr.dt Bdencc

01.01.2009 -Bafance 970,000
12.31"2009 Net inco{nefol the year . w 1,335,0(n
o1.3X2010 Oividendspaid
04.01'2010 Paidin Capitalinexcessof gar
1rrfl r@ .i
1,1,25,m
' ltt$otr' L,260,000
08.30 2010 Gainon retirementof preference '.93!fl0 1,,356,750
1.2.312010 Net bss for the year 3gjm 1,&9;250
01.312011 Dividmdspaid
U$
/"rffi) 'E99,250
L2.3L ?OLL Net lossfor the year ffi 651,000
Dtqfrb&. . lorr h-r14.l
Yourexaminati6ndiscloscdthe following: {' F;D
"l
a. Thefollowingwereomittedat the end of eachyear:
l\- 'Atna'
arl1 r010 2@ 200s .
Accruedincome n;7ao 9,300 8;400 7,050
Prepayments t4,254 li,too 9,300 !2,750
Unearnedincome L4,4AA 13,350 1tr,700 1.0,350
Accruedexpenses 13,500 13,050 10,950 8,100

b. Dividends had been declared in 2009 and in 2O10 but were not recordcd until paid the
following year. Dividendsdeclared in December2OLL,but paid and recorded only in
2012amounted to P125,000.

/R\
AUDITING PROBLE]IIS. PAs 8 (zorl BATcH) lilR.SAY\
l'6 trxl Q.:,r - :' ? i, ( t 100 Pr\*+"/t/
\s&z
 R9SA: TheReuiewSchootof Accountancy Page4of 6
t;
|.. :
c. Thecompahyreceivedtransportation e{uipmentasdonationfrom one of its stoCkhofders on
September30, 2010. As of the date of donation,the equipment has a historicdl
cost of
Pt,!z1,OAqa rernaining usefullife of 3 yearsand a fair valueof P360,0O0. The only entry
madeat the date of the donationwasthe entryexpensing whichis the fee paidto
P45,000,
effectthe transferof ownership.

d. Thecompanypurchased a machineworth P405,000on April30, 2008.Thecompanycharged

the purchase to expense.The machinehasan estimatedlife of 3 yeaB. Thecornpanyuses
the straightlinemethodandthe machinehasarnestimatedlifeof 3 years.

e, The physicalcountof the merchandise P96,000and by

inventoryhad beenunderstated'by
P65,75Oat the endof 2009and 2Ol1,respectively.

f . The merchandiseinventories,which were in tfansit at the end of 201.0and 2011 amounting

were not includedin the physicaland were not likewise
and P48,900;respectively
to P51.,000
recordedaspurchases.Thesewere purchased underFOBshippingpoint.
7U
asof December31.,2@8?
C L. What is the corrpctaccumulated,profit
a. 871,35O cty',186,350
b. L,276,35O d. 1,141,350

C 2. What is the correctnet incomefor the year ended December31, 2009?

a. 554,700 y419,7@
b. 323,70b d. 559,650

profit baianceasof bicember 31, 2010?

A 3. What is the correctaccumulated llt(t1,r0
yr721,50O c. 511,500 llot nD
b: 616;5m - - il 36T,5m ts*@)
/J"vwu)
Whatis the correctnet lossfor the yearendedDecenrber 3t,zQtI? (ro o)
a. 177 i45A c. 222,45O ,
d. 267,450 :4:=l
W2,4ss

...,.;!,.Aecotmtiil Pdici€s - gecific principles,bases,conventions,rules and practicesappliedby an

, " :v,."spfify md presenting
in prreparing financialstatements
.: i :'" ,

1',i'.. An entityshaltchar6€an .s€ountingpolicyonly if the chartge:

(a) is requiredbYa Standard,or
(b) statementsprovidingreliableand more relwant inforrnation
resuftsin the financftal

in AccountingPoliqies:
ApptyingChanges '
\

{a) Initial applicationof'a Standard;- applythe transitional'provisfonof the Standard,if

any
-is
(b) lf there no,transitional provision, the new accounting poliry should apply
retrospectively(asif the new accountingpolicyhad alwaysbeen appliedfrom the very
fl p*r. ff startl- ftris is done by restating the profit of the prior year that is presented in the
financialstatementsand adjuiting the openingor beginning balanceof the retained
earningsof the prior year presentedin the financialstatements.
 thange!n AccountineEstimates- an adjustmentof the carryingaffiquff of an assetor a liability
as a result of.new information or new developmentsand arehot'tfrerefore correctionsof an
error. Qrwrlw MT'fu &,*rh',A

Acc_ounting informationcannotalwaysbe measuredand report€dprecisely:Sometimesfor the

financialstatementsto be reportedon a timely basisfor decisionmaking,accountingdata pften
must be basedon estimatesof future:events.The financialstatementsincorporatethese
estimates, whichare basedoh the bestprofessionaljudgment giventhe informationavailableat
that time. At a laterdate,however,additionalexperience or new factssometimesmakeit clear
that the estimatesneedto be revisedto reflectthe existingbusiness circumstances.Whenthis
happens,a changein accountingestimateshappbns.ExampleS of areasfor whichchangesin
accounting estiinatesaremadeincfudethe following:
r Uncollectiblereceivables
. I Usefullivesof depreciableassets
. Residualvalues for depreciable
assets
Warrantyobligations

The effect of a changein accounting estlmrte $.tl bc rccognired prospcctiyuly by includlq it

in thc profit and loss.

PROBI€M5: TLCo.decidedon lenuary 2,zflllL,to effectthe followingchangerc

in its accounting
policies:

. BADDEBT:Baddebt percentage from ?%b 1A%of aceountsreceivables. TLeo's

receivablebalanceat December31, l-04,u(s,p!.e0,00o,'bnd
the allowanc€for bad
debt accounthasadebitbalanceulPT,CE0

'l h{ value,depreciatedusingSYD,waspurchtcd on Januaryt,z}oLfor P1,15O0O0. As of

fl,tl'
lg January2, IOLL,a changeis madeto Sl-method,and the revisedremaininglife as of
[t$1 the dateof changeis 10years.Residualvalue
remainsat P50,000.
€
?{*'l IZEs*.'
ta/u (uom)
Computefor the following:
hr*- fhr, QLL{L,
t
valueof the accountsreceivableT*Va
1. The ZoLLcarryrng +!gfy-
2. Thbaepreciaiion rorthe.;;;;;r-;;;;; , tfuw
expense It* zw u/ lq7\cD
3. Thecarrying
valueof theequipment
asof Decemb
u, if ,2011is:I, tr,_ -re-
W lr-?to
.'i

PROFLEM 6j PCCo.decidedto changeits depreciationmethodfor its computerhardwere bi^ ',':

straight-lincto rum oil $t FdJ disits beginnirq lanuary 1, 2O11.The computerhardwarehas
a t$% salva3evelue and an cstimateduse{ulllft of 5 years. Thefollowingcomputerpurchases
were madeby FCCo.at the beginningof eachyear, 1ap f
pe ll
t lYt
2008 ' 50,000 ltui &oooo*qa'l.k
T; lst@ tif{d. ,24o
tttt 2oo9
2010
50,000
' 40,000 J't?r2
IDaE r7e/-h'
jrJ r 10l.l(
laro
)w lzn
qN ,firP

lv'ttN Jilr,trl ,zfr tzst'.o >>-

Ov
7 ,o^pute for thefbttowing: - _(ffi frtr w-zrcn
-r4'?12
6=5
'tll tiu Vltv .r-

ft@ ;
t'L-
.,,; {ttf\ W lffL)
i r ti ul
ln+a "

ffi
7 \

of AccounbncY ,*
R;SA: The Reulew*hol

PROBLEM7: H Co. has been usini the ftFO method of inventory costing since it began
in 2009. In 2011 the company changed to the weiglrted everage methsd. The
following are the December31 inventory balancesunder each method:
-perations
t,.tO Weighted Avera$eL0u Acdrt
^iaa
2009 500,000 565,(p0 w wsNo f
ll0r @r
'.ililloF
#

Theeffecton retainedearningsasa resultof makingthe charqeonJs.uarY.U011

a7 ,lll0,O0gincrease c. 6,mdecrease
b. 1.04,000 increase increase
d. 21,4,CI04

lu,. yv
"yr
td'
KX {y

'

I
?
I
t \
t'

a
.,

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