Applied Auditing 2
Applied Auditing 2
Applied Auditing 2
1. When an entity has few property and equipment transactions during the year, the
continuing auditor usually carries out
a. A complete review of the related internal controls and performs test of the
controls on which the entity relies.
b. A complete review of the related internal controls and performs analytical
review tests to verify current-year additions to property and equipment.
c. A preliminary review of the related internal controls and performs a thorough
examination of the balances at the beginning of the year.
d. A preliminary review of the related internals controls and performs extensive
tests of current-year property and equipment transactions.
2. Which of the following audit procedures is a test of control over non-current assets?
a. Agreeing the totals on the non-current asset register to the general ledger.
b. Performing a proof in total for depreciation.
c. Inspecting purchase orders for authorizing signatures
d. Inquiring of management their plans for future capital expenditures.
3. The audit procedure of analyzing the PPE additions for the year is designed primarily to
provide evidence of which financial statement assertion over PPE
a. Valuation and Rights
b. Completeness and Valuation
c. Existence and Rights
d. Existence and valuation
4. In auditing plant and equipment balances, an auditor requests a schedule of repairs and
maintenance expense for the period. This procedure is designed to obtain evidence
concerning management assertions of
a. Existence
b. Completeness
c.Valuation
d. Rights and obligation
5. The audit procedure of analyzing the repairs and maintenance accounts is designed
primarily to provide evidence in support of the audit proposition that all
a. Expenditures for fixed assets have been recorded in the proper period.
b. Capital expenditures have been properly authorized.
c. Noncapitalizable expenditures have been properly expensed.
d. Expenditures for fixed assets have been capitalized.
7. Equipment acquisitions that are misclassified as maintenance expense most likely would
be detected by an internal control that provides for
a. Segregation of duties of employees in the accounts payable department.
b. Independent verification of invoices for disbursements recorded as equipment
acquisitions.
c. Investigation of variances within a formal budgeting system.
d. Authorization by the board of directors of significant equipment acquisitions.
8. Which of the following audit procedures is valid test for the existence of tangible non-
current asset?
a. Inspecting title deeds to buildings.
b. Agreeing figures on the valuation certificate for a building to the general
ledger.
c. Agreeing a sample of assets selected by physical inspection back to the non-
current asset register.
d. Physically inspecting a sample of assets selected from the non-current asset
register.
9. Analysis of which account is least likely to reveal evidence relating to recorded retirement
of equipment?
a. Accumulated depreciation.
b. Insurance expense.
c. Property, plant and equipment.
d. Purchase returns and allowances.
10. Which of the following explanations most likely would satisfy an auditor who questions
management about significant debits to the accumulated depreciation accounts?
a. The estimated remaining useful lives of plant assets were revised upward.
b. Plant assets were retired during the year.
c. The prior year’s depreciation expense was erroneously understated.
d. Overhead allocations were revised at year-end.
11. In testing for unrecorded retirements of equipment, an auditor most likely would:
a. Select items of equipment from the accounting records and then locate them
during the plant tour.
b. Compare depreciation journal entries with similar prior year entries n search of
fully depreciated equipment.
c. Inspect items of equipment observed during the plant tour and then trace them
to the equipment subsidiary ledger.
d. Scan the general journal for unusual equipment additions and excessive debits
to repairs and maintenance accounts.
12. The auditor is most likely to seek information from the plant manager with respect to the:
a. Adequacy of the provision for uncollectible accounts.
b. Appropriateness of physical inventory observation procedures.
c.Existence of obsolete machinery.
d. Deferral of procurement of certain necessary insurance coverage.
13. Which of the following procedures would an auditor most likely perform in obtaining
evidence about propriety of PPE additions?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prioer period
balances.
d. Confirming ownership and corroborating transactions through inquiries with
the management.
14. Which of the following procedures would an auditor most likely perform in obtaining
evidence about valuation of PPE additions?
a. Inspecting documents and physically examining assets.
b. Recomputing the depreciation based on the company’s depreciation policy.
c. Gathering evidence about the reasonableness of the depreciation policy.
d. Confirming ownership and corroborating transactions through inquiries with
the management.
15. In testing the reasonableness of the client’s depreciation policy, which of the following will
be the least likely source of evidence?
a. Industry practice in depreciating and amortizing PPE.
b. Schedule of depreciation computation in the past years with prior years PPE
rollforward analysis.
c. Subsequent events.
d. Confirming ownership and corroborating transactions through inquiries with
the management.
16. An auditor may conclude that depreciation charges are overstated if he or she notes
a. Large amounts of fully depreciated assets.
b. Continuous trade-ins of relatively new assets.
c. Excessive recurring losses on retired assets.
d. Insured values greatly in excess of book values.
17. Which of the following techniques for collecting audit evidence is generally accepted to be
the most efficient from the perspective of the auditor when testing for the completeness
and accuracy of the depreciation charge for the year?
a. Recalculation.
b. Reperformance.
c. Analytical procedures.
d. Confirmation.
PROBLEM 2:
Additional information:
A portion of the building site had been temporarily used by Bacolod to operate a car
park while the building was being constructed. A total of P650,000 was earned by
Bacolod from his incidental activity.
Proceeds from sale of produce from the testing done on the machinery and equipment
amounted to P65,000.
Requirements:
PROBLEM 3:
Miram Company, was organized in early July of 2019. In your audit of the company’s books,
you find the following land, building and equipment account:
Audit notes:
The building acquired on July 2, 2019, had a fair value of P450,000 while the land was
currently appraised at P1,800,000.
P50,000 of the option money paid were for properties not acquired.
Requirements:
1. How much is the correct balance of the Land account as of December 31, 2019?
2. How much is the correct balance of the Building account as of December 31, 2019?
PROBLEM 4:
ABC Corporation started its operations at the beginning of 2019. In your audit of ABC
Corporation’s financial statements the following PPE schedule was presented to you by its
accountant.
Land P10,000,000
Building 6,500,000
Equipment 6,000,000
Furniture and Fixtures 3,500,000
Audit notes:
a. The company acquired the land at the beginning of the year at a total purchase price
of P10,000,000. The term of the acquisition calls for a 20% downpayment and the
issuance of a 5 year non-interest bearing note for the balance. The note is payable
equally at the end of each year starting December 31, 2019. The prevailing market
rate of interest on this date was at 10%.
b. The building was constructed by XYZ constructions which cost the said construction
company a total of P6.5M. The construction started even before the commencement
of operations in 2019 and was completed in time for the company’s inception of
operation at the beginning of 2019. The agreement with the said construction
company calls for the issuance of 100,000 of ABC’s own shares in exchange of the
constructed building. The prevailing fair value of the shares on this date was P70 per
share.
c. Three equipment were acquired during the year by the company is separate occasion
as follows:
- Equipment A was acquired on account at the beginning of January at P2,000,000
payable three months from date of purchase. A 10% discount on the price shall
be provided if payment was made within January. Due to unavailability of cash,
the company paid the amount due at the end of the March.
- Another Equipment (C), which was not recorded in the company’s books, was
received from one of its major stockholders on September 1. The equipment had
a prevailing fair value on the same date at P1,200,000. The company incurred
legal fees in processing the donation at P100,000 which was charged to operating
expense.
d. Various Furniture and Fixtures were acquired at the beginning of the year from a
single supplier with the following terms of payments:
Cash P1,000,000
3 year Non interest bearing note 2,000,000
10,000 shares at par P50 500,000
It was ascertained that the total cash price of the various furniture and fixtures was at
P3,200,000. The prevailing market rate of interest on similar debt security as the note
issued was at 5%.
e. Depreciation on the assets are yet to be made by year end. You have ascertained that
the following depreciation policies shall be appropriate in the circumstance:
Depreciation Method Useful life
Building 150% Declining Balance 15 years.
Equipment SYD 5 years
Furniture and Fixtures Straight-Line 10 years
The salvage value of the asset was estimated at 10% of its initial cost.
Requirements:
1. Determine the depreciation expense for the following assets for 2019:
a. Building
b. Equipment A
c. Equipment B
d. Equipment C
e. Furniture and Fixture
2. Determine the correct carrying values of the following assets as of December 31,
2019:
a. Land
b. Building
c. Equipment A
d. Equipment B
e. Equipment C
f. Furniture and Fixture
PROBLEM 5:
CASE 1:
ABC CORP. borrowed P1,000,000 from BPI Inc. specifically to finance the construction of its
building. The proceeds from the borrowing were received on January 2, 2019 and were
supported by a 5 year, 12% note payable. The construction commenced on July 1, 2019 and
was substantially completed by November 30, 2019. The unused proceeds from the loan were
reinvested on a monthly basis all throughout the year to earn 5% annual interest. The
following were used from the proceeds of the loan (assume at the beginning of each months)
July P100,000
August 150,000
September 300,000
October 200,000
November 150,000
Requirements:
1. How much is the capitalizable borrowing cost?
CASE 2:
Pan Corp. contracted Nat Inc. on January 1, 2019 to construct building for P93,000,000 on
land Pan Corp. purchased a couple of years back. The contract provides that Pan Corp. is to
make five payments in 2019, with the last payment to be made upon completion. The
building was completed on November 30, 2019.
January 1 P8,000,000
April 1 19,000,000
July 31 24,400,000
October 1 27,600,000
November 30 14,000,000
Pan Corp. made the following arrangements with financing companies in 2019:
12%, P30M loan dated January 1, 2019, with simple interest. Both principal
and interest are payable on December 31, 2024. This loan related specifically
to the building project.
10%, 10-year, P24M note dated December 31, 2019, with simple interest;
interest payable annually on December 31. The loan was for general financing
purposes including the partial financing of the construction.
12%, 5-year. P28M note dated December 31, 2019, with simple interest;
interest payable annually on December 31. The loan was for general financing
purposes including the partial financing of the construction.
Requirements:
1. The amount of interest to be capitalized in 2019?
3. The carrying value of the building as of November 30, 2019 or its initial cost?
PROBLEM 6:
Information pertaining to Ganado Corporation’s property, plant and equipment for 2019 is
presented below:
The salvage value of the assets is immaterial. Dep’n is computed to the nearest month.
On January 1, Ganado purchased a new car for P10,000 cash and trade-in of a
two-year-old car with a cost of P9,000 and a book value of P2,700. The new
car has a cash price of P12,000; market value of trade-in is not known
2. What is the correct accumulated depreciation as of Dec. 31, 2019 for the ff. PPE items:
a. Building
b. Machinery and equipment
c. Automotive equipment
PROBLEM 7:
In the course of your audit of property, plant and equipment of Malik Corp. for the period
ended December 31, 2019, you have decided to review property additions to determine
propriety of the items capitalized and the company’s repairs and maintenance expense
accounts to determine whether there are capitalizable cots which were expensed by the
company:
MALIK CORP.
Property Additions
For the period ended December 31, 2019
Additions to Buildings:
Replacement of the old wooden roof with
a fireproof brick roof P300,000
Repainting of the plant buildings 60,000
Routinary repairs on buildings 50,000 P410,000
Additions to Equipment:
Replacement of minor gears P20,000
Replacement of retired factory equipment 500,000
Rearrangement costs of a group of factory
equipment to ensue greater efficiency in
production 120,000* 740,000
Total amount capitalized
MALIK CORP.
Repairs and Maintenance Expense
For the period ended December 31, 2019
PROBLEM 8:
Bonbon Company purchased a manufacturing plant building on January 2010, for P5.2M. The
building has been depreciated using the straight-line method with 30 year useful life and a
10% residual value.
Bonbon’s manufacturing operations has experienced significant downturn for the past two
years because of loss of significant portion of the market because the competitor has
introduced a more superior product that the company’s.
On December 31, 2019, Bonbon estimates that the building has a remaining useful life of 15
years, and that the net cash flows from the use of the building will be P200,000 per year with
no change in the estimated salvage value. The fair value less cost to sell of the asset was set
at P1,560,000.
Requirements:
1. What is the carrying value of the asset on December 31, 2019 before impairment loss
testing?
PROBLEM 9:
Legaspi Corp. is assessing one of its operating departments for impairment as of December
31, 2019. The operating department comprise of several group of assets with aggregate
carrying amount of P7,380,000 as of the testing date.
Individual cash flows related to each asset comprising the department cannot be ascertained
thus you suggested that the company treat the operating department as a single cash
generating unit for the purpose of applying PAS 36, Impairment of assets. A cash generating
unit as defined by the said standards is the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows from other assets or group of
assets.
The following presents the estimated cash flows from the continued operations of the
department:
The fair value of the group of assets net of estimated disposition costs was determined to be
P5,070,000. The prevailing pre-tax discount rate appropriate for this analysis is 5%.
PROBLEM 10:
On December 31, 2019, the machine was appraised as having a gross replacement cost of
P1,500,000. NAIA applies the revaluation model in valuing this class of property, plant, and
equipment after its initial recognition.
Requirements:
1. How much is the depreciation expense in 2020?
2. How much is the balance of the revaluation surplus account on December 31, 2020
assuming that the company uses the “Piecemeal basis” of transferring the revaluation
surplus to retained earnings?
4. Assuming that the machinery was sold on December 31, 2021 at P800,000, what is
the gain or loss to be recognized in the profit or loss for 2021 and how much in revaluation
surplus should be transferred as a “lump-sum to retained earnings?
5. Assuming that the fair market value of the equipment is P1.5M on December 31,
2019, what is the carrying value of the revaluation surplus on December 31, 2020 under
“Piecemeal basis” of transferring the revaluation surplus to retained earnings?
PROBLEM 11:
On December 31, 2017, Pepsi Corp. subjected to impairment test a building which was the
company’s factory site. Because of the expected decline the demand for the company’s
product, the company deemed it necessary to test the said building for possible impairment
loss. Data pertinent to the building on this date were as follows:
Requirements:
1. How much loss on impairment is recognized in 2017?
4. How much is the depreciation expense recognized in 2020 under the cost model of
valuing the property?
5. How much is the depreciation expense recognized in 2020 under the appraisal value
model of valuing the property?
PROBLEM 12:
Ram Corp. purchased a machinery on January 1, 2017 for P5,000,000. The same had an
expected useful life of 10 years. Straight-line depreciation method is in place for similar
items. On January 1, 2019, the asset is appraised as having a sound value of P4,500,000. On
January 1, 2022, the asset has a fair market value of P1,800,000.
1. How much is credited to the revaluation surplus as a result of the revaluation in 2019?