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AUDIT OF LIABILITY (cpar oct 2013 ap-7402)

1. Eng-eng company has is a manufacturer and a retailer of household furnitures. Your audit of
the companys financial statements for the year ended dec 31 2013, discloses the following
debt obligations of the company at the end of its reporting period. Eng-engs financial
statements are authorized for issuance on march 6 2014
1. Eng-eng company has the following three loans payable scheduled to be repaid on
april of the next year
a. The company intends to repay loan for 100,000 when it comes due in april. In the
following oct, the company intends to get a new loan for 150,000 from the same
b. The company intends to refinance loan 2 for 300,000 when it comes due in april.
The refinancing agreement will be signed in aprril
c. The company intends to refinance loan 3 for 500,000 before it comes due in
april. The actual refinancing took place in January
2. A 250,000 short-tem obligation due on march 1 2014, its maturity could be extended
to march 1 2016, provided eng-eng agrees to provide additional collateral. On
February 12 2014, an agreement is reached to extend the loans maturity to marh 1
3. A short-term obligation of 3,600,000 in the form of notes payable due feb 5 2014.
The company issued 75,000 ordinary shares for P36 per share on January 25 2014.
The proceeds from the issuance plus 900,000 cash, were issued to fully settle the
debt on feb 5 2014
4. A long term obligation of 2,500,000 due on dec 1 2018. On nov 10 2013, eng-eng
breaches the covenant on its debt obligation and the loan becomes payable on
demand. An agreement is reached to provide a waiver of the breached on dec 11
5. A long term obligation of 4,000,000. The loan is maturing over 4-years in the amount
of 1,000,000 per year. The loan is dated sept 1 2013, and the first maturity date is
sept 1 2014
6. A debt obligation of 700,000 maturing on dec 31 2016. The debt os callable on
demand by the lender at any time
1. What amount of current liabilities should be reported on the dec 31 2013 statement of
financial position?
a. 6,450,000
2. What amount of noncurrent liabilities should be reported on dec 31 2013 statement of
financial position
a. 3,000,000
b. 5,500,000
d. 6,000,000
In connection with the audit of tiki-tiki company for the year ended dec 31 2013, you are called upon
to verify the accounts payable transaction. You find that the company does not make use of a voucher
register but enters all merchandise purchases in a purchase journal, from shich postings are made to
a subsidiary accounts payable ledger. The subsidiary ledger balance of 1,500,000 as of dec 31 2013
agrees with the accounts payable on the companys general ledger. The analysis of the accounts
discloses the following:
Trade creditors, credit balances
Trade creditors, debit balances

Estimated warranty on products sold

Customers deposits
Due to officers and shareholders for advances
Goods received on consignment at selling price
(offsetting debit made purchases)
A further analysis of the trade creditors debit balances indicates:



Miscellaneous debit balances prior to 2009
No information available due to loss of
Record on fire
manila co- merchandise return for credit
But the company is now out of business
cebu corp merchandise returned, but cebu
Says never received
jolo distrubutors allowance granted on
Defective merchandise after the invoice
Was paid
bulacan co overpayment of invoice
advances to zambales co. this company agrees
to supply certain articles on a cost-plus basis 24,000
goods returned for credit and adjustment
on price after the invoices were paid; credit
memos from suppliers not yet received




Your next step to check the invoices in both the paid and the unpaid invoices files against ledger
accounts. In this connection, you discover an invoice from atlas co of 45,000 dated dec 12 2013
marked duplicate which was entered in the purchases journal in jan 2014 . upon inquiry, you discover
that the merchandise covered by this invoice was received and sold but that the original invoice
apparently has not been received
In the bank reconciliation papers, there is a notation that five checks totaling 63,000 were prepared
and entered in the cash disbursement journal of dec but there checks were not used until jan 10 2014
The inventory analysis summary discloses goods in transit of 5,000 at dec 31 2013 not taken up by
the company under audit during year 2013. These goods are included in your adjusted inventory.
1. The accounts payable trade balance at dec 31 2013 should be
a. 1,471,000
b. 1,614,000
c. 1,214,000
d. 1,477,000
2. The net adjustment to purchases should include a
a. net debit of 51,000
b. net credit of 41,000
c. net debit of 10,000
d. net debit of 73,000
3. the entry to adjust the accounts payable account for those accounts with debit balances
should include a debit to miscellaneous losses of
4. the entry to adjust accounts payable account for those accounts with debit balace should
include a debit to
a. miscellaneous losses of 23,000
b. advances to suppliers of 24,000

c. suppliers debit balances of 18,000

d. purchases of 21,000
5. auditor accounts confirmation of accounts payable balances at the end of the reporting period
be unnecessary because
a. there is likely to be other reliable external evidence to support the balances
b. correspondence with the audit clients attorney will reveal all legal action by vendors for
c. this is a duplication of cut off test
d. accounts payable at the end of the reporting period may not be paid before the audit is
Feel na feen inc has been producing quality appliances for more than two decades. The companys
fiscal year runs from april 1 march 31. The following information relates to the obligations of feel na
feel as of march 31 2013
Feel na feel issued 10,000,000 of 10% bonds on july 1 2011. The prevailing market rate of interest
for these bonds was 12% on the date of issue. The bond will mature on july 1 2021. Interest was paid
semiannually on july 1 and jan 1. Feel na feel uses the effective interest rate method to amortize bond
premium or discount.
Feel na feel has signed several long term notes with financial institution. The maturities of these notes
are given in the schedule below. The total unpaid interest for all these notes amounts to 600,000 on
march 31 2013
Due date
amount due
April 1 2013
July 1 2013
Oct 1 2013
Jan 1 2014
April 1 2014 march 31 2015
April 1 2015 march 31 2016
April 1 2016 march 31 2017
April 1 2017 march 31 2018
April 1 2018 march 31 2019
P 7,000,000
Feel na feel has a one-year product warranty on some selected items in its product line. The estimated
warranty liability on sales made during 2011-2012 fiscal year and still outstanding as of march 31
2012 amounting to 180,000. The warranty costs on sales made from april 1 2013 through march 31
2013 are estimated at 520,000. The actual warranty cost incurred during the current 2012-2013
fiscal t=year are as follows:
Warranty claims honored on 2011-2012 sales
Warranty claims honored on 2012-2013 sales
Total warranty claims honored
P 358,000
Accounts payable for suppliers, goods and services purchased on open account amout to
740,000 as of march 31 2013


Accrued salaries and wages
Withholding taxes payable
Other payroll deductions
Other accruals not separately classified amount to 150,000 as of march 31 2013
On march 15 2013, feel na feel board of directors declared a cash dividend of .20 per
common share and a 10% ordinary share dividend. Both dividends were to be distributed on
april 12 2013 to the ordinary shareholders of the record at the close of business on march
31 2013. Data regarding feel na feel ordinary shares are as follows:
Par value
No. of shares issued and outstanding
Market values of ordinary shares:
March31 2013
March 31 2013
April 12 2013

5.00 per share


22.00 per share

21.50 per share
22.50 per share

1. How much was received by feel na feel from the bonds issued on july 1 2011?
a. 8,852,960
b. 10,000,000 c.10,500,000
2. On march 31 2013, feel na feel statement of financial position would report total current
liabilities of
a. 5,286,000
b. 4,386,000
c. 5,336,000
d. 5,642,000
3. On march 31 2013 feen na feel statement of financial position would report a total
noncurrent liabilities of
a. 14,389,350 b. 14,352,217 c. 14,370,783 d. 14,252,960
On January 1 2012 wizards corporation issued 2,000 of its 5-year 1,000 face value, 11% bonds dated
bonds dated January 1 at an effective annual interest rate (yield) 9%. Interest is payable each dec 31
wizards uses the effective interest method of amortization. On dec 31 2013 the 2,000 bonds were
extinguished early through acquisition in the open market by wizards for 1,980,000 plus accrued
On july 1 2012 wizard issued 5,000 of its 6-year ,1,000 face value, 10% convertible bonds at par.
Interest is payable every june 30 and dec 31. On the date of issue, the prevailing market interest rate
to similar debt without the conversion option is 12%. On july 1, 2013 an investor in wizards convertible
bonds tendered 1,500 bonds for conversion into 15,000 shares of wizards ordinary shares, which had
a fair value of 105 and a par value of 1 at the date of conversion.
1. The issue price of 2,000 5-year, P1,000 face value bonds on jan 1 2012 is
a. 2,155,560
2. Carrying value of the 2,000 5-year, P1,000 face value bonds on dec 31 2012 is.
a. 1,898,400
b. 2,129,500
d. 2,121,100
3. The gain on early retirement of bonds on dec 31 2013 is
a. 20,000
d. -0-

4. The carrying value of the 5,000 6-year,P1,000 face value bonds on dec 31 2012 is
a. 4,605,800
c. 4,732,875
d. 4,615,400
5. The conversion of the 1,500 6-year, 1,000 face value bonds on july 1 2013 will increase
share premium by
a. 1,485,000
b. 1,374,600
d. 1,377,697
The following data were obtained from the initial audit of BIBI company
15%, 10year, bonds payable dated January 1 2012
Cash proceeds from issue on jan 1 2012
of 1,000, P1,000 bonds. The market rate
of interest on the date of issue was 12%
*bond interest expense
Cash paid 1/2/13
Cash paid
Accrual 12/31/13
*accrued interest on bonds
*treasury bonds
Redemption price and interest to date
on 200 bonds permanently retired
on 12/31/13
based on the preceding information, determine the following:
1. Carrying value of bonds payable at dec 31 2013
a. 831,110
b. 800,000
c. 15,000
2. Loss on bond redemption
c. 15,000
d. 34,683
3. accrued interest on bonds at dec 31 2013
b. 135,000
c. 60,000
d. 52,500
4. bond interest expense for the year ended dec 31 2013
a. 150,000
b. 139,174
c. 69,745
d. 160,826

Select the best answer for each of the following
1. In auditing accounts payable, an auditors procedures most likely will focus primarily on
managements assertion of
a. Existence
c. completeness
b. Presentation and disclosure
d. valuation and allocation
2. An auditor performs a test to determine whether all merchandise for which the client was
billed was received. The population for this test consist of all
a. Merchandise received







b. Vendors invoices
c. Canceled checks
d. Receiving reports
The primary audit test to determine if accounts payable ate valued properly is
a. Confirmation of accounts payable
b. Vouching accounts payable to supporting documents
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the balance sheet
Which of the following procedures is least likely to be performed before the balance sheet
a. Observation of inventory count
b. Testing of internal control over cash
c. Search of unrecorded liabilities
d. Confirmation of receivables
The audit assistant found a purchase order for a regular supplier in the amount of 5,500. The
purchases order was dated after receipt of goods. The purchasing agent had forgotten to
issue the purchase order. Also, a disbursement of 450 for materials did not have a receiving
report. The assistant wanted to select additional purchase orders for investigation but was
unconcerned about lack of receiving report. The audit director should
a. Agree with the assistant because the amount of purchases order exception was
considerably larger than the receiving report exception
b. Agree with the assistant because the cash disbursement clerk had been assured by the
receiving clerk that the failure to fill out a report didnt happen very often
c. Disagree with the assistant because two problems have an equal risk of loss associated
with them
d. Disagree with the assistant because the lack of a receiving report has a greater risk of
loss associated with it.
When using confirmation to provide evidence about completeness assertion for accounts
payable, the appropriate population most likely is
a. vendors with whom the entity has previously dine business
b. amounts recorded in the accounts payable subsidiary ledger
c. payees of checks drawn in the month after the year end
d. invoices filed in the entities open invoice file
which of the following is a substantive test that an auditor is most likely to perform to verify
the existence and valuation of recorded accounts payable
a. Investigating the open purchase order file to ascertain that pre-numbered purchase orders
are used and accounted for.
b. Receiving the clients mail, unopened , for a reasonable period of time after year end to
search for unrecorded vendors invoices
c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders
and receiving reports.
d. Confirming accounts payable account balances with known supplies who have zero
Only one of the four statements which compare confirmation of accounts payable with
suppliers and confirmation of accounts receivable with debtors is false. The false statement
is that
a. Confirmation of accounts receivable with debtors is more widely accepted auditing
procedure than is confirmation of accounts payable with suppliers.
b. Statistical sampling techniques are more widely accepted in the confirmation of









accounts payable than the confirmation of accounts receivable

c. As compared with the confirmation of accounts receivable, the confirmation of accounts
payable will tend to emphasize accounts with zero balances at the balance sheet date.
d. It is less likely that the confirmation request sent to the supplier will show the amount
owned than that request sent to the debtor will show the amount due
When title to merchandise in transit has passed to the audit client the auditor engage in the
performance of a purchase cut off will encounter the greatest difficulty in gaining assurance
with respect to the
a. Quantity
Which of the following audit procedure is least likely to detect an unrecorded liability
a. Analysis and recomputation of interest expense
b. Analysis and recomputation of depreciation expense
c. Mailing of standard bank confirmation forms
d. Reading of the minutes of meetings of the board of directors
Unrecorded liabilities are most likely to be found during the review of which of the following
a. unpaid bills
b. shipping records
c. bills of lading
d. unmatched sales invoice
which of the following audit procedures is best for identifying trade accounts payable
a. reviewing cash disbursements recorded subsequent to the balance sheet date to
determine whether the related payables apply to prior period
b. investigating payables recorded just prior to and just subsequent to the balance sheet
date to determine whether they are supported by receiving reports
c. examining unusual relationships between monthly accounts payable balances and record
cash payments
d. reconciling vendors accounts statement to the file of receiving reports to identify items
received just prior to the balance sheet date
in verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor is
most interested in examining the purchase
a. journal
b. requisitions
c. orders
d. invoices
which of the following procedures relating to the examination of accounts payable could the
auditor delegate entirely to the clients employees
a. test footings in the accounts payable ledger
b. reconcile unpaid invoices to vendors statements
c. prepare a schedule of accounts payable
d. mail confirmations of selected account balances
an auditors purpose in reviewing the renewal of note payable shortly after the balance sheet
date most likely is to obtain evidence concerning management assertion about
a. existence
b. presentation and disclosure
c. completeness
d. valuation
an auditors program to audit long-term debt should include steps that require
a. examining bonds trust indentures





b. inspecting the accounts payable subsidiary ledger

c. investigating credits to the bond interest income account
d. verifying the existence of the bond holders
in an audit of accounts payable, an auditor expects the trust indentures to include the
a. auditees debt-to-equity ratio at the time of issuance
b. effective yield of the bonds issued
c. subscription list
d. description of the collateral
in auditing long term bonds payable, an auditor most likely will
a. perform analytical procedures on the bond premium and discount accounts
b. examine documentation of assets purchase with bond proceeds or liens
c. compare interest with the bond payable for reasonableness
d. confirm the existence of individual bondholders at year-end
the audit procedures used to verify accrued liabilities differ from those employed for the
verification of accounts payable because
a. accrued liabilities usually pertain to services of a continuing nature while accounts
payable are the result of completed transactions
b. accrued liability balances are less material than accounts payable balances
c. evidence supporting accrued liabilities is nonexistent while evidence supporting accounts
payable is readily available
d. Accrued liabilities at year-end will become accounts payable during following year.
The auditor is most likely to verify accrued commissions payable in conjunction with the
a. Sales cutoff test
b. Verification of contingent liabilities
c. Review of post balance sheet date disbursement
d. Examination of trade accounts payable