CPA REVIEW SCHOOL OF THE PHILIPPINES AP 9402-1
Manila
AUDITING PROBLEMS
CPA Review
AUDIT OF LIABILITIES
(Part 1 of 2)
PROBLEM 1 – KISAP COMPANY
At December 31, 2023, KISAP COMPANY’s liabilities include the following:
1. P5 million of 10% notes are due on March 31, 2028. The financing agreement contains a
covenant that requires Kisap to maintain current assets at least equal to 200% of its current
liabilities. As of December 31, 2023, Kisap has breached this loan covenant. On February 10,
2024, before Kisap’s financial statements are authorized for issue, Kisap obtained a period of
grace from Mayumi Bank until January 31, 2025, having convinced the bank that the
company’s normal 3 to 1 ratio of current assets to current liabilities will be reestablished
during 2024.
2. P7.5 million of noncancelable 12% bonds were issued at face value on September 30, 2002.
The bonds mature on August 31, 2024. Kisap expects to have sufficient cash available to
redeem the bonds at maturity.
3. P10 million of 10% bonds were issued at face value on June 30, 2004. The bonds mature on
June 30, 2033, but bondholders have the option to call (demand payment on) the bonds on
June 30, 2024. However, the call option is not expected to be exercised, given prevailing
market conditions.
What portion of Kisap Company’s debt should be reported as a noncurrent liability?
A. P5 million C. P10 million
B. P15 million D. P 0
PROBLEM 2 – FEELING COMPANY
FEELING COMPANY has been producing quality appliances for more than two decades. The
company’s fiscal year runs from April 1 to March 31. The following information relates to the
obligations of Feeling as of March 31, 2023.
BONDS PAYABLE
Feeling issued P10,000,000 of 10% bonds on July 1, 2021. The prevailing market rate of interest
for these bonds was 12% on the date of issue. The bonds will mature on July 1, 2031.
Interest is paid semiannually on July 1 and January 1. Feeling uses the effective interest rate
method to amortize bond premium or discount.
NOTES PAYABLE
Feeling has signed several long-term notes with financial institutions. The maturities of these
notes are given in the schedule below. The total unpaid interest for all of these notes amounts
to P600,000 on March 31, 2023.
Due Date Amount Due
April 1, 2023 P 400,000
July 1, 2023 600,000
October 1, 2023 300,000
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CPAR - MANILA AP 9402-1 – AUDIT OF LIABILITIES
January 1, 2024 300,000
April 1, 2024 - March 31, 2025 1,200,000
April 1, 2025 - March 31, 2026 1,000,000
April 1, 2026 - March 31, 2027 1,400,000
April 1, 2027 - March 31, 2028 800,000
April 1, 2028 - March 31, 2029 1,000,000
P 7,000,000
ESTIMATED WARRANTIES
Feeling has a one-year product warranty on some selected items in its product line. The estimated
warranty liability on sales made during the 2021-2022 fiscal year and still outstanding as of March
31, 2022, amounted to P180,000. The warranty costs on sales made from April 1, 2022, through
March 31, 2023, are estimated at P520,000. The actual warranty costs incurred during the current
2022-2023 fiscal year are as follows:
` Warranty claims honored on 2021-2022 sales P 180,000
Warranty claims honored on 2022-2023 sales 178,000
Total warranty claims honored P 358,000
OTHER INFORMATION
1. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to
P740,000 as of March 31, 2023.
2. PAYROLL RELATED ITEMS
Accrued salaries and wages P 300,000
Withholding taxes payable 94,000
Other payroll deductions 10,000
3. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31, 2023.
4. DIVIDENDS
On March 15, 2023, Feeling’s board of directors declared a cash dividend of P0.20 per ordinary
share and a 10% ordinary share dividend. Both dividends were to be distributed on April 12,
2023, to the ordinary shareholders of record at the close of business on March 31, 2023. Data
regarding Feeling ordinary shares are as follows:
Par value P 5.00 per share
Number of shares issued and outstanding 6,000,000 shares
Market values of ordinary shares:
March 15, 2023 P22.00 per share
March 31, 2023 21.50 per share
April 12, 2023 22.50 per share
1. How much was received by Feeling from the bonds issued on July 1, 2021?
A. P8,852,960 B. P10,000,000 C. P10,500,000 D. P10,647,040
2. On March 31, 2023, Feeling’s statement of financial position would report total current
liabilities of
A. P5,286,000 B. P4,386,000 C. P5,336,000 D. P5,642,000
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CPAR - MANILA AP 9402-1 – AUDIT OF LIABILITIES
3. On March 31, 2023, Feeling’s statement of financial position would report total noncurrent
liabilities of
A. P14,389,350 B. P14,352,217 C. P14,370,783 D. P14,252,960
PROBLEM 3 – TOROTOT MUSIC EMPORIUM
TOROTOT MUSIC EMPORIUM carries a wide variety of musical instruments, sound reproduction
equipment, recorded music, and sheet music. To promote the sale of its products, Torotot uses
two promotion techniques—premiums and warranties.
PREMIUMS
The premium is offered on the recorded and sheet music. Customers receive a coupon for each
P10 spent on recorded music and sheet music. Customers may exchange 200 coupons and P200
for a power bank. Torotot pays P340 for each power bank and estimates that 60% of the coupons
given to customers will be redeemed. A total of 6,500 power banks used in the premium program
were purchased during the year and there were 1,200,000 coupons redeemed in 2023.
WARRANTIES
Musical instruments and sound reproduction equipment are sold with a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past experience, is 2%
of sales. Replacement parts and labor for warranty work totaled P1,640,000 during 2023.
Torotot uses the accrual method to account for the warranty and premium costs for financial
reporting purposes. Torotot’s sales for 2023 totaled P72,000,000—P54,000,000 from musical
instruments and sound reproduction equipment and P18,000,000 from recorded music and sheet
music. The balances in the accounts related to warranties and premiums on January 1, 2023,
were as shown below:
Inventory of power banks P 399,500
Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000
Based on the preceding information, determine the amounts that will be shown on the 2023
financial statements for the following:
1. Warranty expense
A. P1,640,000 B. P1,080,000 C. P800,000 D. P360,000
2. Estimated liability from warranties
A. P1,920,000 B. P1,080,000 C. P240,000 D. P800,000
3. Premium expense
A. P1,836,000 B. P840,000 C. P756,000 D. P2,189,500
4. Inventory of power banks
A. P399,500 B. P569,500 C. P2,210,000 D. P739,500
5. Estimated premium claims outstanding
A. P364,000 B. P840,000 C. P756,000 D. P672,000
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CPAR - MANILA AP 9402-1 – AUDIT OF LIABILITIES
MULTIPLE CHOICE QUESTIONS
1. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on
management’s assertion of
A. Existence
B. Presentation and disclosure
C. Completeness
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 consists of all
A. Merchandise received
B. Vendors’ invoices
C. Canceled checks
D. Receiving reports
3. The primary audit test to determine if accounts payable are valued properly is
A. Confirmation of accounts payable.
B. Vouching accounts payable to supporting documentation.
C. An analytical procedure.
D. Verification that accounts payable was reported as a current liability in the balance sheet.
4. Which of the following procedures is least likely to be performed before the balance sheet
date?
A. Observation of inventory count.
B. Testing of internal control over cash.
C. Search for unrecorded liabilities.
D. Confirmation of receivables.
5. An audit assistant found a purchase order for a regular supplier in the amount of P5,500.
The purchase order was dated after receipt of goods. The purchasing agent had forgotten
to issue the purchase order. Also, a disbursement of P450 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 the purchase 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 didn’t 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.
6. 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 done 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 entity’s open invoice file.
7. 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 client’s mail, unopened, for a reasonable period of time after year end to
search for unrecorded vendor’s invoices.
C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders
and receiving reports.
D. Confirming accounts payable balances with known suppliers who have zero balances.
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CPAR - MANILA AP 9402-1 – AUDIT OF LIABILITIES
8. Unrecorded liabilities are most likely to be found during the review of which of the following
documents?
A. Unpaid bills
B. Shipping records
C. Bills of lading
D. Unmatched sales invoices
9. Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
A. Reviewing cash disbursements recorded subsequent to the balance sheet date to
determine whether the related payables apply to the 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
recorded cash payments.
D. Reconciling vendors’ statement to the file of receiving reports to identify items received
just prior to the balance sheet date.
10. Which of the following procedures relating to the examination of accounts payable could
the auditor delegate entirely to the client’s 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 for selected account balances.
11. An audit plan for noncurrent liabilities should include steps that require
A. Examining bond trust indentures.
B. Inspecting the accounts payable subsidiary ledger.
C. Investigating credits to the bond interest income account.
D. Verifying the existence of bondholders.
12. In connection with an audit of bonds payable, an auditor expects to find in the trust
indenture the
A. Description of the collateral.
B. The issuer’s debt-to-equity ratio at the time of issuance.
C. Effective yield of the bonds issued.
D. Subscription list.
13. During an audit of an issuer of bonds, the auditor should obtain written confirmation
regarding debenture transactions from the
A. Internal auditors.
B. Trustee.
C. Client’s attorney.
D. Debenture holders.
14. During its fiscal year, a company issued, at a discount, a substantial amount of first-
mortgage bonds. When performing audit work concerning this bond issue, the independent
auditor should
A. Inspect the records maintained by the bond trustee.
B. Trace the net cash received from the issuance to the bonds payable account.
C. Review the minutes for authorization.
D. Confirm the existence of the bondholders.
15. The auditor is most likely to verify accrued commissions payable in conjunction with the
A. Sales cutoff test.
B. Examination of trade accounts payable.
C. Verification of contingent liabilities.
D. Review of disbursements subsequent to the balance sheet date.
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