AUDIT ACTIVITY: PREPARATION OF AUDIT WORKING PAPERS

and UNQUALIFIED AUDIT REPORT

PROBLEM
You were engaged by the Board of Directors of Walastik Corporation of Damasriñas
City, Cavite to audit the company's financial statements for 2020 and 2019. The company's
accountant provided you with the following comparative statements:

WALASTIK CORPORATION
Statement of Financial Position
December 31, 2020
(with comparative data for 2019)
(In Philippine Pesos)

ASSETS 2020 2019

Cash 499,335 179,505
Trading Securities 20,000 -
Accounts Receivable 120,800 50,300
Allowance for Doubtful Accounts (6,040) (2,515)
Inventories 78,300 25,600
Prepaid Expenses 8,700 5,600
Land 400,000 400,000
Building 2,500,000 2,500,000
Accumulated depreciation-Building (250,000) (125,000)
Equipment, Furniture, & Fixtures 1,350,000 1,150,000
Accumulated Depreciation-EF&F (540,000) (230,000)
Held to Maturity securities 200,000 150,000
Intangible Assets 8,000 10,000
TOTAL ASSETS 4,389,095 4,113,490

EQUITIES:
Accounts Payable 345,000 528,400
Accrued Expenses 42,300 40,250
Unearned Revenues 20,000 18,000
Income Tax Payable 109,875 142,920
Long-Term Notes Payable 500,000 600,000

Ordinary Shares 2,500,000 2,000,000

Share Premiums 312,500 250,000
Accumulated Profits 559,420 533,920
TOTAL EQUITIES 4,389,095 4,113,490
WALASTIK CORPORATION
Statement of Comprehensive Income & Accumulated Profits
For the Year Ended December 31, 2020
(with comparative data for 2019)
(In Philippine Pesos)

2020 2019

Sales 8,500,000 7,400,000

Less: Cost of Sales
Inventories, Jan 1 25,600 -
Purchases, N3t 5,177,700 4,560,000
Total Goods Available for Sale 5,203,300 4,560,000
Inventories, Dec. 31 78,300 25,600
Cost of Sales 5,125,000 4,534,400
Gross Profit 3,375,000 2,865,600
Less: Operating Expenses 1,850,000 900,000
Net Operating Profit 1,525,000 1,965,600
Less: Interest Expense 60,000 60,000
Net Income Before Tax 1,465,000 1,905,600
Less: Provision for Income Tax 439,500 571,680
Net Profit 1,025,500 1,333,920
Accumulated Profit, Jan. 1 533,920 -
Total 1,559,420 1,333,920
Less: Dividends 1,000,000 800,000
Accumulated Profit, Dec. 31 559,420 533,920
WALASTIK CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2020
(with comparative data for 2019)
(In Philippine Pesos)

2020 2019
CASH FLOWS FROM OPERATIN ACTIVITIES:
Net Income After Tax 1,025,500 1,333,920
Depreciation Expense-Bulling 125,000 125,000
Depreciation Expense-Equipment, Furniture, & Fixtures 310,000 230,000
Amortization of Intangible Assets 2,000
(Increase)/Decrease in Trading Securities (20,000)
(Increase)/Decrease in Accounts Receivable (70,500) (50,300)
(Increase)/Decrease in Allowance for Bad Debts 3,525 2,515
(Increase)/Decrease in Inventories (52,700) (25,600)
(Increase)/Decrease in Prepaid Expenses (3,100) (5,600)
Increase/(Decrease) in Accounts Payable (183,400) 528,400
Increase/(Decrease) in Accrued Expenses 2,050 40,250
Increase/(Decrease) in Unearned Revenues 2,000 18,000
Increase/(Decrease) in Income Tax Payable (33,045) 142,920
Net Cash Flows from Operating Activities 1,107,330 2,339,505

CASH FLOWS FROM INVESTING ACTIVITIES:

(Increase)/Decrease in Land (400,000)
(Increase)/Decrease in Building (2,500,000)
(Increase)/Decrease in Equipment, Furniture & Fixtures (200,000) (1,150,000)
(Increase)/Decrease in Securities Held to Maturity (50,000) (150,000)
(Increase)/Decrease in Intangible Assets (10,000)
Net Cash Flows from Investing Activities (250,000) (4,210,000)

CASH FLOWS FROM FINANCING ACTIVITIES:

Increase/(Decrease in Long Term Notes Payable (100,000) 600,000
Increase/(Decrease in Ordinary Shares 500,000 2,000,000
Increase/(Decrease in Share Premiums 62,500 250,000
Increase/(Decrease in Dividends (1,000,000) (800,000)
Net Cash Flows from Financing Activities (537,500) 2,050,000

Net Increase (Decrease) in Cash 319,830 179,505

Cash Balance, Jan. 1 179,505
Cash Balance, Dec. 31 499,335 179,505
AUDIT FINDINGS:

1. The audit client was organized in October, 2018 and started operations in January 2, 2019. The
corporation was authorized to issue 500,000 shares, par P10. No external audit was conducted
in the previous year (2019).

2, The cash count on Dec. 31, 2020 included the following:

a. Unreplenished petty cash vouchers for operating expenses, P5,000
b. Customer's check for P17,000 dated January 15, 2021

3. A review of the inventory summary sheets showed the inventory was understated by P2,000
in 2019 and overstated in 2020 by P6,000.

4. The prepaid expenses at the end of 2019 was understated by P1,000; while that of 2020 was
overstated by P4,000

5. The building is estimated to have a useful economic life of 25 years. The equipment, furniture,
and fixtures has a useful life of 8 years. Additional equipment, furniture, & fixtures were
acquired at the start of the year.

6. Accrued expenses were overstated by P3,000 in 2019; but understated by P5,000 in 2020

7. Unearned revenue for 2019 and 2020 was overstated by P5,000 and P800, respectively

8 Sales on account in 2019 for P20,000 were recorded in 2020

9. Purchases on term n/30 in 2020 for P10,000 were recorded in 2019.

10. Allowance for uncollectible accounts is maintained at 5% of accounts receivable ending balance

11. The intangible asset is for a TRADE MARK costing P10,000 acquired on December 31, 2019 with
an estimated life of 5 years.

12. Income tax rate is 30% , the normal corporate income tax (NCIT) rate for newly organized
corporations.
 A B C D E F G H

WALASTIK CORPORATION
Working Statement of Financial Position
As of December 31, 2019 & 2020
2020 Audit Adjustments 2020
Particulars Per Statement Debit Credit Per Audit
15 Cash 499,335 A 22,000 477,335
16 Trading Securities 20,000 20,000
17 Accounts Receivable 120,800 A 17,000 137,800
18 Allowance for Doubtful Accounts (6,040) O 150 N 1,000 (6,890)
19 Inventories 78,300 C 6,000 72,300
20 Prepaid Expenses 8,700 E 4,000 4,700
21 Land 400,000 400,000
22 Building 2,500,000 2,500,000
23 Accumulated depreciation-Building (250,000) F 50,000 (200,000)
24 Equipment, Furniture, & Fixtures 1,350,000 1,350,000
25 Accumulated Depreciation-EF&F (540,000) F 227,500 (312,500)
26 Held to Maturity securities 200,000 200,000
27 Intangible Assets 8,000 8,000
28 Total Assets 4,389,095 4,650,745
29
30 Accounts Payable 345,000 345,000
31 Accrued Expenses 42,300 I 5,000 47,300
32 Unearned Revenues 20,000 K 800 19,200
33 Income Tax Payable 109,875 Q 31,860
34 P 45,375 187,110
35 Long-Term Notes Payable 500,000 500,000
36 Ordinary Shares 2,500,000 2,500,000
37 Share Premiums 312,500 312,500
38 Accumulated Profits,, Dec. 31 533,920 639,795
39 Dividends (1,000,000) (1,000,000)
40 Total 3,363,595 3,550,905
41 Net Income forwarded 1,025,500 1,099,840
42 Total Equities 4,389,095 4,650,745

A B C D E F G H

WALASTIK CORPORATIOIN
Working Statement of Comprehensive Income & Accumulated Profits
For the YearS Ended December 31, 2019 & 2020
2020 Audit Adjustments 2020
Particulars Per Statement Debit Credit Per Audit
54 Sales 8,500,000 J 5,000 K 800
55 L 20,000 8,475,800
56 Less: Cost of Sales
57 Inventories, Jan 1 25,600 B 2,000 27,600
58 Purchases, N3t 5,177,700 M 10,000 5,187,700
59 Total Goods Available for Sale 5,203,300 5,215,300
60 Inventories, Dec. 31 78,300 C 6,000 72,300
61 Cost of Sales 5,125,000 5,143,000
62 Gross Profit 3,375,000 3,332,800
63 Less: Operating Expenses 1,850,000 A 5,000 F 25,000
64 D 1,000 G 141,250
65 E 4,000 O 150
66 H 3,000
67 I 5,000 1,701,600
68 Net Operating Profit 1,525,000 1,631,200
69 Less: Interest Expense 60,000 60,000
70 Net Income Before Tax 1,465,000 1,571,200
71 Less: Income Tax 439,500 Q 31,860 471,360
72 Net Profit 1,025,500 1,099,840
73 Accumulated Profit, Jan. 1 533,920 N 1,000 B 2,000
74 P 45,375 D 1,000
75 F 25,000
76 G 86,250
77 H 3,000
78 J 5,000
79 L 20,000
80 M 10,000 639,795
81 Total 1,559,420 1,739,635
82 Less: Dividends 1,000,000 1,000,000
83 Accumulated Profit, Dec. 31 559,420 739,635

-
 I J K L M N

2019 Audit Adjustments 2019

Per Statement Debit #NAME? Per Audit
179,505 179,505 137,800
- 6890
50,300 G 20,000 70,300
(2,515) I 1,000 (3,515)
25,600 A 2,000 27,600
5,600 B 1,000 6,600
400,000 400,000
2,500,000 2,500,000
(125,000) C 25,000 (100,000) (100,000)
1,150,000 1,150,000
(230,000) D 86,250 (143,750) (143,750)
150,000 150,000
10,000 10,000
4,113,490 4,246,740 (243,750)

528,400 H 10,000 518,400

40,250 E 3,000 37,250
18,000 F 5,000 13,000
142,920 j 45,375 188,295
187,110
600,000 600,000
2,000,000 2,000,000
250,000 250,000

(800,000) (800,000)
2,779,570 2,806,945
1,333,920 1,439,795
4,113,490 - 4,246,740

I J K L M N

2019 Audit Adjustments 2019

Per Statement Debit Credit Per Audit
7,400,000 F 5,000
G 20,000 7,425,000

-
4,560,000 H 10,000 4,550,000
4,560,000 4,550,000
25,600 A 2,000 27,600
4,534,400 4,522,400
2,865,600 2,902,600
900,000 I 1,000
B 1,000
C 25,000
D 86,250
E 3,000 785,750
1,965,600 2,116,850
60,000 60,000
1,905,600 2,056,850
571,680 j 45,375 617,055
1,333,920 1,439,795
- - *

1,333,920 1,439,795
800,000 800,000
533,920 639,795
WALASTIK CORPORATION
Statement of Changes in Equity
For the Year Ended December 31, 2020
(with comparative data for 2019)
(In Philippine Pesos)
Note 2020
Ordinary Share
Share Premium
Balances per book, Jan 1 2,000,000 250,000

Prior Year's Adjustments 4

Adjusted balances, January 1 2,000,000 250,000

Issuance of Share Capital 500,000 62,500

Net Profit for the year

Dividends declared and paid

Balances, December 31 2,500,000 312,500

2019
Ordinary Share
Share Premium
Balances, Jan 1

Issuance of Share Capital 2,000,000 250,000

Net Profit for the year

Dividends declared and paid

Balances, December 31 2,000,000 250,000

 NOTES TO THE FINANCIAL STATEMENTS

Accumulated Note 4: PRIOR YEAR'S ADJUSTMENTS, 1/1/20

Profit Understatement of provision for Bad Debts. 2019 (1,000)
533,920 Understatement of Provisison for incom tax, 2019 (45,375)
Understatement of Inventories, 2019 2,000
105,875 Understatement of Prepaid expenses, 2019 1,000
Overstatement of Depreciaiton - Building, 2019 25,000
639,795 Overstatement of Depreciaiton - EFF, 2019 86,250
Overstatement of Accrued Expenses, 12/31/19 3,000
Overastatement of Unearned Renue, 12/31/19 5,000
1,099,840 sales of 2019 recorded in 2020 20,000
Purchases of 2020 recorded in 2019 10,000
(1,000,000) TOTAL 105,875

739,635

Accumulated
Profit
-

1,439,795

(800,000)

639,795
WALASTIK CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2020
(with comparative data for 2019)
(In Philippine Pesos)

Note 2020 2019

Sales. Net 8,475,800 7,425,000

Cost of Sales 3 (5,143,000) (4,522,400)

Gross Profit 3,332,800 2,902,600

Operating Expenses (1,701,600) (785,750)

Net Operating Income 1,631,200 2,116,850

Interest Expense (60,000) 60,000

Net Income Before Tax 1,571,200 (2,056,850)

Provision for Income Tax. 30% (471,360) (617,055)

Net Profit 1,099,840 1,439,795

NOTES TO THE FINANCIAL STATEMENTS

Note 3: Cost of Goods Sold 2020 2019

Inventory, January 1 27,600 -

Purchases 5,187,700 4,550,000

Total Goods Availalble for Sale 5,215,300 4,550,000

Inventory, December 31 (72,300) (27,600)

Cost of Goods sold 5,143,000 4,522,400

 WALASTIK CORPORATION
Statement of Financial Position
December 31, 2020
(with comparative data for 2019)
(In Philippine Pesos)

Note 2020 2019

ASSETS

Current Assets:
Cash & Cash Equivalents 477,335 179,505
Trading Securities 20,000
Receivables 1 130,910 66,785
Inventories 72,300 27,600
Prepaid Expenses 4,700 6,600
TOTAL 705,245 280,490

Non-Current Asets
Property, Plant, & Equipment, net 2 3,737,500 3,806,250
Held to Maturity Securities 200,000 150,000
Intangible Assets 8,000 10,000
TOTAL 3,945,500 3,966,250

TOTAL ASSETS 4,650,745 4,246,740

LITIES & SHAREHOLDERS' EQUITY

Current Liabilites
Accounts Payable 345,000 518,400
Accrued Expenses 47,300 37,250
Unearned Revenues 19,200 13,000
Income Tax Payable 187,110 188,295
TOTAL 598,610 756,945

Non-Current Liabilities
Long-term Notes Payable 500,000 600,000

TOTAL LIABILITIES 1,098,610 1,356,945

Shareholders' Equity
Ordinary Shares 2,500,000 2,000,000
Share Premiums 312,500 250,000
Accumulated Profits,, Dec. 31 739,635 639,795
TOTAL 3,552,135 2,889,795
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY 4,650,745 4,246,740
NOTES TO THE FINANCIAL STATEMENTS

Note 1: RECEIVABLES 2020 2019

Accounts Receivable 137,800 70,300

Allowance for Doubtful Accounts (6,890) (3,515)
Net Realizable Value 130,910 66,785

Note 2: POPERTY, PLANT, & EQUIPMENT

2020
Accumulated Net Book
Cost Depreciation Value
Land 400,000 400,000
Building 2,500,000 200,000 2,300,000
Equipment, Furniture, & Fixtures 1,350,000 312,500 1,037,500
TOTAL 4,250,000 512,500 3,737,500

2019
Accumulated Net Book
Cost Depreciation Value
Land 400,000 400,000
Building 2,500,000 100,000 2,400,000
Equipment, Furniture, & Fixtures 1,150,000 143,750 1,006,250
TOTAL 4,050,000 243,750 3,806,250

268,750
WALASTIK CORPORATION

Statement of Cash Flows

For the Year Ended December 31, 2020
(with comparative data for 2019)
(In Philippine Pesos)
INDIRECT METHOD
2020 2019
Cash Flows from OPERATING ACTIVITIES:
Net Income (accrual) 1,099,840 1,439,795
Add: Depreciation Expenses 268,750 243,750
Amortizarion of Intangile Assets 2,000 -
Net Income (cash) 1,370,590 1,683,545
Changes in Working Capital
Increase in Receivables (64,125) (66,785)
Increase in Inventories (44,700) (27,600)
Decrease in Prepaid Expenses 1,900 (6,600)
Decrease in Accounts Payable (173,400) 518,400
Increase in Accrued Expenses 10,050 37,250
Increase in Unearned Revenues 6,200 13,000
Decrease in Income Tax Payable (1,185) 188,295
NET CASH INFLOWS from OPERATING ACTIVITIES 1,105,330 2,339,505

Cash Flows from INVESTING ACTIVITIES:

Purchase of temporary investments (20,000)

Purchase of land (400,000)
Purchase of Building (2,500,000)
Acquisition of additonal equipment, furniture & Fixtdures (200,000) (1,150,000)
Purchase of long-term Investments (50,000) (150,000)
Acquisition of Intagible Asset (10,000)
TOTAL CASH OUTFLOWS from INVESTING ACTIVITIES (270,000) (4,210,000)

Cash Flows from FINANCING ACTIVITIES:

Issuance of long term notes 600,000
Retirement of Long-term Notes payable (100,000)
Issuance of Share Capital 562,500 2,250,000
Payment of Dividend (1,000,000) (800,000)
NET CASH OUTFLOWS from FINANCING ACDTIVITIES (537,500) 2,050,000

NET INCREASE IN CASH 297,830 179,505

CASH BALANCE, January 1 179,505

CASH BALANCE, December 31 477,335 179,505
Working Paper for Statement of Cash Flows
For the Year ended December 31, 2020
Statement of Financial Position CHANGES
2020 2019 Increase
ASSETS (Decrease)

Current Assets:
Cash & Cash Equivalents 477,335 179,505 297,830
Trading Securities 20,000 - 20,000
Receivables 130,910 66,785 64,125
Inventories 72,300 27,600 44,700
Prepaid Expenses 4,700 6,600 (1,900)
TOTAL 705,245 280,490

Non-Current Asets
Property, Plant, & Equipment, net 3,737,500 3,806,250 (68,750)
Held to Maturity Securities 200,000 150,000 50,000
Intangible Assets 8,000 10,000 (2,000)
TOTAL 3,945,500 3,966,250

TOTAL ASSETS 4,650,745 4,246,740 106,175

LIABILITIES & SHAREHOLDERS' EQUITY

Current Liabilites

Accounts Payable 345,000 518,400 (173,400)

Accrued Expenses 47,300 37,250 10,050

Unearned Revenues 19,200 13,000 6,200

Income Tax Payable 187,110 188,295 (1,185)
TOTAL 598,610 756,945

Non-Current Liabilities
Long-term Notes Payable 500,000 600,000 (100,000)

TOTAL LIABILITIES 1,098,610 1,356,945

Shareholders' Equity
Ordinary Shares 2,500,000 2,000,000 500,000
Share Premiums 312,500 250,000 62,500
 Accumulated Profits,, Dec. 31 739,635 639,795 99,840
TOTAL 3,552,135 2,889,795

TOTAL LIABILITIES & SHAREHOLDERS' EQUITY 4,650,745 4,246,740 404,005

297,830
 Particulars
ACTIVITIES
Operating Invessting Financing

Purchase of temporary investments (20,000)

Increase in Receivables (64,125)
Increase in Inventories (44,700)
Decrease in Prepaid Expenses 1,900

Depreciation Expenses 68,750

Purchase of long-term Investments (50,000)
Amortization of Intangible Assets 2,000

Decrease in Accounts Payable (173,400)

Increase in Accrued Expenses 10,050

Increase in Unearned Revenues 6,200

Decrease in Income Tax Payable (1,185)

Retirement of Long-term Notes Pzayable (100,000)

500,000
Issuance of Capital Shares
62,500
Net Income 1,099,840
Dividends Declared & Paid (1,000,000)

905,330 (70,000) (537,500)

297,830
WALASTIK CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2020
(with comparative data for 2019)
(In Philippine Pesos)
Note 2020 2019
DIRECT METHOD

Cash Flows from Operating Acdtivites

Collections from customers 1 8,417,875
Payment to Creditors/suppliers 2 (5,361,100)
Payment of income taxes 3 (472,545)
Payment of Expenses 4 (1,418,900)
Payment of Interest Expense on LT Notes Payable (60,000)
Net Cash flows form Operating Activities 1,105,330

Cash Flows from INVESTING ACTIVITIES:

Purchase of temporary investments (20,000)

Purchase of land -
Purchase of Building -
Acquisition of additonal EFF (200,000)
Purchase of long-term Investments (50,000)
Acquisition of Intagible Asset
TOTAL CASH OUTFLOWS from INVESTING ACTIVITIES (270,000)

Cash Flows from FINANCING ACTIVITIES:

Issuance of long term notes -
Retirement of Long-term Notes payable (100,000)
Issuance of Share Capital 562,500
Payment of Dividend (1,000,000)
NET CASH OUTFLOWS from FINANCING ACDTIVITIES (537,500)

NET INCREASE IN CASH 297,830

CASH BALANCE, January 1 179,505

CASH BALANCE, December 31 477,335

NOTES TO THE FINANCIAL STATEMENTS
2020 References
Note 1: Collection from Customers
Accounts Receivable - 12/31/19 66,785 SFP 2019
Unearned Revenue, 12/31/19 (13,000) SFP 2019
Sales of 2020 8,475,800 CSI 2020
Accounts Receivable - 12/31/20 (130,910) SFP 2020
Unearned Revenue, 12/31/20 19,200 SFP 2020
Collection in 2020 8,417,875

Note 2: Payment to Creditors/suppliers

Accocunts Payable, 12/31/19 518,400 SFP 2019
Purchases of 2020 5,187,700 CSI 2020
Accounts Payable, 12/31/20 (345,000) SFP 2020
Payment to creditors/suppliers 5,361,100

Note 3: Payment of Income Tax

Income Tax Payable, 12/21/19 188,295 SFP 2019
Provision for Income Tax - 2020 471,360 CSI 2020
Income Tax Payable, 12/21/20 (187,110) SFP 2020
Payment for Inomce Tax 472,545

Note 4: Payment of Expenses

Accrued expenses. 12/31/19 37,250
Expenses - 2020 (paid in cash) 1,430,850 1,701,600 SCI 2020
Accrued expenses. 12/31/20 (47,300) (268,750) Depreciation SCF 2020
Prepaid Expenses, 12/31/19 (6,600) (2,000) amortization SCF 2020
Prepaid Expenses12/31/20 4,700 1,430,850
Payment for Expenses 1,418,900