Scribd
Upload
4 views

Operations-Audit-Compre-problems-with-solution

The document outlines an operations audit focusing on various financial assertions related to Property Plant and Equipment, investment securities, government grants, construction revenue, and accounting metrics such as EPS and PER. It provides detailed calculations and discrepancies in financial reporting as of December 31, 20x1, highlighting significant understatements in several accounts. Additionally, it includes solutions for depreciation, investment valuations, and revenue recognition from government grants and construction projects.

Uploaded by

hakdoghakdog84
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
4 views

Operations-Audit-Compre-problems-with-solution

The document outlines an operations audit focusing on various financial assertions related to Property Plant and Equipment, investment securities, government grants, construction revenue, and accounting metrics such as EPS and PER. It provides detailed calculations and discrepancies in financial reporting as of December 31, 20x1, highlighting significant understatements in several accounts. Additionally, it includes solutions for depreciation, investment valuations, and revenue recognition from government grants and construction projects.

Uploaded by

hakdoghakdog84
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

Operations Audit

Audit of PPE, Investment securities, Government grant, Construction Revenue, Home/Branch


Accounting, EPS and PER

With solution

As a newly hired audit staff, you are assigned to audit the assertions pertaining to the following.
The auditee is suspecting that the company’s accountant does not reflect the correct amount of
the following assertions as of December 31, 20x1:

Account Amount Correct (Over)


presented amount Understated
Property plant and equipment (NBV) 6,500,200 7,210,813 710,613
Investment in Securities @ amortized cost 500,580
Ending inventory @ cost model 780,580
Investment in branch account 450,500
Deferred gross profit from Government grant 10 million 7,290,116 (2,709,884)
Earned profit from construction Year 20x0 8,500,000 1,432,250 (7,067,750)
Earned profit from construction Year 20x1 25,000,000 4,301,850 (20,698,150)
Receivables from construction year 20x0 250,000 3,962,500 3,712,500
Receivables from construction year 20x1 300,000 16,315,000 16,015,000
Investment in Securities @ FVPL 800,799
Unrealized loss in Investment in Securities @ 41,469
FVPL
Earnings per share (EPS) 25.18 385.39 360.21
Price earning ratio 12.57 0.10 (12.47)

a. On April 1, 20x1, Company purchased the equipment with a cash price of P7,580,200
with the following additional cost.
Non-refundable taxes 15,000
Trail and safety machine to protect the equipment 14,850
Cooling cost need for the machine 47,450
Cost of training employees who will use the machine 45,000
Insurance cost for the whole year 24,000
Salvage value of the equipment 250,000
Useful life 15
Depreciation method 1.5 declining
Actual usage of the equipment June 01, 20x1

Solution:
Cash price 7,580,200
Non-refundable taxes 15,000
Trail and safety machine to protect the equipment 14,850
Cooling cost need for the machine 47,450
Cost of the equipment 7,657,500

Depreciation (1/15) x 1.5 10%

Cost of equipment 7,657,500


Depreciation expense (P7,657,500 x 10%) x 7/12 (446,688)
Net book value Dec 31, 20x1 7,210,813
b. On January 01, the company invests in debt securities using cost model, four years 10%
1,500,200, interest is payable annually December 31, the prevailing rate for this
investment is 12%. Fair value of the investment at 1,800,650

c. Data are presented below:


Cost Retail
Beginning inventory 25,800 67,580
Purchases 840,250 940,450
Purchase discount 19,800
Department transfer in 20,800 45,000
Freight in 16,470
Freight out 2,800
Mark up 200,000
Sales 980,200
Sales discount 150,500
Sales returns 108,500
Employee discounts 18,000
Normal losses due to shrinkage 16,500

d. Home and branch records:


Home Branch
Sales 780,900 250,988
Shipment to branch 48,900
Shipment from Home office 61,125
OPEX 75,800 22,960
Sales discount 20,800 3,785
Sales returns and allowances 7,841 2,441
Beginning inventory (purchase outside) 20,800 15,500
Purchases (from outside supplier) 168,780 115,500
Ending inventory (20% of the inventory 80,500 90,600
of the branch if from the HO)

e. On January 01, the company received a grant from the government in the amount of P10
million for the construction of the building that will be completed after 5 years. The
budgeted expenditure for the 5-year construction are as follows:
Year 1 8,750,000
Year 2 6,750,000
Year 3 2,580,500
Year 4 4,758,500
Year 5 9,450,200

Solution:
Year 1 8,750,000
Year 2 6,750,000
Year 3 2,580,500
Year 4 4,758,500
Year 5 9,450,200
Total expenditure 32,289,200

Unearned revenue from Govr Grant 10,000,000


Earned revenue:
Year 1 (8,750,000 / 32,289,200) (2,709,884)
Year 2 (6,750,000/ 32,289,200) (2,090,482)
Year 3 (2,580,500/ 32,289,200) (799,184)
Year 4 (4,758,500/ 32,289,200) (1,473,713)
Year 5 (9,450,200/ 32,289,200) (2,926,737) (10,000,000)
Unearned income -

Year 1 Unearned income from Govr grant 7,290,116


(10,000,000 - 2,709,884)

f. On January 01, 20x0, the company accepted a construction project for P25 million with
the estimated cost of P16,500,000. The details of the project are as follows:
Year 20x0 Year 20x1
Cost incurred to date 2,980,450 8,250,500
Estimated cost to complete 13,319,000 12,168,200
Cost incurred for the next year usage 200,550 100,850
Collection 250,000 300,000

Solution
Year 20x0 Year 20x1
Contract asset 25,000,000 25,000,000
Estimated cost to complete (16,500,000) (16,500,000)
Unearned profit 8,500,000 8,500,000

Cost incurred to date 2,779,900 11,130,100


/ Total cost to complete 16,500,000 16,500,000
Percentage of completion 16.85% 67.46%

Contract asset 25,000,000 25,000,000


* Percentage of completion 16.85% 67.46%
Receivable contract 4,212,500 16,865,000
Collection 20x0 (250,000) (250,000)
Collection 20x1 - (300,000)
Receivable contract, end 3,962,500 16,315,000

Unearned profit 8,500,000 8,500,000


* Percentage of completion 16.85% 67.46%
Earned profit to date 1,432,250 5,734,100
Earned profit in prior year - (1,432,250)
Profit to date 1,432,250 4,301,850

g. On January 01, the company invests in debt securities through profit or loss, four-year
8% 800,600, interest is payable annually December 31, the prevailing rate for this
investment is 12%. At the end of the year the prevailing rate is 10.5%

h. During the year the company had a net income of P4,780,250. The authorized capital
stock 250,000 with P30 as par value per share.
Common share 45,000
Share premium – common share 37,500
14% Preference share P25 par value 625,000
August 01, issued 25,000 common shares at a selling price of 3,750,000
P150
10% 4 year bonds payable, interest payable annually 1,000,000

Market share of common stock at the end of the year is P38.50

Solution:
Common shares – Jan 01 (45,000 / P30 par value) 1,500 shares
Issued shares – Aug 01 (25,000 shares x 5/12) 10,417 shares
Average outstanding common shares 11,917 shares
Net income 4,780,250
Interest expense on bonds payable (1,000,000 x 10%) (100,000)
Dividends – preference shares (625,000 x 14%) (87,500)
Net income distributable to common shares 4,592,750
/ Average outstanding common shares 11,917 shares
Earnings per share (EPS) 385.39

Price earnings ratio (PER)


Market price share 38.50
/ EPS 385.39
PER 0.10

You might also like