University of San Jose-Recoletos

Grace 2.0
Corporatio
n Audited by:
R&L CPAs

Submitted by:
Lopez, Lindy Ann
Semblante, Rhea Angelica

Submitted to:
Mr. Cedric Val Naranjo CPA
COMPREHENSIVE PROBLEM:

R&L CPAS, a well-known auditing firm in Cebu, has been engaged by GRACE
2.0 CORPORATION to perform the audit of the corporation’s financial statements, which
were prepared by the company’s accountant, for the year ended December 31, 2017. In
connection with R&L CPAS’ audit of the company, you and your team were assigned to
perform the audit of cash, receivables and inventories by your senior auditor.

On the same month, you obtained the following information regarding GRACE
2.0 CORPORATION’s company background.

GRACE 2.0 CORPORATION was incorporated in the Philippines and was

registered with Securities and Exchange Commission (SEC) on January 25, 2015. The
company is primarily engaged in the business of buying, selling, handling and otherwise
dealing with toys. The company’s principal place of business is located in M. Pepito
Street, Poblacion Occidental, Consolacion, Cebu.

The company’s main line of business is purchasing and selling toys primarily
designed for young adults from ages 12-18 like remote control cars, water gun, Jigsaw
Puzzle, Beyblade, Yo-yo, Toy Soldier, Hot Wheels Toy Car, Lego sets, Play-Doh. Robots,
Doll House, Barbie Doll, Tea Set, etc. The company has suppliers for the mentioned
merchandise outside Cebu and sells these products to retail companies within Cebu
City.

At the start of the audit, you were provided and were able to obtain the
unadjusted trial balance of the company:
You started your audit with the following accounts:
Cash
The following are your cash composition:
Cash in Bank-BDO ₱ 1,220,000.00
Petty Cash Fund 50,000.00
Total ₱ 1,270,000.00
 In line with your audit, you conducted a surprise cash count of the company’s
cash on hand – petty cash fund and other cash which may be on hand with the
company’s cashier. You began to count in the presence of the company’s cashier, Ms.
Liz Demi. In the course of your counting you found the following items:
Additional Information:
a. The balance of petty cash per book is ₱ 50,000.00.
b. The following employees’ pay envelope have been opened and the money
removed. Each envelope was marked “unclaimed”:
JB Deleon ₱ 2,400.00
JL Maraguinot ₱ 3,500.00

] Also, as part of your audit procedure, you sent a letter of confirmation to BDO
requesting the balance of the client’s cash account. On January 02, 2018, the bank had
sent you the company’s statement of account.
ACCOUNTS RECEIVABLE
You have also been assigned to audit the accounts receivable. These are the following
data you gathered as of December 31, 2017:

Accounts Receivable ₱ 680, 000

Allowance for Doubtful Accounts 18, 000

From the schedule of accounts receivable as of December 31, 2017, you determined
that this amount includes the following:

Accounts with debit balances:

60 days and below ₱ 325, 000
61 – 90 days 108, 000
91-120 days 215, 500
Over 120 days 31, 500
Accounts Receivable per Ledger 680, 000

Additional information:
a. Accounts receivable outstanding for more than a year amounting to ₱20,000.00
should be written-off.
b. Good sold on account for ₱100,000.00 on September 28, 2017, terms FOB
Shipping Point has not been recorded by the company. No collection was made
yet.
c. Sales returns amounting to ₱25,000.00 from sales made in October 11, 2017
was credited to accounts payable.
d. Purchase returns from purchases during December totaling ₱130,000.00 were
erroneously debited to accounts receivable.
e. Goods sold to Tom Book in December 31, 2017 amounting to ₱280,000.00 terms
FOB Destination has not been recorded. The goods were not yet delivered as of
December 31 and was included in the inventory count of that year.
f. Confirmation replies received directly from customers disclosed the following
exceptions:

Customers Comments Audit Findings

Ni Hwang Balance amounting to ₱85,500.00 was paid on Grace 2.0
December 27, 2017. Corporation
erroneously credited
Ann Lee’s accounts
receivable account.
Ann Lee Did I win a lottery? My balance of ₱150,000.00 Ann Lee’s account
suddenly went down to ₱64,500.00. Thank you was credited for Ni
Grace 2.0 Corporation! � Hwang’s payment on
December 27, 2017.
Kim Chee I do not owe this amount PASHNEA! I did not It was revealed that
receive any merchandise from your company! goods sold to Kim
Chee for ₱55,000.00
on December 28,
2017, terms FOB
Shipping Point was
lost in transit. The
company has
acknowledged its
responsibility for the
loss of merchandise.
Ai Do I do not owe you this much. I only purchased Ai Do’s purchase on
merchandise amounting to ₱36, 000.00 October 15, 2017
was erroneously
debited to his
account for
₱63, 000.00
Tim Park I already paid my balance of ₱30,000.00 last It was found out that
December 3, 2017. You must’ve forgotten it Tin Park instead of
huh. Tim Park’s account
was credited for the
payment of the
balance.
Alan Zhang I already paid half of the price last December Payment of
23, 2017. ₱19,000.00 has not
been recorded by
the company.
Based on your discussion with Grasya, Grace 2.0 Corporation’s Credit Manager, you
both agreed that an allowance for doubtful accounts should be maintained using the
following rates:

60 days and below 1%

61 – 90 days 3%
91-120 days 5%
Over 120 days 10%

NOTES RECEIVABLE AND PAYABLE

The company provided you the following data on their Notes Receivable and
Notes Payable:
 Notes Receivable ₱ 735,000.00
Notes Payable ₱1,700,000.00

In order to test the accruals and the composition of these notes, you observed
the promissory notes issued by the company and those that are issued to the company.
INVENTORIES

On December 31, 2017, a physical count was conducted to merchandise on hand, which
reflected a balance of P1, 100, 000. Your review of the inventory count list disclosed the
following:

1. Merchandise costing P300,000 was shipped on December 28, 2017,

terms FOB Destination. The sale was properly recorded. Since the goods
were not on hand during the count, it was not included in the inventory.

2. Merchandise costing P35,000 was delivered to Grace 2.0 Corporation on

December 31, 2017, terms FOB Destination. The purchase was not
recorded nor the merchandise included in the inventory.

3. Goods costing P7,000 was out on consignment when the count was
made. Since the goods are not on hand during the count, it was excluded
from the inventory.
4. Goods in transit costing P88,000 was not included in the inventory
because it was not on hand during the count. The goods were shipped
FOB Destination and the purchase was recorded in the books of Grace
2.0 Corporation.

5. Included in the count were goods sold to KAYAPA Corp. on FOB

Destination. The cost of the merchandise was P92,000. This was already
recorded as sales on account but were shipped only on January 6, 2018.

6. Merchandise on hand were included in the count. These materials are

returns from customers and can’t be sold because of its defects. The cost
was P79,000.

7. Merchandise costing P143,500 were marked “held on consignment”

during the count. Since those goods were on hand, they were included in
count. However, no purchase was recorded.

8. Goods in transit costing P34,000 shipped FOB Shipping Point was

excluded from the inventory, and further testing revealed that the
purchase had been recorded.

9. Merchandise sold to LABAN Corp. was still in transit during the count.
Since the goods were not on hand, it was not included in the inventory. It
was however recorded in the books in the amount of P33,000. The goods
cost P23,000 and were shipped FOB Destination.

10. Included in the inventory are goods marked “hold for shipping
instructions”. These goods cost P10,000.
Requirements:

a. Make the following:

1. Cash Count Sheet
2. Bank Reconciliation
3. Aging of Accounts Receivable
4. Schedule of Notes Receivable and Notes Payable
5. Schedule of Accrued Interest Receivable and Interest Payable
b. Compute for the adjusted balance of the following and present them in good
form:
1. Allowance for Doubtful Accounts
2. Inventory
3. Sales
4. Accounts Receivable
5. Accounts Payables