Please choose the correct answer

Case 1

At the beginning of 20x2, Jericho, Inc. discovered the following errors made in the preceding two (2) years:

20x1 20x2

Overstatement of ending inventory P100,000 P40,000

Omission of wages payable 14,000 16,000

Omission of allowance for doubtful accounts 26,000 34,000

Prepaid insurance recorded as expense 10,000 4,000

The reported net income was P540,000 in 20x1, and P700,000 in 20x2. The allowance for doubtful accounts had a zero balance at the beginning of 20x1. No accounts were written off during 20x1 or 20x2. Ignore income

taxes.

1. Which of the following scenarios might cause an overstatement of Jericho's ending inventory?

a. The clerk recorded purchased goods still in transit as of December 31, 20x2, terms - FOB shipping point from the seller.

b. An error in November 20x1 costing revealing selling expenses have been deferred and included as inventoriable costs unless the goods are sold. As of December 31, 20x1, 750 units of these inventories from November 20x1 are still unsold.

c. One of its type of inventory has a current selling price of P10 per unit. The price is expected to be retained until the next three years from 20x1. However, related cost to sell is expected to increase at an average rate of 15% every year starting 20x2. Estimated cost to sell as of 20x1 amounted to P2 per unit. Average cost for this type of inventory is at P5 per unit.

d. Actual count sheet reveals only 1,000 units of Inventory A is on hand. Inventory subledger report as of December 27, 20x2 only shows 800 units of Inventory A. The actual count was held on January 4, 20x3 which 200 units were received by the warehouse last December 28, 20x2. The accounting department was already on holiday break starting December 23, 20x2 and only resumed on January 4, 20x3. Only the accounting department has an authority to post goods receipting and goods delivery in the inventory subledger.

e. All of the above.

2. Which of the following assertions is affected and how the risk of omission of allowance for doubtful accounts affect our risk assessment of receivables and other related accounts?

a. Valuation of receivables. Increase in inherent risk as assumptions made by Jericho are deemed to be insufficient resulting to an evident omission on allowance for doubtful accounts.

b. Valuation of receivables. Increase in control risk as assumptions made by Jericho are deemed to be insufficient resulting to an evident omission on allowance for doubtful accounts even though these have been reviewed by the CFO and BOD.

c. Presentation and disclosure. Increase in inherent risk as assumptions made by Jericho are deemed to be insufficient resulting to an evident omission on allowance for doubtful accounts.

d. Presentation and disclosure. Increase in control risk as assumptions made by Jericho are deemed to be insufficient resulting to an evident omission on allowance for doubtful accounts.

e. Existence of receivables. Increase in control risk as omission of allowance for doubtful accounts may be attributed to the arising numbers of fictitious customers which also overstate our sales.

f. All of the above.

3. Which of the following procedures would probably unveil the omission of wages payable by Jericho?

a. Analytical procedures. Comparing budgeted amounts to actual amounts.

b. Cut-off analysis. An investigation of transactions near the reporting periods.

c. Completeness check. Checking the completeness of payable voucher slips by inspecting their reference numbers.

d. Test of unusual balances.

e. All of the above.

f. Choices a and d are correct.

4. Why do you think prepaid insurance was recorded by Jericho as an outright expense?

a. Since Jericho is paying the insurance premium in advance and using the asset method.

b. Since Jericho is paying the insurance premium in advance and using the expense method.

c. Since Jericho is being assessed for the insurance premium in advance and using the accrual method.

d. Since Jericho is being assessed for the insurance premium in advance and using the cash basis method.

e. Both a and c are correct.

f. Both b and d are correct.