Solution manual applied auditing by cabrera chapter16 answer

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Solution manual applied auditing by cabrera chapter16   answer

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CHAPTER 16 16-1 a 16-2 d 16-3 SUBSTANTIVE TESTS OF INCOME STATEMENT ACCOUNTS Red Company Requirement (1) Reported net income Subtract ending inventory overstatement Add beginning inventory overstatement Subtract wages payable when incurred Add wages payable when expensed Subtract bad debts Add back prepayments in year recorded as expense Subtract prepayments in year expense is incurred Correct net income 2006 2005 P 35,000 P 27,000 (2,000) 5,000 (800) 700 (400)* 200 (5,000) (700) (1,300) 500 (500) P 37,200 P 20,500 * P1,700 – P1,300 Requirement (2) 2007 Jan Retained Earnings Insurance Expense Inventory Wages Expense Allowance for Doubtful Accounts 4,300 200 2,000 800 1,700 16-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition 16-4 Orange Corporation Requirement (1) (1) (2) (3) (4) Allowance for Uncollectible Accounts Administrative Expenses (37,000 – 19,600) To reflect reduction in loss experience rate Unrealized Holding Loss on Trading Marketable Securities Valuation Allowance Retained Earnings To reduce marketable securities to market valuation and correct prior year’s profit Retained Earnings Cost of Sales Merchandise Inventory To adjust for overstatements in opening and closing inventories a b (5) (6) 17,400 17,400 19,000 16,000 3,000 4,000 2,100 6,100 Equipment Operating Expenses Retained Earnings Accumulated Depreciation: Equipment To adjust for error in recording of equipment purchase in 2005 and related depreciation for 2005 and 2006 12,000 1,100 Accumulated Depreciation: Equipment Equipment Other Income To adjust for misposting of equipment sale 17,500 Prepaid Expenses Operating Expenses Retained Earnings To adjust for nonrecognition of prepaid expense in 2005 and 2006 Ordinary Shares Capital in Excess of Par To adjust for capital contributed in excess of par value 10,900 2,200 15,000 2,500 900 900 1,800 60,000 60,000 Substantive Tests of Income Statement Accounts 16-3 Requirement (2) Orange Corporation Computation of Corrected Net Income For Years Ended December 31, 2006 and 2005 Reported income Change in accounts receivable loss experience rate Unrealized loss (gain) on marketable securities Ending merchandise inventories overstated: December 31, 2005 December 31, 2006 Misposting of equipment purchase: Decrease in operating expenses – 2005 Increase in operating expenses – 2006 Misposting of proceeds of equipment sold Recognition of prepaid insurance Corrected net income 2006 Debit (Credit) 2005 Debit (Credit) P(220,000) P(195,000) (17,400) 19,000 (3,000) (4,000) 6,100 4,000 (10,900) 1,100 (2,500) 900 (1,800) P(216,800) P(206,700) 16-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition 16-5 XOR Corporation XOR Corporation Worksheet to Correct Net Profit and Balance Sheet Accounts From 2004 to 2006 Net Profit Unadjusted balance Add (Deduct) Adjustments (1) Overvaluation of inventory 2004 2005 (2) Undervaluation of inventory 2003 2006 (3) Prepaid expenses omitted at end of year 2003 2004 2005 2006 (4) Prepaid income omitted at end of year 2004 2006 (5) Accrued expenses omitted at end of year 2003 2004 2005 2006 (6) Accrued income omitted at end of year 2004 2006 Adjusted amount 2004 2005 2006 Inventory Retained Earnings P 7,500 P 6,500 P 5,500 P25,000 P27,000 (7,000) 7,000 (8,000) 8,000 9,000 9,000 Adjustments to Balance Sheet Accounts Prepaid Prepaid Accrued Expenses Income Expenses    Accrued Income  (6,000) 9,000 (900) 700 (400) 200 ( 75) 125  P(5,850) (700) 500 (500) 600 600 (300) (300) 100 ( 50) ( 50) 600 400 75 (100) 300 50 (125)  P 5,550 150  P22,500  P34,000 150  P36,400  P 600  P 300  P 50 150  P 150 Substantive Tests of Income Statement Accounts 16-6 Sun Freight Company 10 a c c a a c a d a a P107,700 P376,800 P159,000 P320,550 P25,000 P125,000 P68,600 P179,650 P703,250 P144,250 (P112,500 – P4,800) (P204,000 – P45,000) (P9,500 + P25,000 + P16,250 + P18,250 + P75,250) 16-5 ...16-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition 16-4 Orange Corporation Requirement (1) (1) (2) (3) (4)... (4,000) 6,100 4,000 (10,900) 1,100 (2,500) 900 (1,800) P(216,800) P(206,700) 16-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition 16-5 XOR Corporation XOR Corporation Worksheet to Correct

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