Audit Application - Lec. 13 Revenues Expenses

AUDIT OF THE REVENUE &
EXPENSE ACCOUNTS
BY PROF. ANITA B. CATOLICO
AUDIT OBJECTIVES
1. Determine whether all revenues and expenses

applicable to the audit period have been
recognized and are matched properly in
accordance with the GAAP.
2. Determine whether all material unusual and
infrequent items are segregated properly in the
Income Statement and Comprehensive Income.
3. Determine whether revenues and expenses are
classified properly and consistently.
4. Determine whether disclosures are adequate and
in accordance with financial reporting standards.
Auditor’s Approach
1. Analytical Review of Operations – consists of

comparing the statement of profit or loss and
comprehensive income for the year being audited
with the budget for the year and the actual amounts
for the prior year and determining the underlying
reasons for significant variations or the lack thereof.
2. Account Analysis – auditor will analyze certain
selected operating accounts to supplement the
information already obtained. Accounts generally
requiring analysis are: Salaries & wages; Taxes,
licenses & fees; Rent & royalties; Legal and
professional fees; Maintenance & repairs;
Contributions; Advertising; Travel & entertainment;
Miscellaneous expense; Interest expense
 The following is Ace Co.’s pre-audit income
statement for the year ended Dec. 31, 2021:

Sales P2,964,000
Cost of goods sold 1,926,000
Gross income P1,038,000
 Operating expenses:
 Rent expense P250,000
 Salaries expense 345,000
 Utilities expense 219,000
 Advertising expense 30,000
 Warranty expense 14,000
 Other expenses 35,500 893,500
 Net Income P144,500
 You obtained the following information from the company’s
accounting records:
 Some of Ace’s customers pay for their orders in advance. At
Dec. 31, 2021, orders paid for in advance of shipment totaled
P15,000. These have been included in the sales figure.
 Ace’s products are sold with a 30-day money-back
guarantee. Customers seldom returned the products during
the year. Ace has not included in the sales figure and in cost
of goods sold those products sold within the last 30 days of
the current year. The revenue is P98,000 and the cost of the
products is P63,700.
A. On July 1, 2021, Ace prepaid its office space rent
for 18 months. The amount paid, P216,000, was
recorded as rent expense.
B. The amount of P120,000 was paid on July 1, 2021
for general advertising to be completed prior to
Dec. 31, 2021. Ace management believes that the
advertising will benefit a 2-year period and
therefore, has decided to charge the costs to the
income statement at the rate of P5,000 per month.
 In prior years, Ace has estimated warranty
expense using a percentage of sales. Future
warranty costs relating to 2021 sales are
estimated to amount to 2% of sales. However,
during 2021, Ace elected to charge costs to
warranty expense as costs were incurred. Ace
spent P14,000 during 2021 to repair and replace
defective products sold in current and prior years.
 The correct amount of Ace sales revenue for 2021 is
 P2,964,000
 P3,062,000
 P3,047,000
 P2,983,300
 Ace income statement for 2021 should show gross income of
 P1,121,000
 P1,023,000
 P974,300
 P1,057,300
 Ace total expenses (excluding cost of goods sold) for 2021 should be
 P886,440
 P958,440
 P872,440
 P856,440
 Ace net income for 2021 (ignore income tax) should be
 P98,860
 P170,860
 P184,860
 P234,560
 The prepaid advertising account balance on Dec. 31, 2021, is
 P0
 P90,000
 P30,000
 P120,000
Prob. 2
 On July 1, 2021, Let Co. purchased Go Co. ten-

year, 8% bonds with a face amount of P1,000,000
for P840,000. The bonds mature on June 30,
2026 and pay interest semiannually on June 30
and Dec. 31. For the 6 months ended Dec. 31,
2021, Let Co. recorded bond discount
amortization of P3,600 using the effective
interest method.
 What is the amount of interest income to be
recognized for the current year from this long-
term investment?
 P83,600
 P36,400
 P40,000
 P43,600

Prob. 3
 The balance of Lux Co.’s advertising expense
account at Dec. 31, 2021, was P264,000 before any
necessary year-end adjustment relating to the
following:
 Included in the P264,000 is the P75,000 cost of
product posters for a sales promotional campaign in
January 2022.
 Radio advertisements during 2021 were billed to
Lux on Jan. 3, 2022. Lux paid the P30,000 invoice
on Jan. 15, 2022.
 What is the amount of advertising expense that
should be reported by Lux in its Dec. 31, 2021
income statement?
 P309,000
 P294,000
 P219,000
 P264,000

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AUDIT OF THE REVENUE &

1. Determine whether all revenues and expenses

1. Analytical Review of Operations – consists of

 On July 1, 2021, Let Co. purchased Go Co. ten-

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