AUDITING PROBLEMS

AP.402 AUDIT OF INVENTORIES

The Use of Assertions in Obtaining Audit Evidence

Assertions about classes of transactions and events for the Existence - assets, liabilities, and equity interests exist.
period under audit: (COCAC)
Completeness - all assets, liabilities and equity interests
Completeness - all transactions and events that should
that should have been recorded have been recorded.
have been recorded have been recorded.
Valuation and allocation - assets, liabilities, and equity
Occurrence - transactions and events that have been
interests are included in the financial statements at
recorded have occurred and pertain to the entity.
appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.
Classification - transactions and events have been
recorded in the proper accounts.
Assertions about presentation and disclosure: (COCA)
Accuracy - amounts and other data relating to recorded
transactions and events have been recorded appropriately. Completeness - all disclosures that should have been
included in the financial statements have been included.
Cutoff - transactions and events have been recorded in the
correct accounting period. Occurrence and rights and obligations - disclosed events,
transactions, and other matters have occurred and pertain
to the entity.
Assertions about account balances at the period end:
(RECV) Classification and understandability - financial information
is appropriately presented and described, and disclosures
Rights and obligations - the entity holds or controls the
are clearly expressed.
rights to assets, and liabilities are the obligations of the
entity.
Accuracy and valuation - financial and other information
are disclosed fairly and at appropriate amounts.

INTERNAL CONTROL MEASURES

1. Authority and responsibility for controlling the 6. Deliveries of materials, finished stock and merchandise
inventories should be centralized management and in should be made only upon specific authorizations
one person. emanating at authorized levels.
2. There should be careful selection of inventory 7. Slow-moving, obsolete and damaged stock should be
personnel and intensive training of such personnel in identified and reported following periodic reviews of
policies, objectives and system of inventory control. physical and book records by qualified employees.
Valuation on the basis of approved cost-mark-down
3. Adequate physical facilities for handling and storage of
methods should be reviewed.
inventory should be provided.
8. Safeguards against that action of the element and
4. Adequate system of procedures, forms and reports
inaccuracies in recording receipts and issues should be
related to the management of inventories should be
adopted. Example – Maintaining adequate insurance
developed and implemented.
coverage.
5. Quantitative controls through perpetual inventory
records; book quantities verified with physical counts
at least once a year and differences being investigated,
promptly adjusted and reported to higher authority
should be implemented.

SUBSTANTIVE AUDIT OF INVENTORIES

Inventory Balances 1. Before the client takes the physical inventory, review
and approve the client’s written plan for taking it.
Existence: Recorded inventory exist 2. Observe the client personnel physically counting
inventory.

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AP.402
EXCEL PROFESSIONAL SERVICES, INC.

3. Confirm inventories on consignment and held in public Occurrence: Recorded purchases are for items that were
warehouses. acquired
Examine underlying documents for authenticity and
reasonableness. Scan voucher register for large or
Completeness: All inventory of the entity recorded
unusual items. Trace inventory purchased to perpetual
4. Obtain a copy of prenumbered inventory tags used by records. Scan voucher register for duplicate payments.
the client in taking inventory and reconcile the tags to
the listing. Classification: Purchase transactions have been recorded
5. For selected items, trace from tags to listing. in the proper accounts

6. Perform cutoff procedures. Obtain the receiving report For a sample of entries in the purchases journal, verify the
number for the last shipment received prior to year- accuracy of account coding.
end and determine that the item is included in
inventory. Also, identify the last shipping document
and determine, based on shipping terms, whether the Accuracy (Valuation): Purchases are recorded at proper
item was properly recorded in sales or inventory. amounts
7. Perform analytical procedures. Recompute invoices and compare invoice price to purchase
order.
Rights and obligations: Inventory is owned by the entity
8. Determine that consigned inventory has been excluded
Production
from inventory and that inventory pledged has been
properly disclosed. Examine confirmations from
Completeness: All production transactions that occurred
financial institutions and read minutes of the board of
are recorded
directors’ meetings.
Account for a sequence for production reports.
Valuation and allocation: Recorded inventory is valued in
accordance with GAAP Occurrence: Recorded production transactions occurred
9. Considering the method the client uses for inventory For selected transactions, examine signed materials
valuation, examine invoices for inventory on hand or requisitions, approved labor tickets, and allocation of
trace prior year’s inventory listing to verify cost. overhead.
10. For selected items, determine net realizable value Classification: Production transactions have been recorded
(NRV) of the inventory and apply the lower of cost or in the proper accounts
NRV. For a sample of entries, verify the accuracy of account
11. Verify computations in the inventory listing. coding.
12. Review the obsolescence of the inventory by:
a. being alert while observing inventory being taken Accuracy (Valuation): Production transactions are
for damaged, slow-moving, or scrap inventory. recorded at proper amounts
b. Scanning perpetual records for slow-moving items Test cost records by tracing to underlying documents, such
and discussing their valuation with client. as bill of materials, labor tickets, authorized labor rates,
and standard overhead rates. Review variances.
Presentation and disclosure: Inventory is classified and
disclosed in accordance with GAAP - end -
13. Determine whether accounts are classified and
disclosed in the financial statements in accordance
with GAAP.

Purchases

Completeness: Purchases that occurred are recorded

Trace a sequence of receiving reports to entries in the
voucher register. Test cutoff. Account for a sequence of
entries in the voucher register.
PROBLEM NO. 1 b. Retailers were holding P50,000, at cost, of goods on
consignment from Pasay, at their stores on December
Pasay Company, a manufacturer of small tools, provided
31, 2010.
the following information from its accounting records for
the year ended December 31, 2010: c. Included in the physical count were tools billed to a
customer FOB shipping point on December 31, 2010.
Inventory at December 31, 2010 (based
These tools had a cost of P31,000 and were billed at
on physical count on Dec. 31, 2010) P1,290,000
P40,000. The shipment was on Pasay’s loading dock
Accounts payable at December 31, 2010 876,000
waiting to be picked up by the common carrier.
Net sales (sales less sales returns) 8,087,000

Additional information follows:

a. Parts held on consignment from Anito to Pasay d. P15,000 worth of parts which were purchased from
amounting to P9,000, were included in the physical Sogo and paid for in December 2010 were sold in the
count of goods in Pasay’s warehouse on December 31, last week of 2010 and appropriately recorded as sales
2010, and in accounts payable at December 31, 2010. of P21,000. The parts were included in the physical
count on December 31, 2010, because the parts were
EXCEL PROFESSIONAL SERVICES, INC.

on the loading dock waiting to be picked up by the Dec. SI No. Dec. RR No.
customer. 31 971 16,000 31 1063 64,000
Dec. Closing Dec. Closing
e. Goods were in transit from a vendor to Pasay on 31 entry (5,530,000) 31 entry (3,000,000)
December 31, 2010. The invoice cost was P71,000, P - P -
and the goods were shipped FOB shipping point on Note: SI = Sales Invoice RR = Receiving Report
December 29, 2010.
Inventory P600,000
f. Work in process inventory costing P30,000 was sent to Accounts receivable 500,000
an outside processor for plating on December 30, Accounts payable 400,000
2010.
g. Tools returned by customers and held pending You observed the physical inventory of goods in the
inspection in the returned goods area on December 31, warehouse on December 31 and were satisfied that it was
2010, were not included in the physical count. On properly taken.
January 8, 2011, the tools costing P32,000 were
inspected and returned to inventory. Credit memos When performing sales and purchases cut-off tests, you
totaling P47,000 were issued to the customers on the found that at December 31, the last Receiving Report
same date. which had been used was No. 1063 and that no shipments
had been made on any Sales Invoices whose number is
h. Tools shipped to a customer FOB destination on larger than No. 968. You also obtained the following
December 26, 2010, were in transit at December 31, additional information:
2010, and had a cost of P21,000. Upon notification of
receipt by the customer on January 2, 2011, Pasay a) Included in the warehouse physical inventory at
issued a sales invoice for P42,000. December 31 were goods which had been purchased
and received on Receiving Report No. 1060 but for
i. Goods, with an invoice cost of P27,000, received from which the invoice was not received until the following
a vendor at 5:00 p.m. on December 31, 2010, were year. Cost was P18,000.
recorded on a receiving report dated January 2, 2011.
The goods were not included in the physical count, but b) On the evening of December 31, there were two trucks
the invoice was included in accounts payable at in the company siding:
December 31, 2010.  Truck No. CPA 123 was unloaded on January 2 of
the following year and received on Receiving
j. Goods received from a vendor on December 26, 2010, Report No. 1063. The freight was paid by the
were included in the physical count. However, the vendor.
related P56,000 vendor invoice was not included in  Truck No. ILU 143 was loaded and sealed on
accounts payable at December 31, 2010, because the December 31 but leave the company premises on
accounts payable copy of the receiving report was lost. January 2. This order was sold for P100,000 per
Sales Invoice No. 968.
k. On January 3, 2011, a monthly freight bill in the
amount of P6,000 was received. The bill specifically c) Temporarily stranded at December 31 at the railroad
related to merchandise purchased in December 2010, siding were two delivery trucks enroute to Brooks
one-half of which was still in the inventory at Trading Corporation. Brooks received the goods,
December 31, 2010. The freight charges were not which were sold on Sales Invoice No. 966 terms FOB
included in either the inventory or accounts payable at Destination, the next day.
December 31, 2010.
d) Enroute to the client on December 31 was a truckload
REQUIRED: of goods, which was received on Receiving Report No.
1064. The goods were shipped FOB Destination, and
Determine the adjusted amounts of: freight of P2,000 was paid by the client. However, the
a. Inventory as of December 31, 2010 freight was deducted from the purchase price of
b. Accounts Payable as of December 31, 2010 P800,000.
c. Net sales for the year 2010
QUESTIONS:

PROBLEM NO. 2 Based on the above and the result of your audit, determine
the following:
You were engaged by Quezon Corporation for the audit
of the company’s financial statements for the year ended 1. Sales for the year ended December 31, 2010
December 31, 2010. The company is engaged in the a. P5,250,000 c. P5,400,000
wholesale business and makes all sales at 25% over cost. b. P5,150,000 d. P5,350,000
2. Purchases for the year ended December 31, 2010
The following were gathered from the client’s accounting a. P3,000,000 c. P3,018,000
records: b. P3,754,000 d. P3,818,000
SALES PURCHASES 3. Inventory as of December 31, 2010
Date Ref. Amount Date Ref. Amount a. P864,000 c. P968,000
Balance Balance b. P800,000 d. P814,000
forwarded P5,200,000 forwarded P2,700,000
Dec. SI No. Dec. RR No. 4. Accounts receivable as of December 31, 2010
27 965 40,000 27 1057 35,000 a. P350,000 c. P370,000
Dec. SI No. Dec. RR No. b. P220,000 d. P120,000
28 966 150,000 28 1058 65,000
5. Accounts payable as of December 31, 2010
Dec. SI No. Dec. RR No.
a. P418,000 c. P 400,000
28 967 10,000 29 1059 24,000
b. P354,000 d. P1,218,000
Dec. SI No. Dec. RR No.
31 969 46,000 30 1061 70,000
Dec. SI No. Dec. RR No.
31 970 68,000 31 1062 42,000 PROBLEM NO. 3
EXCEL PROFESSIONAL SERVICES, INC.

DECEMBER 2010
Makati Company is preparing its 2010 financial
Sales Sales
statements. Prior to any adjustments, inventory is valued
invoice invoice
at P1,605,000. During your audit, you found the following
amount date Cost Date shipped
information relating to certain inventory transactions from
a) P150,000 Dec. 21 P100,000 Dec. 31, 2010
your cutoff test.
b) 100,000 Dec. 31 40,000 Nov. 03, 2010
a. Goods valued at P110,000 are on consignment with a c) 50,000 Dec. 29 30,000 Dec. 30, 2010
customer. These goods were not included in the d) 200,000 Dec. 31 120,000 Jan. 03, 2011
ending inventory figure. e) 500,000 Dec. 30 280,000 Dec. 29, 2010
(shipped to
b. Goods costing P87,000 were received from a vendor on consignee)
January 5, 2011. The related invoice was received and JANUARY 2011
recorded on January 12, 2011. The goods were f) P300,000 Dec. 31 P200,000 Dec. 30, 2010
shipped on December 31, 2010, terms FOB shipping g) 200,000 Jan. 02 115,000 Jan. 02, 2011
point. h) 400,000 Jan. 03 275,000 Dec. 31, 2010
c. Goods costing P85,000, sold for P102,000, were
shipped on December 31, 2010, and were delivered to REQUIRED:
the customer on January 2, 2011. The terms of the Prepare the necessary adjusting entries at December 31,
invoice were FOB shipping point. The goods were 2010.
included in the ending inventory for 2010 and the sale
was recorded in 2011.
d. A P35,000 shipment of goods to a customer on PROBLEM NO. 5
December 31, terms FOB destination was not included Your client, Mandaluyong Company, is an importer and
in the year-end inventory. The goods cost P26,000 wholesaler. Its merchandise is purchased from several
and were delivered to the customer on January 8, suppliers and is warehoused until sold to customers.
2011. The sale was properly recorded in 2011.
e. The invoice for goods costing P35,000 was received In conducting your audit for the year ended December 31,
and recorded as a purchase on December 31, 2010. 2010, you were satisfied that the system of internal control
The related goods, shipped FOB destination were was good. Accordingly, you observed the physical
received on January 2, 2011, and thus were not inventory at an interim date, November 30, 2010 instead
included in the physical inventory. of at year end. You obtained the following information
from your client’s general ledger:
f. Goods valued at P154,000 are on consignment from a
vendor. These goods are not included in the physical Inventory, January 1, 2010 P 1,312,500
inventory. Physical inventory, November 30, 2010 1,425,000
Sales for 11 months ended Nov. 30, 2010 12,600,000
g. A P60,000 shipment of goods to a customer on Sales for the year ended Dec. 31, 2010 14,400,000
December 30, 2010, terms FOB destination, was Purchases for 11 months ended Nov. 30,
recorded as a sale upon shipment. The goods, costing 2010 (before audit adjustments) 10,125,000
P37,000 and delivered to the customer on January 6, Purchases for the year ended Dec. 31,
2011, were not included in the 2010 ending inventory. 2010 (before audit adjustments) 12,000,000

REQUIRED: Your audit disclosed the following information:

1. Compute the proper inventory amount to be reported a) Shipments received in November and
on Makati’s balance sheet for the year ended included in the physical inventory but
December 31, 2010. recorded as December purchases.
P 112,500
2. By how much would the profit or loss have been b) Shipments received in unsalable
misstated if no adjustments were made for the above condition and excluded from physical
transactions? (Disregard tax implications) inventory. Credit memos had not
been received nor chargebacks to
vendors been recorded:
PROBLEM NO. 4 Total at November 30, 2010 15,000
You were engaged to perform an audit of the accounts of Total at December 31, 2010
the Manila Company for the year ended December 31, (including the November
2010, and you observed the taking of the physical unrecorded chargebacks) 22,500
inventory of the company on December 30, 2010. Only c) Deposit made with vendor and charged
merchandise shipped by the company to customers up to to purchases in October, 2010.
and including December 30, 2010 have been eliminated Product was shipped in January,
from inventory. The inventory as determined by physical 2011. 30,000
inventory count has been recorded on the books by the d) Deposit made with vendor and charged
company’s controller. No perpetual inventory records are to purchases in November, 2010.
maintained. All sales are made on an FOB shipping point Product was shipped FOB destination,
basis. You are to assume that all purchase invoices have on November 29, 2010 and was
been correctly recorded. The inventory was recorded included in November 30, 2010
through the cost of sales method. physical inventory as goods in
transit. 82,500
The following lists of sales invoices are entered in the sales e) Through the carelessness of the
books for the month of December 2010 and January 2011, receiving department shipment in
respectively. early December 2010 was damaged
by rain. This shipment was later sold
in the last week of December at cost.
150,000
EXCEL PROFESSIONAL SERVICES, INC.

financial statements disclosed the following

REQUIRED: information:
1. Gross profit rate for 11 months ended November 30, 2009 2008
2010. Net sales P5,300,000 P3,900,000
Net purchases 2,800,000 2,350,000
2. Cost of goods sold during the month of December
Beginning inventory 500,000 660,000
2010 using the gross profit method.
Ending inventory 750,000 500,000
3. December 31, 2010 inventory using the gross profit
f. Inventory with a cost of P70,000 was salvaged and
method.
sold for P35,000. The balance of the inventory was a
total loss.

QUESTIONS:
Based on the above and the result of your audit, answer
PROBLEM NO. 6 the following:
On April 21, 2010, a fire damaged the office and 1. How much is the adjusted balance of Accounts
warehouse of Muntinlupa Company. The only Receivable as of April 21, 2010?
accounting record saved was the general ledger, from a. P400,000 c. P360,000
which the trial balance below was prepared. b. P440,000 d. P354,000
Muntinlupa Company 2. How much is the sales for the period January 1 to April
Trial Balance 21, 2010?
March 31, 2010 a. P1,430,000 c. P1,510,000
DEBIT CREDIT b. P1,519,500 d. P1,506,000
Cash P 180,000 3. How much is the adjusted balance of Accounts Payable
Accounts receivable 400,000 as of April 21, 2010?
a. P286,000 c. P237,000
Inventory, Dec. 31, 2009 750,000 b. P106,000 d. P343,000
Land 350,000
4. How much is the net purchases for the period January
Building 1,100,000 1 to April 21, 2010?
Acc. depreciation P 413,000 a. P650,500 c. P660,000
Other assets 56,000 b. P673,500 d. P683,000
Accounts payable 237,000 5. How much is the cost of sales for the period January 1
Accrued expenses 180,000 to April 21, 2010?
a. P786,500 c. P830,500
Share capital, P100 par 1,000,000 b. P835,725 d. P828,300
Retained earnings 520,000
6. How much is the estimated inventory on April 21,
Sales 1,350,000 2010?
Purchases 520,000 a. P570,000 c. P623,500
Operating expenses 344,000 . b. P587,775 d. P579,500

Totals P3,700,000 P3,700,000 7. How much is the estimated inventory fire loss?
a. P579,500 c. P535,000
The following data and information have been gathered: b. P477,000 d. P512,000

a. The company’s year-end is December 31.

b. An examination of the April bank statement and PROBLEM NO. 7
cancelled checks revealed that checks written during You are engaged in the regular annual examination of the
the period April 1 to 21 totaled P130,000: P57,000 accounts and records of Valenzuela Manufacturing Co.
paid to accounts payable as of March 31, P34,000 for for the year ended December 31, 2010. To reduce the
April merchandise purchases, and P39,000 paid for workload at year end, the company, upon your
other expenses. Deposits during the same period recommendation, took its annual physical inventory on
amounted to P129,500, which consisted of receipts on November 30, 2010. You observed the taking of the
account from customers with the exception of a P9,500 inventory and made tests of the inventory count and the
refund from a vendor for merchandise returned in inventory records.
April.
c. Correspondence with suppliers revealed unrecorded The company’s inventory account, which includes raw
obligations at April 21 of P106,000 for April materials and work-in-process is on perpetual basis.
merchandise purchases, including P23,000 for Inventories are valued at cost, first-in, first-out method.
shipments in transit on that date. There is no finished goods inventory.

d. Customers acknowledged indebtedness of P360,000 at The company’s physical inventory revealed that the book
April 21, 2010. It was also estimated that customers inventory of P1,695,960 was understated by P84,000. To
owed another P80,000 that will never be acknowledged avoid delay in completing its monthly financial statements,
or recovered. Of the acknowledged indebtedness, the company decided not to adjust the book inventory until
P6,000 will probably be uncollectible. year-end except for obsolete inventory items.
e. The insurance company agreed that the fire loss claim Your examination disclosed the following information
should be based on the assumption that the overall regarding the November 30 inventory:
gross profit ratio for the past two years was in effect a. Pricing tests showed that the physical inventory was
during the current year. The company’s audited overstated by P61,600.
EXCEL PROFESSIONAL SERVICES, INC.

b. An understatement of the physical inventory by P4,200 c. Select the last few shipping advices used before
due to errors in footings and extensions. the physical count and determine whether
c. Direct labor included in the inventory amounted to shipments were recorded as sales.
P280,000. Overhead was included at the rate of 200% d. Inspect the open purchase order file for significant
of direct labor. You have ascertained that the amount commitments that should be considered for
of direct labor was correct and that the overhead rate disclosure.
was proper.
3. An auditor is most likely to inspect loan agreements
d. The physical inventory included obsolete materials with under which an entity’s inventories are pledged to
a total cost of P7,000. During December, the obsolete support management’s financial statement assertion of
materials were written off by a charge to cost of sales. a. Existence or occurrence.
b. Completeness.
Your audit also disclosed the following information about c. Presentation and disclosure.
the December 31 inventory: d. Valuation or allocation.
a. Total debits to the following accounts during December
were: 4. An auditor selected items for test counts while
Cost of sales P1,920,800 observing a client’s physical inventory. The auditor
Direct labor 338,800 then traced the test counts to the client’s inventory
Purchases 691,600 listing. This procedure most likely obtained evidence
b. The cost of sales of P1,920,800 included direct labor of concerning
P386,400. a. Existence. c. Rights.
b. Completeness. d. Valuation.
QUESTIONS:
5. Periodic cycle counts of selected inventory items are
Based on the above and the result of your audit, determine made at various times during the year rather than a
the following: single inventory count at year-end. Which of the
1. Adjusted amount of physical inventory at November following is necessary if the auditor plans to observe
30, 2010 inventories at interim dates?
a. P1,715,560 c. P1,845,760 a. Complete recounts by independent teams are
b. P1,631,560 d. P1,722,560 performed.
b. Perpetual inventory records are maintained.
2. Adjusted amount of inventory at December 31, 2010 c. Unit cost records are integrated with production
a. P1,509,760 c. P1,502,760 accounting records.
b. P1,516,760 d. P1,425,760 d. Inventory balances are rarely at low levels.
3. Cost of materials on hand, and materials included in
work in process as of December 31, 2010 6. A client maintains perpetual inventory records in both
a. P819,560 c. P728,560 quantities and pesos. If the assessed level of control
b. P812,560 d. P942,760 risk is high an auditor will probably
a. Apply gross profit tests to ascertain the
4. The amount of direct labor included in work in process reasonableness of the physical counts.
as of December 31, 2010 b. Increase the extent of tests of controls relevant to
a. P618,800 c. P338,800 the inventory cycle.
b. P232,400 d. P386,400 c. Request the client to schedule the physical
inventory count at the end of the year.
5. The amount of factory overhead included in work in
d. Insist that the client perform physical counts of
process as of December 31, 2010
inventory items several times during the year.
a. P 772,800 c. P464,800
b. P1,237,600 d. P777,600
7. If the perpetual inventory records show lower
quantities of inventory that the physical count an
explanation of the difference might be unrecorded
PROBLEM NO. 8
a. Sales. c. Purchases.
Select the best answer for each of the following: b. Purchase returns. d. Purchase discounts.
1. Which of the following is not one of the independent 8. The physical count of inventory of a retailer was higher
auditor's objectives regarding the audit of inventories? than shown by the perpetual records. Which of the
a. Verifying that inventory counted is owned by the following could explain the difference?
client. a. Inventory item has been counted but the tags
b. Verifying that the client has used proper inventory placed on the items had not been taken off the
pricing. items and added to the inventory accumulation
c. Ascertaining the physical quantities of inventory on sheets.
hand. b. Credit memos for several items returned by
d. Verifying that all inventory owned by the client is customers had not been recorded.
on hand at the time of the count. c. No journal entry had been made on the retailer’s
books for several items returned to its suppliers.
2. Which of the following audit procedures probably d. An item purchased “FOB shipping point” had not
provides the most reliable evidence concerning the arrived at the date of the inventory count and had
entity’s assertion of rights and obligations related to not been reflected in the perpetual records.
inventories?
a. Trace test counts noted during the entity’s physical 9. An auditor is most likely to learn of slow-moving
count to the entity’s summarization of quantities. inventory through
b. Inspect agreements to determine whether any a. Inquiry of sales personnel
inventory is pledged as collateral or subject to any b. Inquiry of warehouse personnel
liens. c. Physical observation of inventory
d. Review of perpetual inventory records.
EXCEL PROFESSIONAL SERVICES, INC.

b. Evaluation of lower of cost or market test.

10. Purchase cut-off procedures should be designed to test c. Identification of obsolete or damaged merchandise
whether all inventory to evaluate allowance (reserve) for obsolescence.
a. Purchased and received before year-end was paid d. Determination of goods on consignment at another
for. location.
b. Ordered before year-end was received. 13. What form of analytical review might uncover the
c. Purchased and received before year-end was existence of obsolete merchandise?
recorded. a. Inventory turnover rates.
d. Owned by the company is in the possession of the b. Decrease in the ratio of gross profit to sales.
company at year-end. c. Ratio of inventory to accounts payable.
11. The audit of year-end inventories should include steps d. Comparison of inventory values to purchase
to verify that the client’s purchases and sales cutoffs invoices.
were adequate. These audit steps should be designed
to detect whether merchandise included in the physical 14. The auditor tests the quantity of materials charged to
count at year-end was not recorded as a work in process by tracing these quantities to
a. Sale in the subsequent period a. Cost ledgers.
b. Purchase in the current period b. Perpetual inventory records.
c. Sale in the current period c. Receiving reports.
d. Purchase in the subsequent period d. Material requisitions.

12. An auditor’s observation of physical inventories at the

main plant at year-end provides direct evidence to
support which of the following objectives?
a. Accuracy of the priced-out inventory. - now do the DIY drill -

DO-IT-YOURSELF (DIY) DRILL

PROBLEM NO. 1
Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery stores. The company operates a perpetual
inventory system, with the first-in, first-out method used to assign costs to inventory items. Transactions and other
related information regarding two of the items (baked beans and plain flour) carried by Jay Roy Ltd are given below for
June 2010 the last month of the company's reporting period.
Baked beans Plain flour
Unit of packaging Case containing 25 x 410g cans Box containing 12 x 4kg bags
Inventory @ 1 June 2010 35,000 cases @ P19.60 62,500 boxes @ P38.40
Purchases 1. 10 June: 20,000 cases @ P19.50 per 1. 3 June: 15,000 boxes @ P38.45
case 2. 15 June: 20,000 boxes @ P38.45
2. 19 June: 47,000 cases @ P19.70 per 3. 29 June: 24,000 boxes @ P39.00
case
Purchase terms 2/10, n/30, FOB destination n/30, FOB destination
June sales 73,000 cases @ P28.50 95,000 boxes @ 40.00
Returns and allowances A customer returned 5,000 cases that had As June 15 purchase was unloaded, 1,000
been shipped in error. The customer's boxes were discovered damaged. A credit
account was credited for P142,500. of P38,450 was received by Jay Roy
Retailing Ltd.
Physical count at 30 June
2010 32,600 cases on hand 1,500 boxes on hand
Explanation of variance No explanation found assumed stolen Boxes purchased on 29 June still in transit
on 30 June
Net realizable value at 30
June 2010 P29.00 per case P38.50 per box

QUESTIONS:
5. Which of the following is the best procedure for
Based on the above and the result of your audit, answer identifying shortages of specific items in an inventory of
the following: raw materials?
a. Compare the results of a physical inventory of raw
1. The inventory of baked beans as of June 30, 2010 at
materials with perpetual inventory records.
cost, as adjusted is
b. Compare inventory turnover rates with prevailing
a. P641,860 c. P642,360
rates from previous years.
b. P642,220 d. P641,360
c. Estimates inventory quantities by using the gross
2. The inventory of plain flour as of June 30, 2010 at profit method.
cost, as adjusted is d. Review internal controls for the physical protection
a. P134,575 c. P57,675 of inventories.
b. P993,675 d. P57,725
3. The amount of inventory shortage is PROBLEM NO. 2
a. P27,440 c. P168,560
b. P27,580 d. P 0 The Bolinao Company values its inventory at the lower of
FIFO cost or net realizable value (NRV). The inventory
4. The total inventory to be recognized in the balance accounts at December 31, 2009, had the following
sheet as of June 30, 2010 is balances.
a. P699,895 c. P 699,535
b. P700,035 d. P1,623,970 Raw materials P 650,000
EXCEL PROFESSIONAL SERVICES, INC.

Work in process 1,200,000 a. P51,200 c. P57,200

Finished goods 1,640,000 b. P56,000 d. P57,600

The following are some of the transactions that affected

the inventory of the Bolinao Company during 2010. PROBLEM NO. 3
Jan. 8 Bolinao purchased raw materials with a list Pateros Company engaged you to examine its books and
price of P200,000 and was given a trade records for the fiscal year ended June 30, 2010. The
discount of 20% and 10%; terms 2/15, n/30. company’s accountant has furnished you not only the copy
Bolinao values inventory at the net invoice of trial balance as of June 30, 2010 but also the copy of
price company’s balance sheet and income statement as at said
date. The following data appears in the cost of goods sold
section of the income statement:
Inventory, July 1, 2009 P 125,000
Purchases 900,000
Goods available for sale 1,025,000
Inventory, June 30, 2010 175,000
Cost of goods sold P850,000
Jan. 8 Bolinao purchased raw materials with a list
price of P200,000 and was given a trade The beginning and ending inventories of the year were
discount of 20% and 10%; terms 2/15, n/30. ascertained thru physical count except that no reconciling
Bolinao values inventory at the net invoice items were considered. Even though the books have been
price closed, your working paper trial balance show all account
with activity during the year. All purchases are FOB
Feb. 14 Bolinao repossessed an inventory item from a shipping point. The company is on a periodic inventory
customer who was overdue in making basis.
payment. The unpaid balance on the sale is
P15,200. The repossessed merchandise is to In your examination of inventory cut-offs at the beginning
be refinished and placed on sale. It is and end of the year, you took note of the following:
expected that the item can be sold for P24,000
after estimated refinishing costs of P6,800. July 1, 2009
The normal profit for this item is considered to
be P3,200. a. June invoices totaling to P32,500 were entered in the
voucher register in June. The corresponding goods not
Mar. 1 Refinishing costs of P6,400 were incurred on received until July.
the repossessed item. b. Invoices totaling P13,500 were entered in the voucher
register in July but the goods received during June.
Apr. 3 The repossessed item was resold for P24,000
on account, 20% down.
June 30, 2010
Aug. 30 A sale on account was made of finished goods
c. Invoices with an aggregate value of P46,500 were
that have a list price of P59,200 and a cost
entered in the voucher register in July, and the goods
P38,400. A reduction of P8,000 off the list
were received in July. The invoices, however, were
price was granted as a trade-in allowance. The
date June.
trade-in item is to be priced to sell at P6,400 as
d. June invoices totaling P18,500 were entered in the
is. The normal profit on this type of inventory
voucher register in June but the goods were not
is 25% of the sales price.
received until July.
e. Invoices totaling P27,000 ( the corresponding goods
QUESTIONS:
for which were received in June) were entered the
Based on the above and the result of your audit, answer voucher register, July.
the following: (Assume the client is using perpetual f. Sales on account in the total amount of P44,000 were
inventory system) made on June 30 and the goods delivered at that time.
However, book entries relating to the sales were made
6. The entry on Jan. 8 will include a debit to Raw
in July.
Materials Inventory of
a. P200,000 c. P141,120
QUESTIONS:
b. P144,000 d. P196,000
Based on the above and the result of your cut-off tests,
7. The repossessed inventory on Feb. 14 is most likely to
answer the following:
be valued at
a. P14,000 c. P17,200 11. How much is the adjusted Purchases for the fiscal year
b. P24,000 d. P14,400 ended June 30, 2010?
a. P973,500 c. P960,000
8. The journal entries on April 3 will include a
b. P900,000 d. P978,500
a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of 12. How much is the adjusted Inventory as of June 30,
P14,000. 2010?
c. Credit to Profit on Sale of Repossessed Inventory a. P196,000 c. P223,000
of P3,600. b. P240,000 d. P125,000
d. Credit to Repossessed Inventory of P20,400.
13. How much is the adjusted Cost of goods sold for the
9. The trade-in inventory on Aug. 30 is most likely to be fiscal year ended June 30, 2010?
valued at a. P877,500 c. P829,000
a. P8,000 c. P6,000 b. P992,500 d. P891,000
b. P4,800 d. P6,400
14. An auditor usually examines receiving reports to
10. How much will be recorded as Sales on Aug. 30? support entries in the
EXCEL PROFESSIONAL SERVICES, INC.

a. Voucher register and sales returns journal. a. Obtaining confirmation of inventories pledged
b. Sales journal and sales returns journal. under loan agreements.
c. Voucher register and sales journal. b. Testing the computation of standard overhead
d. Check register and sales journal. rates.
c. Examining paid vendors' invoices.
15. Which one of the following audit procedures would give
d. Reviewing direct labor rates.
the least assurance regarding valuation of inventory?
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