Audit of inventories (cpar oct 2013 reviewer AP-7406)

Problem 1
Bird Company is a manufacturer of small tools. The following information was obtained from the
companys accounting records for the year ended dec. 31 2013
Inventory count dec.31 2013 (based on physical count
in birds warehouse at cost on dec.31 2013)
accounts payable at dec.31 2013
net sales (sales less sales return)

3,740,000
2,830,000
19,386,800

*your audit reveals the following information:

1.the physical count included tools billed to customer FOB shipping point on dec 31 2013. These tools
cost 192,000 and were billed at 235,500 they were in the shipping area waiting to be picked up by
the customer.
2.good shipped fob shipping point by a vendor were in transit on dec 31 2013. These goods with
invoice cost of 279,000 were shipped on dec 29 2013
3. work in process inventory costing 31,000 was sent to job contractor for further processing
4.not included in the physical count were goods returned by customer on dec 31 2013. These goods
costing 147,000 were inspected and returned to inventory on jan.7,2014. Credit memos for 203,400
were issued to the customer at the date
5. in transit to a customer on dec 31 2013, were tools costing 51,000 shipped fob shipping point on
dec 26 2013. A sales invoice for 88,200 was issuedon jan 3 2014 when bird company was notified
that the tools has been received.
6. at exactly 5:00pm on dec 31 2013, goods costing 93,600 were received from a vendor. These were
recorded on a receiving report dated jan. 2 2014. The related invoice was recorded on dec 31 2013,
but the goods were not included in the physical count.
7.included in the physical count were goods received from a vendor on dec 27 2013. However the
related invoice for 108,000 was not recorded because the accounting departments copy of the
receiving report was lost.
8.a monthly freight billfor 96,000 was received on January 3 2014. It specifically related to
merchandise bought in dec 2013, one-half of which was still in the inventory at dec. 31 2013. The
freight was not included in either the inventory or in the accounts payable at dec 31 2013

Question
1. Birds dec. 31 2013 inventory shoud be increased by
a. 279,000
B. 648,600
c.555,000
d.540,600
2. Birds accounts payable balance at dec. 31 203 should increase by
a.483,000
b.279,000
c.108,000
d.576,600
3. The amout of net sales to be reported on birds income statement for the year ended dec 31
2013 should be
a.18,947,900
b.19,386,800
c.19,036,100
d.19,151,300
4. Birds statement of financial position at dec 31 2013 should report accounts payable of
a.3,217,000
b.2,755,000
c.2,830,000
d.3,313,000
5.
the amount of inventory to be reported on birds dec 31 2013 statement of financial
position should be
a.4,148,000
b.4,294,000
c.4,388,600
d.3,740,000

PROBLEM 2
You were engaged by first love corporation for the audit of the companys financial statement for the
year ended dec 31 2013. The company is engaged in the wholesale business and make all sales at
25% over cost
*the following were gathered from the clients accounting records:
Sales
purchases
Date
reference
amount
date
reference
amount
Bal forwarded
5,200,000
bal. forwarded
2,800,000
Dec 27
si no. 965
40,000
dec 28
rr no 1059
24,000
Dec 28
si no 966
150,000
dec 30
rr no 1061
70,000
Dec 28
si no 967
10,000
dec 31
rr no 1062
42,000
Dec 31
si no 969
46,000
dec 31
rr no 1063
64,000
Dec 31
si no 970
68,000
dec 31
closing entry
(3,000,000)
Dec 31
si no 971
16,000
P 0
Dec 31
closing entry
(5,530,000)
P 0
Note: SI sales invoice
RR = receiving report
Accounts receivable
500,000
Inventory
600,000
Accounts payable
400,000
You observed the physical inventory of goods in the warehouse on dec 31 and were satisfied that it
was properly taken.
When performing the sales and purchases cut off test, you found that at dec 31 the last receiving
report which had been used was no. 1063 and that no shipments had been made on any sales invoice
whose no. is larger than no. 968. You also obtained the following additional information:
a.) Included in the warehouse physical inventory at dec 31 were goods which had been
purchased and received report no 1060 but for which the not received until the following year.
The cost was 18,000
b.) At the close of the business, dec 31 2013, there were two trucks on the company siding:
Truck no. CPA 123 was unloaded on jan 2 of the folloing year and received on
receiving report no 1063. The freight was paid by the vendor.
Truck no. ILU 143 was loaded and sealed on dec 31 but left the company premises
in jan 2. This order was sold for 100,000 per saled invoice no 968
c.) Temporary stranded at dec 31 at the railroad siding were two delivery trucks enroute to
brooks trading corporation. Brooks received the goods which were sold on sales invoice
no.966, terms fob destination ,the next day
d.) Enroute to the client on dec 31 was truckload of goods, which was received on receiving
report no 1064. The goods were shipped fob destination, and freight of 2,000 was paid by the
client. However the freight was deducted from the purchase price of 800,000.
Based on the above and the result of your audit, determine the following
1. Sales for the year ended dec 31 2013
a. 5,250,000
b. 5,400,000
c. 5,150,000
d.5,350,000
2. Purchases for the year ended dec 31 2013
a.3,000,000
b.3,018,000
c.3,754,000
d.3,818,000
3.
inventory as of dec 31 2013
a.864,000
b.968,000
c.800,000
d.814,000
4.
accounts receivable as of dec 31 2013
a.350,000
b. 370,000
c.220,000
d.120,000

5.

accounts payable as of dec 31 2013

a.418,000
b. 400,000
c. 354,000

d. 1,218,000

PROBLEM NO. 4
Malabon sales company uses first in first out method in calculating the cost of goods sold for the
three product that the company handles. Inventories and purchases information concerning the three
products are given for the month of October.
Product c
product p
product a
Oct 1
inventory
50,000 units
30,000 units
65,000 units
At 6.00
at 10.00
at 0.90
Oct 1-15 purchases
70,000 units
45,000 units
30,000 units
At 6.50
at 10.50
at 1.25
Oct 16-31
purchases
30,000 units
At 8.00
Oct 1-31 sales
105,000 units
50,000 units
45,000 units
Oct 31
sales price
8.00/units
11.00/unit
2.00/units
*on oct 31 the companys suppliers reduced their prices from the most recent purchase price by the
following percentage: product c,20% ; product p 10% ; product a,8%. Accordingly, malabod decided to
reduce its sales price at all times by 10% effective November 1. Malabons selling cost is 10% of the
sales price. Product c and p have a normal profit(after selling cost) of 30% on sales price, while the
normal profit on product a (after selling cost) is 15% of selling price.
Base on the above and the result of your audit, determine the fillowing
1. The cost of inventory at oct 31 is
a.565,000
b.557,310
c.655,500
d.617,500
2. The amount of inventory to be reported on the companys balance sheet at oct 31 is
a.569,850
b.559,350
c.543,810
d.595,350
3. The allowance of inventory writedown at oct 31 is
a.5,650
b.85,650
c. 13,500
d.60,150
4. The cost of sales after loss on inventory writedown for the month on oct is
a.1,293,650
b.1,022,260
c.1,290,650
d.1,208,000

.
Select the best answer
1. Which of the following is not one of the independent auditors objective regarding the audit of
inventories?
a. Verifying that the inventory counted is owned by the client
b. Verifying that the client has used proper inventory pricing
c. Ascertaining the physical quantities of inventory on hand
d. Verifying that all inventory owned by the client is on hand at the time of count
2. Which of the following audit procedures probably provides the most reliable evidence
concerning the entitys assertion of rights and obligations related to inventories?
a. Trace test counts noted during the entitys physical count to the entities summarization of
quantities

b. Inspect agreements to determine whether any inventory is pledge as collateral or

subject to any liens
c. Select the last few shipping advices used before the physical count and determine
whether shipments are recorded as sales
d. Inspect the open purchase order file for significant commitments that should be
considered for disclosure.
3. An auditor most likely would inspect load agreements under which an entitys inventories are
pledge to support managements financial assertion of
a. Existence
b. Completemess
c. Presentation and disclosure
d. Valuation and allocation
4. An auditor selected items for test counts while observing clients physical inventory. The
auditor then traced the test counts to the clients inventory listing. This procedure most likely
obtained evidence concerning
a. Existence
b. Completeness
c. Presentation and disclosure
d. Valuation and allocation

5. Periodic cycle counts of selected inventory items are made at various items during the year
rather than a single inventory count at year-end. Which of the following is necessary if the
auditor plans to observe inventories at interim dates ?
a.
b.
c.
d.

Complete recounts by independent teams are performed

Perpetual inventories are maintained
Unit cost record are integrated with production accounting records
Inventory balances are rarely at low levels

6. A client maintains perpetual inventory records in both quantities and pesos. If the assessed
level of control risk is high, an auditor will probably
a. Apply gross profit test to ascertain the reasonableness of the physical counts
b. Increase the extent of the tests of controls relevant to the inventory cycle
c. Request the client to schedule the physical count at the end of the year
d. Insist that the client perform physical counts of inventory items several times during the
year
7. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the
physical inventory listing to obtain evidence that all items
a. Included in the listing have been counted
b. Represented by inventory tags are included in the listing
c. Included in the listing are represented bay inventory tags
d. Represented by inventory tags are bona fide
8. If the perpetual inventory records show lower quantities of inventory than the physical count,

an
a.
b.
c.
d.

explanation of the difference might be unrecorded

Sales
Purchases return
Purchases
Purchases discount

9. The physical count of inventory of a retailer was higher than shown by the perpetual records.
Which of the following could explain the difference?
a. Inventory item has been counted but the tag placed on the items had not been taken off
the items and added to the accumulation sheets
b. Credit memos of several items returned by customer had not been recorded
c.

No journal entry had been made on the retailers books for several items returned to its
suppliers.
d. An item purchased fob shipping point had not arrived at the date of the inventory count
and had not been reflected in the perpetual records.
10. An
a.
b.
c.
d.

auditor is most likely to learn of slow moving inventory through

Inquiry of sales personnel
Inquiry of sales personnel
Purchased and received before year-end was recorded
Owned by the company is in the possession of the company at year-end

11. Purchase cut off procedures should be designed to test whether all inventory
a. Purchased and receives before year-end was paid for
b. Ordered before year-end was received
c. Purchased and received before year-end was received
d. Owned by the company is in the possession of the company at year-end
12. The audit of inventories should include steps to verify that the clients purchases and sales
cutoffs were adequate. This audit step should be designed to detect whether merchandise
included in the physical count at year-end was not included as a
a. Sale in the subsequent period
b. Purchase in the current period
c. Sale in the current period
d. Purchase in the subsequent period
13. An auditors observation of physical inventories at the main plant at year-end provides direct
evidence to support which of the following objectives
a. Accuracy of period-out inventory
b. Evaluation of the lower cost or market test
c. Identification of obsolete or damaged merchandise to evaluate allowance (reserve) for
obsolescence
d. Determination of goods on consignment at another location
14. What form of analytical review might uncover the existence of obsolete merchandise?
a. Inventory turnover rates
b. Decrease in the ratio of gross profit sales
c. Ratio of inventory to accounts payable
d. Comparison of inventory values to purchase invoices

15. Which of the following is the best audit test to evaluate the accuracy of the inventory record of
materials inventory in a production operation/
a. Trace selected inventory receipts to perpetual inventory records
b. Vouch selected postings in the perpetual inventory records to source documents
c. Perform turnover test for materials inventory
d. Reconcile quantities on hand per physical counts of selected items with perpetual
inventory and verify pricing