AUDITING PROBLEMS

Quiz on Inventories
SET A

Problem 1
In your audit of the December 31, 2014 financial statements of Ivy Inc., you found the following inventory related transactions:
a. Goods costing P100,000 are on consignment with a customer. These goods were invoiced at normal profit margin which
was at 40% based on cost and was recorded as 2014 sales. Being offsite on the count date which was on December 30,
2013, the goods were not included in the physical count.
b. Goods costing P33,000 were delivered to Ivy Inc. on January 4, 2015. The invoice of these goods were received and
recorded on January 10, 2015. The invoice showed the shipment was made on December 29, 2014, FOB shipping point.
c. Goods costing P40,000 were shipped FOB shipping point on December 31, 2014, and were received by the customer on
January 2, 2015. Although sale was recorded in 2014, these goods were included in the 2014 inventory.
d. Goods costing P16,000 were shipped to a customer on December 30, 2014, FOB destination. These goods were received by
the customer on January 5, 2015 and were not included in the physical count. The sale was properly recorded in 2015.
e. Goods costing P22,000 shipped by a vendor under FOB destination term, were received on January 3, 2015. The related
invoice however, were received on December 31, 2014, thus was recorded as purchase in 2014.
f. Goods costing P50,000 were received from a vendor under consignment term. These goods were included in the physical
count. No purchase related to the inventory had been recorded yet.
g. Ivy Inc., recorded as 2014 sale a P112,000 invoice for goods delivered to a customer on December 31, 2014, FOB
Destination. The goods were received by the customer on January 5, 2015. Having been delivered after the count date, the
goods were included in the physical count.

Requirements:
1. What is the net adjustment to inventories as of December 31, 2014?
A. 59.000
B. 43,000
C. 50,000
D. 66,000
2. Assuming all sales are on account, what is the net adjustment to accounts receivable as of December 31, 2014?
A. 260,000
B. 252,000
C. 140,000
D. 212.000
3. Assuming all purchases are on account, what is the net adjustment to accounts payable?
A. 22,000
B. 33,000
C. 11,000
D. 55,000
4. What is the effect of the errors to the 2014 net income
A. 194,000
B. 220,000
C. 164,000
D. 204,000

Problem 2
On May 31, 2014, a fire completely destroyed the work in process inventory of Alder Paints. Physical inventory figures were
published as follows:
As of January 1, 2014 As of May 31, 2014
Raw Materials P 15,000 P30,000
Work-in Process 50,000
Finished Goods 70,000 60,000

Sales for the first five months of 2014 were P150,000. Raw materials purchased were P50,000. Freight on purchases was P5,000.
Direct labor for the five months was P40,000. To determine the value of the lost inventory, the insurance adjusters have agreed to
use an average gross profit rate of 32.59. Assume that manufacturing overhead was 45% of direct labor cost.

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Requirements:
5. The value of the goods manufactured and completed as of May 31, 2014 was
A. P60,000
B. P90,000
C. P95,000
D. 91,250
6. Raw materials used during the first five months of 2014 were
A. P25,000
B. P35,000
C. P40,000
D. P45,000
7. The total value of goods put in process during the five-month period amounted to
A. P143,000
B. P150,000
C. P168,000
D. P148,000
8. The value of the destroyed work in process inventory as determined by the insurance adjusters would be
A. P56,750
B. P65,750
C. P86,750
D. P57,650

Problem 3
On May 21, 2014, a fire destroyed the entire merchandise inventory on hand of Natural Corporation The following information is
available:
Sales, January 1 through May 2, 2014 P380,000
Sales return (covering the same period) 20,000
Sales allowance (covering the same period) 10,000
Sales discounts (covering the same period) 25,000
Inventory, January 1, 2014 80,000
Purchases, January 1 through May 2, 2014 (including P40,000 of
goods in transit on May 2, 2014 shipped FOB shipping point) 400,000
Purchase discounts 40,000
Purchase returns and allowances 30,000
Mark-up percentage on cost 20%

9. What is the estimated inventory on May 2, 2014 immediately prior to the fire?
A. 70,000
B. 82,000
C. 110,000
D. 122,000
10. How much should be recognized as inventory loss?
A. 30,000
B. 42,000
C. 70,000
D. 82,000

Problem 4
You were assigned to test the reasonableness of the inventory account balance as reported by your client, Surety Corp. The
following information is made available by Surety Corp.'s accountant:
Cost Retail
Beginning inventory P598,000 P1,500,000
Purchases 3,048,400 5,500,000
Freight-in 80,000
Purchase returns 140,000 180,000
Mark-ups 600,000
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Mark-up cancellation 100,000
Mark-down 1,300,000
Mark-down cancellation 385,000
Sales 4,470,000
Sales returns 150,000
Sales discount 200,000
Employee discount 400,000

Ending inventory as a result of the physical count conducted on December 31, was at P649,600. What is the amount of estimated
inventory shortage, if any, as a result of your test of reasonableness under the following assumed cost formula? (round-off cost
percentage to 2 whole numbers)
11. Lower of cost or average/Conservative/Conventional Approach
A. None
B. 176,050
C. 327,700
D. 479,350
12. Average Approach
A. None
B. 176,050
C. 294,000
D. 327,700
13. FIFO Retail Approach
A. 176,050
B. 294,000
C. 378,250
D. 479,350

Problem 5
Nancy Inc. had the following items of merchandise inventories with related information about estimated selling price and cost to sell
as of December 31, 2014:

Class Z
Item Quantity Unit Cost Unite Selling Price Unit Cost to sell
Z-01 10,000 P20 P30 P5
Z-02 15,000 25 30 8
Z-03 20,000 30 40 14
Z-04 25,000 32 45 10
Z-05 30,000 35 50 20

Class Y
Item Quantity Unit Cost Unite Selling Price Unit Cost to sell
Y-01 20,000 P22 P25 P2
Y-02 22,000 28 30 5
Y-03 28,000 25 40 10
Y-04 25,000 30 35 10
Y-05 30,000 15 30 5

Required:
14. What is the correct carrying value of inventories if the lower of cost or NRV valuation is employed on an item per item
basis?
A. 5,515,000
B. 5,831,000
C. 5,981,000
D. 6,100,000
15. What is the loss on inventory write-down, assuming that direct write-off method is used under requirement 1?
A. None

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B. 119,000
C. 150,000
D. 466,000
16. What is the correct carrying value of inventories if the lower of cost or NRV valuation is employed on a per class basis?
A. 5,515,000
B. 5,831,000
C. 5,981,000
D. 6,100,000
17. What is the loss on inventory write-down, assuming that direct write off method is used under requirement 3?
A. None
B. 119,000
C. 150,000
D. 466,000

Problem 6
18. Which of the following assertions is the primary assertion that is satisfied by physically observing the client’s inventory
count?
A. Rights
B. Valuation
C. Completeness
D. Existence

19. After accounting for a sequence of inventory tags, an auditor traces a sample tags to the physical inventory listing to obtain
evidence that all items
A. Included in the listing have been counted
B. Represented by the inventory tags are included in the listing
C. Included in the listing are represented by inventory tags
D. Represented by inventory tags are bona fide

20. When a physical count of inventory is performed at an interim date, the auditor observes it at that time and tests the
perpetual records for transactions:
A. Throughout the year
B. Which are representative sample of the period under audit
C. From the date of the count to year-end
D. From the date of the count to the end of the audit field work

-End-

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