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AP.0101 Inventories CPART PDF
AP.0101 Inventories CPART PDF
Assertions about classes of transactions and events for the period under
audit: (COCAC)
Completeness - all transactions and events that should have been recorded
have been recorded.
Occurrence - transactions and events that have been recorded have occurred
and pertain to the entity.
Cutoff - transactions and events have been recorded in the correct accounting
period.
Rights and obligations - the entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.
Completeness - all assets, liabilities and equity interests that should have
been recorded have been recorded.
Valuation and allocation - assets, liabilities, and equity interests are included
in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded.
Completeness - all disclosures that should have been included in the financial
statements have been included.
Page 1 of 20 AP.0101
Occurrence and rights and obligations - disclosed events, transactions, and
other matters have occurred and pertain to the entity.
Accuracy and valuation - financial and other information are disclosed fairly
and at appropriate amounts.
Page 2 of 20 AP.0101
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.
6. Perform cutoff procedures. Obtain the receiving report number for the last
shipment received prior to year-end and determine that the item is
included in inventory. Also, identify the last shipping document and
determine, based on shipping terms, whether the item was properly
recorded in sales or inventory.
8. Determine that consigned inventory has been excluded from inventory and
that inventory pledged has been properly disclosed. Examine confirmations
from financial institutions and read minutes of the board of directors’
meetings.
9. Considering the method the client uses for inventory valuation, examine
invoices for inventory on hand or trace prior year’s inventory listing to
verify cost.
10. For selected items, determine net realizable value (NRV) of the inventory
and apply the lower of cost or NRV.
Page 3 of 20 AP.0101
12. Review the obsolescence of the inventory by:
a. being alert while observing inventory being taken for damaged, slow-
moving, or scrap inventory.
b. Scanning perpetual records for slow-moving items and discussing their
valuation with client.
13. Determine whether accounts are classified and disclosed in the financial
statements in accordance with GAAP.
Purchases
Production
Page 4 of 20 AP.0101
For selected transactions, examine signed materials requisitions, approved
labor tickets, and allocation of overhead.
Classification: Production transactions have been recorded in the proper
accounts
PROBLEM NO. 1
c. Included in the physical count were tools billed to a customer FOB shipping
point on December 31, 2017. These tools had a cost of P31,000 and were
billed at P40,000. The shipment was on Pasay’s loading dock waiting to be
picked up by the common carrier.
d. P15,000 worth of parts which were purchased from Sogo and paid for in
December 2017 were sold in the last week of 2017 and appropriately
recorded as sales of P21,000. The parts were included in the physical
count on December 31, 2017, because the parts were on the loading dock
waiting to be picked up by the customer.
Page 5 of 20 AP.0101
e. Goods were in transit from a vendor to Pasay on December 31, 2017. The
invoice cost was P71,000, and the goods were shipped FOB shipping point
on December 29, 2017.
j. Goods received from a vendor on December 26, 2017, were included in the
physical count. However, the related P56,000 vendor invoice was not
included in accounts payable at December 31, 2017, because the accounts
payable copy of the receiving report was lost.
REQUIRED:
PROBLEM NO. 2
Page 6 of 20 AP.0101
a. Goods valued at P110,000 are on consignment with a customer. These
goods were not included in the ending inventory figure.
c. Goods costing P85,000, sold for P102,000, were shipped on December 31,
2017, and were delivered to the customer on January 2, 2018. The terms
of the invoice were FOB shipping point. The goods were included in the
ending inventory for 2017 and the sale was recorded in 2018.
e. The invoice for goods costing P35,000 was received and recorded as a
purchase on December 31, 2017. The related goods, shipped FOB
destination were received on January 2, 2018, and thus were not included
in the physical inventory.
REQUIRED:
PROBLEM NO. 3
Page 7 of 20 AP.0101
the company’s controller. No perpetual inventory records are maintained. All
sales are made on an FOB shipping point basis. You are to assume that all
purchase invoices have been correctly recorded. The inventory was recorded
through the cost of sales method.
The following lists of sales invoices are entered in the sales books for the
month of December 2017 and January 2018, respectively.
DECEMBER 2017
Sales Sales
invoice amount invoice date Cost Date shipped
a) P150,000 Dec. 21 P100,000 Dec. 31, 2017
b) 100,000 Dec. 31 40,000 Nov. 03, 2017
c) 50,000 Dec. 29 30,000 Dec. 30, 2017
d) 200,000 Dec. 31 120,000 Jan. 03, 2018
e) 500,000 Dec. 30 280,000 Dec. 29, 2017
(shipped to consignee)
JANUARY 2018
f) P300,000 Dec. 31 P200,000 Dec. 30, 2017
g) 200,000 Jan. 02 115,000 Jan. 02, 2018
h) 400,000 Jan. 03 275,000 Dec. 31, 2017
REQUIRED:
PROBLEM NO. 4
In conducting your audit for the year ended December 31, 2017, you were
satisfied that the system of internal control was good. Accordingly, you
observed the physical inventory at an interim date, November 30, 2017
instead of at year end. You obtained the following information from your
client’s general ledger:
Page 8 of 20 AP.0101
Your audit disclosed the following information:
REQUIRED:
PROBLEM NO. 5
On April 21, 2017, a fire damaged the office and warehouse of Muntinlupa
Company. The only accounting record saved was the general ledger, from
which the trial balance below was prepared.
Muntinlupa Company
Trial Balance
March 31, 2017
DEBIT CREDIT
Cash P 180,000
Accounts receivable 400,000
Inventory, Dec. 31, 2016 750,000
Land 350,000
Building 1,100,000
Acc. depreciation P 413,000
Other assets 56,000
Accounts payable 237,000
Accrued expenses 180,000
Page 9 of 20 AP.0101
DEBIT CREDIT
Share capital, P100 par 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 344,000 .
Totals P3,700,000 P3,700,000
e. The insurance company agreed that the fire loss claim should be based on
the assumption that the overall gross profit ratio for the past two years was
in effect during the current year. The company’s audited financial
statements disclosed the following information:
2016 2015
Net sales P5,300,000 P3,900,000
Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 750,000 500,000
f. Inventory with a cost of P70,000 was salvaged and 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 the following:
Page 10 of 20 AP.0101
1. How much is the adjusted balance of Accounts Receivable as of April 21,
2017?
a. P400,000 c. P360,000
b. P440,000 d. P354,000
2. How much is the sales for the period January 1 to April 21, 2017?
a. P1,430,000 c. P1,510,000
b. P1,519,500 d. P1,506,000
4. How much is the net purchases for the period January 1 to April 21, 2017?
a. P650,500 c. P660,000
b. P673,500 d. P683,000
5. How much is the cost of sales for the period January 1 to April 21, 2017?
a. P786,500 c. P830,500
b. P835,725 d. P828,300
PROBLEM NO. 6
You are engaged in the regular annual examination of the accounts and
records of Valenzuela Manufacturing Co. for the year ended December 31,
2017. To reduce the workload at year end, the company, upon your
recommendation, took its annual physical inventory on November 30, 2017.
You observed the taking of the inventory and made tests of the inventory
count and the inventory records.
The company’s inventory account, which includes raw materials and work-in-
process is on perpetual basis. Inventories are valued at cost, first-in, first-out
method. There is no finished goods inventory.
The company’s physical inventory revealed that the book inventory of
P1,695,960 was understated by P84,000. To avoid delay in completing its
monthly financial statements, the company decided not to adjust the book
inventory until year-end except for obsolete inventory items.
Page 11 of 20 AP.0101
Your examination disclosed the following information regarding the November
30 inventory:
a. Pricing tests showed that the physical inventory was overstated by
P61,600.
b. An understatement of the physical inventory by P4,200 due to errors in
footings and extensions.
c. Direct labor included in the inventory amounted to P280,000. Overhead
was included at the rate of 200% of direct labor. You have ascertained
that the amount of direct labor was correct and that the overhead rate was
proper.
d. The physical inventory included obsolete materials with a total cost of
P7,000. During December, the obsolete materials were written off by a
charge to cost of sales.
Your audit also disclosed the following information about the December 31
inventory:
a. Total debits to the following accounts during December were:
Cost of sales P1,920,800
Direct labor 338,800
Purchases 691,600
b. The cost of sales of P1,920,800 included direct labor of P386,400.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Adjusted amount of physical inventory at November 30, 2017
a. P1,715,560 c. P1,845,760
b. P1,631,560 d. P1,722,560
2. Adjusted amount of inventory at December 31, 2017
a. P1,509,760 c. P1,502,760
b. P1,516,760 d. P1,425,760
3. Cost of materials on hand, and materials included in work in process as of
December 31, 2017
a. P819,560 c. P728,560
b. P812,560 d. P942,760
4. The amount of direct labor included in work in process as of December 31,
2017
a. P618,800 c. P338,800
b. P232,400 d. P386,400
5. The amount of factory overhead included in work in process as of
December 31, 2017
a. P 772,800 c. P464,800
b. P1,237,600 d. P777,600
Page 12 of 20 AP.0101
PROBLEM NO. 7
Page 13 of 20 AP.0101
a. Apply gross profit tests to ascertain the reasonableness of the physical
counts.
b. Increase the extent of tests of controls relevant to the inventory cycle.
c. Request the client to schedule the physical inventory count at the end of
the year.
d. Insist that the client perform physical counts of inventory items several
times during the year.
8. 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 tags placed on the items had
not been taken off the items and added to the inventory accumulation
sheets.
b. Credit memos for several items returned by customers had not been
recorded.
c. No journal entry had been made on the retailer’s 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.
11. The audit of year-end inventories should include steps to verify that the
client’s purchases and sales cutoffs were adequate. These audit steps
should be designed to detect whether merchandise included in the physical
count at year-end was not recorded 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
Page 14 of 20 AP.0101
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.
b. Evaluation of lower of 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.
13. What form of analytical review might uncover the existence of obsolete
merchandise?
a. Inventory turnover rates.
b. Decrease in the ratio of gross profit to sales.
c. Ratio of inventory to accounts payable.
d. Comparison of inventory values to purchase invoices.
14. The auditor tests the quantity of materials charged to work in process by
tracing these quantities to
a. Cost ledgers.
b. Perpetual inventory records.
c. Receiving reports.
d. Material requisitions.
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 2017 the last month of
the company's reporting period.
Page 15 of 20 AP.0101
Baked beans Plain flour
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 A customer returned 5,000 As June 15 purchase was
allowances cases that had been shipped unloaded, 1,000 boxes were
in error. The customer's discovered damaged. A
account was credited for credit of P38,450 was
P142,500. received by Jay Roy
Retailing Ltd.
Physical count at
30 June 2017 32,600 cases on hand 1,500 boxes on hand
Explanation of No explanation found Boxes purchased on 29 June
variance assumed stolen still in transit on 30 June
Net realizable
value at 30 P29.00 per case P38.50 per box
June 2017
QUESTIONS:
Based on the above and the result of your audit, answer the following:
Page 16 of 20 AP.0101
PROBLEM NO. 2
The Bolinao Company values its inventory at the lower of FIFO cost or net
realizable value (NRV). The inventory accounts at December 31, 2016, had
the following balances.
The following are some of the transactions that affected the inventory of the
Bolinao Company during 2017.
Apr. 3 The repossessed item was resold for P24,000 on account, 20%
down.
Aug. 30 A sale on account was made of finished goods that have a list
price of P59,200 and a cost P38,400. A reduction of P8,000 off
the list price was granted as a trade-in allowance. The trade-
in item is to be priced to sell at P6,400 as is. The normal profit
on this type of inventory is 25% of the sales price.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Assume the client is using perpetual inventory system)
6. The entry on Jan. 8 will include a debit to Raw Materials Inventory of
a. P200,000 c. P141,120
b. P144,000 d. P196,000
7. The repossessed inventory on Feb. 14 is most likely to be valued at
a. P14,000 c. P17,200
b. P24,000 d. P14,400
Page 17 of 20 AP.0101
8. The journal entries on April 3 will include a
a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of P14,000.
c. Credit to Profit on Sale of Repossessed Inventory of P3,600.
d. Credit to Repossessed Inventory of P20,400.
PROBLEM NO. 3
Pateros Company engaged you to examine its books and records for the
fiscal year ended June 30, 2017. The company’s accountant has furnished
you not only the copy of trial balance as of June 30, 2017 but also the copy of
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:
The beginning and ending inventories of the year were ascertained thru
physical count except that no reconciling items were considered. Even
though the books have been closed, your working paper trial balance show all
account with activity during the year. All purchases are FOB shipping point.
The company is on a periodic inventory basis.
July 1, 2016
Page 18 of 20 AP.0101
c. Invoices with an aggregate value of P46,500 were entered in the voucher
register in July, and the goods were received in July. The invoices,
however, were date June.
d. June invoices totaling P18,500 were entered in the voucher register in June
but the goods were not received until July.
e. Invoices totaling P27,000 ( the corresponding goods for which were
received in June) were entered the voucher register, July.
f. Sales on account in the total amount of P44,000 were made on June 30
and the goods delivered at that time. However, book entries relating to the
sales were made in July.
QUESTIONS:
Based on the above and the result of your cut-off tests, answer the following:
11. How much is the adjusted Purchases for the fiscal year ended June 30,
2017?
a. P973,500 c. P960,000
b. P900,000 d. P978,500
13. How much is the adjusted Cost of goods sold for the fiscal year ended
June 30, 2017?
a. P877,500 c. P829,000
b. P992,500 d. P891,000
15. Which one of the following audit procedures would give the least
assurance regarding valuation of inventory?
a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.
- end of AP.0101 -
Page 19 of 20 AP.0101
AUDIT PROCEDURES APTITUDE TEST 1 (APAT) 1
ANSWER SHEET
THEORETICAL DRILL
01. 11.
02. 12.
03. 13.
04. 14.
05. 15.
06. 16.
07. 17.
08. 18.
09. 19.
10. 20.
Page 20 of 20 AP.0101