AUDITING PROBLEMS-INVENTORIES

Problem 1- Having been engaged as external auditor of Dragon Company on Feb. 01,2020, you were
unable to observe the taking of inventory on December 31, 2019, which was reported to amount
to P345,000. The following data were gathered by you:
Inventory, December 31, 2018 320,000
Purchases during 2019 1,390,000
Cash sales during 2019 380,000
Shipment received on December 26, 2019, recorded as purchase, but
not included in physical inventory 12,000
Deposits made with suppliers,entered as purchases (goods were not received
2019) 25,000
Collections on accounts receivable, 2019 1,800,000
Accounts receivable, Jan.1, 2019 260,000
Accounts receivable, Dec. 31, 2019 310,000
Gross profit percentage on sales 40%
The estimated inventory shortage/overage at Dec. 31, 2019 was __________________________

Problem 2- Britney, Inc. uses a periodic inventory system and a fiscal year ending Sept. 30 On Sept. 30, 2019, the
company correctly reported inventory on hand costing P14,500. During the fiscal year ending Sept.30,2020, the
company recorded purchases of P45,000. A physical count on Sept.30,2020 revealed that goods costing P21,000
were on hand. The following events occurred between Sept.23 and Oct. 7,2020:

1) Goods costing P5,000 that the company was holding as a consignee were included in the physical count.

2) An invoice for goods costing P4,600 was received and entered as a credit purchase on Sept.29. The goods arrived
on Oct. 2. The supplier shipped the goods FOB shipping point on Sept. 27.

3) An invoice for goods costing P4,100 was received and entered as a credit purchase on Oct. 3. The goods arrived
on that date and were in satisfactory condition. The invoice indicates that the supplier shipped the goods FOB
destination on Sept.29.

4) Goods that Britney specially purchased from an overseas supplier for ultimate sale to Diamond Enterprises, Inc. were
included in the physical count. A contract between the two companies pertaining to the goods states that "title passes
when buyer approves the goods". A representative from Diamond Enteprises inspected and approved the goods in
Britney's warehouse on Sept. 28. Britney shipped the goods and recorded a sale on Oct. 4. The goods cost P2,500 and
were sold on credit for P3,600.

5) Goods costing P1,800 and housed in a special storeroom were inadvertently overlooked when the physical count was
taken.

6) An invoice for goods costing P3,700 was received and entered as a credit purchase on Sept. 28. The supplier
shipped the goods FOB shipping point on Sept. 26. The receiving report indicates that Britney received the goods on
October 1.
Instructionsa) Make all necessary correcting entries for the fiscal year ending Sept. 30,2020. Assume that the
adjusting entry for cost of goods sold has not been made and that the books for the year have not been
closed.
b) Compute the corredt inventory amount for Britney's balance sheet dated Sept.30,2020.
 c) Make the adjusting journal entry to record the cost of goods sold for the fiscal year ending 09/30/20

Problem 3- Katrina, Inc. is an importer and wholesaler of cellphone accessories. Its merchandise is purchased
from a number of suppliers and is warehoused until sold to customers. In conducting your audit of Katrina's
financial statements for the year ended Dec. 31, 2019, you determined that the internal control system is functioning
effectively. You observed the physical count of inventory on November 30, 2019. The following information were
obtained from Katrina's accounting records:
Sales for 11 months ended November 30 3,400,000
Sales for year ended Dec. 31 3,840,000
Purchases for 11 months ended November 30 2,700,000
Purchases for year ended December 31 3,200,000
Inventory, January 1 350,000
Inventory, November 30 (Per physical count) 380,000
Your audit disclosed the following information:
1) Shipments received in unsalable condition and excluded from physical inventory. The returns were not recorded
because no credit memo were received from vendors:
Total at November 30 40,000
Total at December 31 (including the Nov. 30 unrecorded returns) 60,000
2) Deposit made with vendor and charged to Purchases in October. The goods were
shipped on January, 2020 8,000
3) Deposit made with vendor and charged to Purchases in November. The goods were shipped FOB
destination on November 29 and were included in the physical inventory as goods in transit. 22,000
4) Shipments received in November and included in the physical count at Nov. 30 but recorded as
December purchases 30,000
5) Due to the carelessness of the receiving dept., a December shipment was damaged by rain. These
goods were later sold at cost in December. 40,000
Based on the preceding information, determine the following:
1) Adjusted purchases up to: November 30- _____________________ December 31- ___________________
2) Cost of goods sold for 11 months ended November 30,2019-____________________________
3) Gross profit ratio for 11 months ended November 30,2019- _____________________________
4) Gross profit for the month of December- ___________________________________________
5) Estimated inventory at December 31, 2019- _________________________________________

Problem 4- Flores Company cans two food commodites which it stores at various warehouses. The company
uses a perpetual inventory system under which the finished goods inventory is charged with production and
credited for sales at standard cost. The detail of the finished goods inventory is maintained on punched cards
by the tabulating department in units and pesos for the various warehouses.
The accounting department receives copies of daily production reports and sales invoices. Units are then extended
at standard cost and a summary of the day's activity is posted to the Finished Goods Inventory general ledger
control account. Next, the sales invoices and production reports are sent to the tabulating department for processing.
Every month, the control account and detailed tab records are reconciled and adjustments recorded. The last
reconciliation and adjustments were made at Nov. 30,2017.
Your CPA firm observed the taking of the physical inventory at all locations at Dec. 31, 2019. The inventory count
began at 4 PM and was completed at 8 PM. The company's figure for the physical inventory is P342,400. The
general ledger control accoount balance at Dec. 31 was P384,900, and the final tab run of the inventory punched
cards showed a total of P403,300. Unit cost data for the company's two products are as follows:
Product A- std. cost of P2 Product B- std. cost of P3
 A review of December transactions disclosed the following:
1) Sales invoice no. 1310, Dec. 2, was priced at standard cost for P11,700, but was listed on the accounting dept's
daily summary at P11,200.

2) A production report for P23,900, Dec. 15, was processed twice in error by the tabulation department.
3) Sales invoice no. 1423, Dec. 9, for 1,200 units of Product A, was priced at a standard cost of P1.50 per unit by the
accounting dept. The tabulating department corrected the error but did not notify the Acctg. Dept. of the error.

4) A shipment of 3,400 units of Product A was invoiced by the billing dept. as 3,000 units on sales invoice no.1504,
Dec. 27. The error was discovered by your review of the transactions.

5) On Dec. 27, the Pampanga warehouse notified the tabulating department to remove 2,200 unsalable units of
Product A from the finished goods inventory, which it did without receiving a special invoice from the accounting
department. The accounting dept. received a copy of the Pampanga warehouse notification on Dec. 29 and prepared
a special invoice which was processed in the normal manner. The units were not included in the physical invty.

6) A report for the production on Jan. 3 of 2,500 units of Product B was processed for the Bulacan plant as of Dec. 31.
7) A shipment of 300 units of Product B was made from the Tarlac warehouse to Ken's Markets, Inc. at 8:30 PM
on Dec. 31 as an emergency service. The sales invoice was processed as of Dec. 31. Flores Company prefers
to treat the transaction as a sale in 2019.

8) The working papers of the auditor observing the physical count at the Bataan warehouse revealed that 700 units
of Product B were omitted from Flores' physical count. Flores concurred that the units were omitted in error.

9) A sales invoice for 600 units of Product A shipped from the Zambales warehouse was mislaid and was not
processed until Jan. 5. The units were shipped on December 30.

10) The physical inventory of the Angeles warehouse excluded 350 units of product A marked "reserved".
Investigation revealed that this merchandise being stored as a convenience for Steve's Markets, Inc. as a customer.
This merchandise, which has not been recorded as a sale, is billed as it is shipped.

11) A shipment of 10,000 units of Product B was made on Dec. 27 from the Zambales warehouse to the Bataan
warehouse. The shipment arrived on Jan. 6 but had been excluded from the physical inventories.
Required: Prepare a worksheet to reconcile the balances for the physical inventory, Finished Goods inventory
general ledger account, and tabulating dept's detail of finished goods inventory ("tab run"). Use the format below:
Physical Inv. GL Control Account Tabulating Dept's detail of Invty
Balance per client
Adjustment:
1
2

Adjusted balances

Problem 5) The audited income statement of ABC Company shows a net income of P150,000 for the year
ended December 31, 2019. Adjustments were made for the following errors:
1) Dec. 31, 2018 inventory understated by P28,500
2) Dec. 31, 2019 inventory overstated by P37,000.
3) A P12,000 customer's deposit received on December 2019, was credited to sales in 2019. The goods were
actually shipped on January, 2020.
What is the unadjusted net income of ABC Company for the year ended December 31, 2019? ______________

Problem 6: Greg., Inc. began operations on Jan. 1, 2017 The following data pertain to the company's
first two years in business: Reported amount Correct Amount
Inventory, Dec. 31, 2017 P20,000 P40,000
Inventory, Dec. 31, 2018 P35,000 P35,000
Net income, 2017 P60,000 ?
Net Income, 2018 P66,000 ?
Retained Earnings, 2017 P60,000 ?
Retained Earnings, 2018 P126,000 ?
During 2017 and 2018, the company's income tax expense rate was 40% and the company declared no
dividends. Compute the correct amount for each of the missing items.

Problem 7-Your client took a complete physical inventory under your observation as of December 15 and adjusted the inventor
control account (client uses perpetual inventory method) to agree with the physical inventory. You have decided to accept the b
of the control account as of Dec. 31, after reflecting transactions recorded therein from Dec.16-31, in connection with your audi
for the year. Your examination of the sales cut off as of December 15 and December 31 revealed the following items not previo
considered in the adjustments. Date Date Date credited to
Item Cost Sales Price Shipped Billed Control account
1 5,650 7,200 12/14/2019 12/17/2019 12/17/2019
2 2,430 4,650 12/13/2019 12/20/2019 12/13/2019
3 6,870 9,200 3/1/2020 12/31/2019 12/31/2019
What adjusting journal entries, if any, would you make for each of the above items?
 ept. 30, 2019, the
pt.30,2020, the
s costing P21,000

9. The goods arrived

The goods arrived

e goods FOB

d Enterprises, Inc. were

ates that "title passes
proved the goods in
e goods cost P2,500 and

the physical count was

28. The supplier

ceived the goods on

ume that the

ear have not been
ending 09/30/20

e is purchased

ystem is functioning
nformation were

were not recorded

_____________

he company

unched cards

ts are then extended

eneral ledger
ment for processing.
ed. The last

The inventory count

342,400. The
ventory punched
 accounting dept's

P1.50 per unit by the

of the error.

s invoice no.1504,

salable units of
the accounting
Dec. 29 and prepared
physical invty.

n plant as of Dec. 31.

Inc. at 8:30 PM
ompany prefers

aled that 700 units

and was not

Inc. as a customer.

e to the Bataan

ods inventory
the format below:
e goods were

______________

r 15 and adjusted the inventory

u have decided to accept the balance
1, in connection with your audit
d the following items not previously