Since 1977

AUDITING PROBLEMS OCAMPO/CABARLES/SOLIMAN/OCAMPO

AP.2901-Audit of Inventories OCTOBER 2020

The Use of Assertions in Obtaining Audit Evidence

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.
Classification - transactions and events have
recorded in the proper accounts.
Accuracy - amounts and other data relating to recorded
transactions and events have been recorded appropriately.
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.
been
Assertions about presentation and disclosure: (COCA)
Completeness - all disclosures that should have been
included in the financial statements have been included.

Cutoff - transactions and events have been recorded in the Occurrence and rights and obligations - disclosed events,
correct accounting period. transactions, and other matters have occurred and pertain
to the entity.

Assertions about account balances at the period end: Classification and understandability - financial information
(RECV) is appropriately presented and described, and disclosures
are clearly expressed.
Rights and obligations - the entity holds or controls the
rights to assets, and liabilities are the obligations of the
Accuracy and valuation - financial and other information
entity.
are disclosed fairly and at appropriate amounts.
Existence - assets, liabilities, and equity interests exist.

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.

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EXCEL PROFESSIONAL SERVICES, INC.

SUBSTANTIVE AUDIT OF INVENTORIES

Inventory Balances Purchases

Existence: Recorded inventory exist
1. Before the client takes the physical inventory, review
and approve the client’s written plan for taking it.
2. Observe the client personnel physically counting
inventory.
3. Confirm inventories on consignment and held in public
warehouses.
Completeness: All inventory of the entity recorded
4. Obtain a copy of prenumbered inventory tags used by
the client in taking inventory and reconcile the tags to
the listing.
5. For selected items, trace from tags to listing.
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.
7. Perform analytical procedures.
Rights and obligations: Inventory is owned by the entity
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.
Valuation and allocation: Recorded inventory is valued in
accordance with GAAP
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.
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.
Occurrence: Recorded purchases are for items that were
acquired
Examine underlying documents for authenticity and
reasonableness. Scan voucher register for large or
unusual items. Trace inventory purchased to perpetual
records. Scan voucher register for duplicate payments.
Classification: Purchase transactions have been recorded in
the proper accounts
For a sample of entries in the purchases journal, verify the
accuracy of account coding.
Accuracy (Valuation): Purchases are recorded at proper
amounts
Recompute invoices and compare invoice price to purchase
order.
Production
Completeness: All production transactions that occurred
are recorded
Account for a sequence for production reports.
Occurrence: Recorded production transactions occurred
For selected transactions, examine signed materials
requisitions, approved labor tickets, and allocation of
overhead.
Classification: Production transactions have been recorded
in the proper accounts
For a sample of entries, verify the accuracy of account
coding.

11. Verify computations in the inventory listing. Accuracy (Valuation): Production transactions are
12. Review the obsolescence of the inventory by: recorded at proper amounts
a. being alert while observing inventory being taken
Test cost records by tracing to underlying documents, such
for damaged, slow-moving, or scrap inventory.
as bill of materials, labor tickets, authorized labor rates,
b. Scanning perpetual records for slow-moving items
and standard overhead rates. Review variances.
and discussing their valuation with client.

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.

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EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 1 QUESTIONS:

You were engaged by Quezon Corporation for the audit 1. When inventory is material to the financial statements,
of the company’s financial statements for the year ended the auditor shall obtain sufficient appropriate audit
December 31, 2020. The company is engaged in the evidence regarding the existence and condition of
wholesale business and makes all sales at 25% over cost. inventory by:
a. Attendance at physical inventory counting, unless
The following were gathered from the client’s accounting impracticable.
records: b. Performing audit procedures over the entity’s final
inventory records to determine whether they
SALES PURCHASES
accurately reflect actual inventory count results.
Date Ref. Amount Date Ref. Amount
c. Both a and b.
Balance Balance
d. Neither a nor b.
forwarded P5,200,000 forwarded P2,700,000
Dec. SI No. Dec. RR No.
27 965 40,000 27 1057 35,000 2. Attendance at physical inventory counting involves:
Dec. SI No. Dec. RR No. a. Inspecting the inventory to ascertain its existence
28 966 150,000 28 1058 65,000 and evaluate its condition, and performing test
Dec. SI No. Dec. RR No. counts.
28 967 10,000 29 1059 24,000 b. Observing compliance with management’s
Dec. SI No. Dec. RR No. instructions and the performance of procedures for
31 969 46,000 30 1061 70,000 recording and controlling the results of the physical
Dec. SI No. Dec. RR No. inventory count.
31 970 68,000 31 1062 42,000 c. Obtaining audit evidence as to the reliability of
Dec. SI No. Dec. RR No. management’s count procedures.
31 971 16,000 31 1063 64,000 d. All of these.
Dec. Closing Dec. Closing
31 entry (5,530,000) 31 entry (3,000,000) 3. The procedures involve in the attendance at physical
P - P -
inventory counting
Note: SI = Sales Invoice RR = Receiving Report
a. Serve as risk assessment procedures.
b. Serve as test of controls.
Inventory P600,000 c. Serve as substantive procedures.
Accounts receivable 500,000 d. May serve as test of controls or substantive
Accounts payable 400,000 procedures depending on the auditor’s risk
assessment, planned approach and the specific
You observed the physical inventory of goods in the procedures carried out.
warehouse on December 31 and were satisfied that it was
properly taken. 4. In which of the following cases is attendance at
physical inventory counting impracticable?
When performing sales and purchases cut-off tests, you a. Where inventory is held in a location that may
found that at December 31, the last Receiving Report pose threats to the safety of the auditor.
which had been used was No. 1063 and that no shipments b. Where the auditor will be inconvenienced because
had been made on any Sales Invoices whose number is of the difficulty, time and cost involved in doing
larger than No. 968. You also obtained the following the procedures.
additional information: c. Both a and b.
d. Neither a nor b.
a) Included in the warehouse physical inventory at
December 31 were goods which had been purchased 5. If attendance at physical inventory counting is
and received on Receiving Report No. 1060 but for impracticable, the auditor shall
which the invoice was not received until the following a. Perform alternative audit procedures to obtain
year. Cost was P18,000. sufficient appropriate audit evidence regarding the
b) On the evening of December 31, there were two trucks existence and condition of inventory.
in the company siding: b. Modify the opinion in the auditor’s report.
• Truck No. CPA 123 was unloaded on January 2 of c. Make or observe some physical counts on an
the following year and received on Receiving alternative date, and perform audit procedures on
Report No. 1063. The freight was paid by the intervening transactions.
vendor. d. Do nothing and just rely on the result of physical
• Truck No. ILU 143 was loaded and sealed on inventory counting conducted by the client.
December 31 but leave the company premises on
January 2. This order was sold for P100,000 per 6. Which of the following may provide sufficient
Sales Invoice No. 968. appropriate audit evidence about the existence and
condition of inventory if attendance at physical
c) Temporarily stranded at December 31 at the railroad inventory counting is impracticable?
siding were two delivery trucks enroute to Brooks a. Inspection of documentation of the subsequent
Trading Corporation. Brooks received the goods, sale of specific inventory items purchased prior to
which were sold on Sales Invoice No. 966 terms FOB the physical inventory counting.
Destination, the next day. b. Inspection of documentation of the subsequent
d) Enroute to the client on December 31 was a truckload sale of specific inventory items purchased after the
of goods, which was received on Receiving Report No. physical inventory counting.
1064. The goods were shipped FOB Destination, and c. Both a and b.
freight of P2,000 was paid by the client. However, the d. Neither a nor b.
freight was deducted from the purchase price of
P800,000.

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7. When inventory under the custody and control of a a. Goods costing P180,000 were received from a vendor
third party is material to the financial statements, the on January 3, 2021. The goods were not included in
auditor shall obtain sufficient appropriate audit the physical count. The related invoice was received
evidence regarding the existence and condition of that and recorded on December 30, 2020. The goods were
inventory by shipped on December 31, 2020, terms FOB shipping
a. Requesting confirmation from the third party as to point.
the quantities and condition of inventory held on
b. Goods costing P200,000, sold for P300,000, were
behalf of the entity.
shipped on December 31, 2020, and were received by
b. Performing inspection or other audit procedures
the customer on January 2, 2021. The terms of the
appropriate in the circumstances.
invoice were FOB shipping point. The goods were
c. Performing one or both of the procedures in (a)
included in the ending inventory for 2020 and the sale
and (b).
was recorded in 2021.
d. Relying only on the written representations made
by the client’s management. c. The invoice for goods costing P150,000 was received
and recorded as a purchase on December 31, 2020.
8. Which of the following is not one of the independent The related goods, shipped FOB destination were
auditor's objectives regarding the audit of inventories? received on January 2, 2021, but were included in the
a. Verifying that inventory counted is owned by the physical inventory as goods in transit.
client.
b. Verifying that the client has used proper inventory d. A P600,000 shipment of goods to a customer on
pricing. December 30, 2020, terms FOB destination, was
c. Ascertaining the physical quantities of inventory on recorded as a sale upon shipment. The goods, costing
hand. P400,000 and delivered to the customer on January 6,
d. Verifying that all inventory owned by the client is 2021, were not included in the 2020 ending inventory.
on hand at the time of the count. e. Goods valued at P250,000 are on consignment from a
vendor. These goods are included in the physical
9. An auditor is most likely to inspect loan agreements inventory.
under which an entity’s inventories are pledged to
support management’s financial statement assertion of f. Goods valued at P160,000 are on consignment with a
a. Existence or occurrence. customer. These goods are not included in the
b. Completeness. physical inventory.
c. Presentation and disclosure.
d. Valuation or allocation. QUESTIONS:
Based on the above and the result of your audit, answer
10. An auditor selected items for test counts while the following:
observing a client’s physical inventory. The auditor
then traced the test counts to the client’s inventory 1. The inventory as of December 31, 2020 is understated
listing. This procedure most likely obtained evidence by
concerning a. P230,000 c. P140,000
a. Existence. c. Rights. b. P190,000 d. P290,000
b. Completeness. d. Valuation.
2. The cost of sales for the year ended December 31,
2020 is overstated by
Based on the given information and the result of your
a. P290,000 c. P440,000
audit, determine the following:
b. P110,000 d. P380,000
11. Sales for the year ended December 31, 2020
3. The profit for the year ended December 31, 2020 is
a. P5,250,000 c. P5,400,000
misstated by
b. P5,150,000 d. P5,350,000
a. P190,000 over c. P140,000 under
12. Purchases for the year ended December 31, 2020 b. P 10,000 over d. P290,000 under
a. P3,000,000 c. P3,018,000
4. The working capital as of December 31, 2020 is
b. P3,754,000 d. P3,818,000
misstated by
13. Inventory as of December 31, 2020 a. P190,000 over c. P140,000 under
a. P864,000 c. P968,000 b. P 10,000 over d. P290,000 under
b. P800,000 d. P814,000
5. Purchase cut-off procedures should be designed to test
14. Accounts receivable as of December 31, 2020 whether all inventory
a. P350,000 c. P370,000 a. Owned by the company is in the possession of the
b. P220,000 d. P120,000 company at year-end.
b. Ordered before year-end was received.
15. Accounts payable as of December 31, 2020 c. Purchased and received before year-end was paid
a. P418,000 c. P 400,000 for.
b. P354,000 d. P1,218,000 d. Purchased and received before year-end was
recorded.

PROBLEM NO. 2 6. The audit of year-end inventories should include steps

During your audit of the Makati Corporation for the year
ended December 31, 2020, you found the following
information relating to certain inventory transactions from
your observation of the client’s physical count and review
of sales and purchases cutoff:
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

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SOLUTION GUIDE (Question No. 1 to 4) a. For practical reasons, the physical inventory
counting may be conducted at a date, or dates,
Over (Under) other than the date of the financial statements.
Inventory COS Profit WC b. This may be done irrespective of whether
a management determines inventory quantities by
b an annual physical inventory counting or maintains
c a perpetual inventory system.
d c. The effectiveness of the design, implementation
e and maintenance of controls over changes in
f inventory determines whether the conduct of
physical inventory counting at a date, or dates,
other than the date of the financial statements is
appropriate for audit purposes.
PROBLEM NO. 3 d. All of these.
Your client, Mandaluyong Company, is an importer and 2. A client maintains perpetual inventory records in both
wholesaler. Its merchandise is purchased from several quantities and pesos. If the assessed level of control
suppliers and is warehoused until sold to customers. risk is high an auditor will probably
a. Request the client to schedule the physical
In conducting your audit for the year ended December 31, inventory count at the end of the year.
2020, you were satisfied that the system of internal control b. Apply gross profit tests to ascertain the
was good. Accordingly, you observed the physical reasonableness of the physical counts.
inventory at an interim date, November 30, 2020 instead c. Increase the extent of tests of controls relevant to
of at year end. You obtained the following information the inventory cycle.
from your client’s general ledger: d. Insist that the client perform physical counts of
inventory items several times during the year.
Inventory, January 1, 2020 P 1,312,500
Physical inventory, November 30, 2020 1,425,000 3. Gross profit rate for 11 months ended November 30,
Sales for 11 months ended Nov. 30, 2020 12,600,000 2020 is
Sales for the year ended Dec. 31, 2020 14,400,000 a. 19% c. 21%
Purchases for 11 months ended Nov. 30, b. 20% d. 22%
2020 (before audit adjustments) 10,125,000
4. Cost of goods sold during the month of December
Purchases for the year ended Dec. 31,
2020 using the gross profit method is
2020 (before audit adjustments) 12,000,000
a. P1,470,000 c. P1,320,000
b. P1,440,000 d. P1,290,000
Your audit disclosed the following information:
5. December 31, 2020 inventory using the gross profit
a) Shipments received in November and
method is
included in the physical inventory but
a. P1,860,000 c. P1,725,000
recorded as December purchases. P 112,500
b. P1,740,000 d. P1,710,000
b) Shipments received in unsalable
condition and excluded from physical
inventory. Credit memos had not
SOLUTION GUIDE:
been received nor chargebacks to
vendors been recorded: Question No. 3
Total at November 30, 2020 15,000
Total at December 31, 2020 Sales, up to 11/30 P12,600,000
(including the November Less COS, up to 11/30:
unrecorded chargebacks) 22,500 Inventory, 1/1 P 1,312,500
c) Deposit made with vendor and charged Net purchases, 11/30
to purchases in October 2020. TGAS
Product was shipped in January Inventory, 11/30
2021. 30,000 Gross profit
d) Deposit made with vendor and charged
to purchases in November 2020. Computation of adjusted amounts:
Product was shipped FOB destination,
Inventory, N.P.,11/30 N.P.,12/31
on November 29, 2020 and was
11/30 (11 mos.) (12 mos.)
included in November 30, 2020
physical inventory as goods in Unadjusted 1,425,000 10,125,000 12,000,000
transit. 82,500
e) Through the carelessness of the a
receiving department shipment in
early December 2020 was damaged b
by rain. This shipment was later sold c
in the last week of December at cost. 150,000
d
QUESTIONS:
e
Based on the above and the result of your audit, answer
the following: Adjusted
1. Which statement is correct regarding physical
inventory counting conducted other than at the date of
the financial statements?

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Question No. 4 d. Customers acknowledged indebtedness of P360,000 at

April 21. It was also estimated that customers owed
Sales, up to 12/31 P14,400,000
another P80,000 that will never be acknowledged or
Less sales, up to 11/30 12,600,000
recovered. Of the acknowledged indebtedness, P6,000
Sales - December 1,800,000
will probably be uncollectible.
Sales without profit ( 150,000)
Sales with profit 1,650,000 e. The insurance company agreed that the fire loss claim
x Cost ratio should be based on the assumption that the overall
COS with profit gross profit ratio for the past two years was in effect
COS without profit during the current year. The company’s audited
Total financial statements disclosed the following
information:
Question No. 5 2019 2018
Net sales P5,300,000 P3,900,000
Inventory, 1/1 P 1,312,500
Net purchases 2,800,000 2,350,000
Net purchases, 12/31
Beginning inventory 500,000 660,000
TGAS
Ending inventory 750,000 500,000
Less cost of sales:
With profit f. Inventory with a cost of P70,000 was salvaged and
[(14.4M -.15M)x.8] sold for P35,000. The balance of the inventory was a
Without profit total loss.
Estimated inventory, 12/31
QUESTIONS:
Based on the above and the result of your audit, answer
PROBLEM NO. 4 the following:
On April 21, 2020, a fire damaged the office and 1. How much is the adjusted balance of Accounts Payable
warehouse of Muntinlupa Company. The only as of April 21, 2020?
accounting record saved was the general ledger, from a. P286,000 c. P237,000
which the trial balance below was prepared. b. P106,000 d. P343,000
Muntinlupa Company 2. How much is the net purchases for the period January
Trial Balance 1 to April 21, 2020?
March 31, 2020 a. P650,500 c. P660,000
DEBIT CREDIT b. P673,500 d. P683,000
Cash P 180,000 3. How much is the adjusted balance of Accounts
Accounts receivable 400,000 Receivable as of April 21, 2020?
a. P400,000 c. P360,000
Inventory, Dec. 31, 2019 750,000
b. P440,000 d. P354,000
Land 350,000
4. How much is the sales for the period January 1 to April
Building 1,100,000 21, 2020?
Acc. depreciation P 413,000 a. P1,430,000 c. P1,510,000
Other assets 56,000 b. P1,519,500 d. P1,506,000
Accounts payable 237,000 5. How much is the cost of sales for the period January 1
Accrued expenses 180,000 to April 21, 2020?
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 2020?
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. 5
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, 2020. 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, 2020. 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 unpaid 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.

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EXCEL PROFESSIONAL SERVICES, INC.

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.
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:
4. Which of the following auditing procedures most likely
would provide assurance about a manufacturing
entity’s inventory valuation?
a. Tracing test counts to the entity’s inventory listing.
b. Obtaining confirmation of inventories pledged
under loan agreements.
c. Reviewing shipping and receiving cutoff procedures
for inventories.
d. Testing the entity’s computation of standard
overhead rates.
5. 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. 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.
c. No journal entry had been made on the retailer’s
books for several items returned to its suppliers.
d. Credit memos for several items returned by
customers had not been recorded.
6. 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.

Based on the above and the result of your audit, answer 7. An auditor is most likely to learn of slow-moving
the following: inventory through
a. Inquiry of sales personnel
1. Adjusted amount of physical inventory at November 30
b. Inquiry of warehouse personnel
a. P1,715,560 c. P1,845,760
c. Physical observation of inventory
b. P1,631,560 d. P1,722,560
d. Review of perpetual inventory records.
2. Adjusted amount of inventory at December 31
a. P1,509,760 c. P1,502,760 8. The auditor tests the quantity of materials charged to
b. P1,516,760 d. P1,425,760 work in process by tracing these quantities to
a. Cost ledgers.
3. Cost of materials on hand, and materials included in
b. Perpetual inventory records.
work in process as of December 31
c. Receiving reports.
a. P819,560 c. P728,560
d. Material requisitions.
b. P812,560 d. P942,760

SOLUTION GUIDE (Question No. 3)

Inventory,11/30
Direct labor, 11/30 ( 280,000)
Factory overhead, 11/30
Materials, 11/30
Purchases - December 691,600
Total
Less materials in COS:
Adj. COS – Dec.
Direct labor ( 386,400)
Factory overhead
Materials on hand and
included in WIP
- now do the DIY drill -

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EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

PROBLEM NO. 1 5. When auditing inventories, an auditor would least
likely verify that
During your audit of the Warriors Corporation for the year
a. The financial statement presentation of inventories
ended December 31, 2020, you found the following
is appropriate.
information relating to certain inventory transactions from
b. Damaged goods and obsolete items have been
your observation of the client’s physical count and review
properly accounted for.
of sales and purchases cutoff. The client uses perpetual
c. All inventory owned by the client is on hand at the
inventory system.
time of the count.
d. The client has used proper inventory pricing.
Note 1
Goods held on consignment from Golden State Corp. to
Warriors Corp. amounting to P100,000, were included in
PROBLEM NO. 2
the physical count of goods in Warriors’ warehouse on
December 31, 2020, and in accounts payable at December The cost goods sold section of the income statement
31, 2020. prepared by your client for the year ended December 31
appears as follows:
Note 2
Inventory, January 1 P 80,000
Goods were in transit from a vendor to Warriors on
Purchases 1,600,000
December 31, 2020. The invoice cost was P180,000, and
Cost of goods available for sale 1,680,000
the goods were shipped FOB shipping point on December
Inventory, December 31 100,000
29, 2020.
Cost of goods sold P1,580,000
Note 3
Although the books have been closed, your working paper
A P420,000 shipment of goods to a customer on December
trial balance is prepared showing all accounts with activity
30, 2020, terms FOB destination, was recorded as a sale
during the year. This is the first time your firm has made
upon shipment. The goods cost P210,000 and received by
an examination. The January 1 and December 31
the customer on January 3, 2021.
inventories appearing above were determined by physical
count of the goods on hand on those dates and no
Note 4
reconciling items were considered. All purchases are FOB
Goods, with an invoice cost of P150,000, received from a
shipping point.
vendor on December 31, 2020, were recorded on a
receiving report dated January 2, 2021. The goods were
In the course of your examination of the inventory cutoff,
not included in the physical count, but the invoice was
both at the beginning and end of the year, you discovered
included in accounts payable at December 31, 2020.
the following facts:
Note 5
Beginning of the Year
Included in the physical count were goods billed to a
customer FOB shipping point on December 31, 2020. 1. Invoices totaling P25,000 were entered in the voucher
These goods had a cost of P70,000 and were billed at register in January, but the goods were received
P140,000. The shipment was on Warriors’ loading dock during December.
waiting to be picked up by the common carrier.
2. December invoices totaling P13,200 were entered in
QUESTIONS: the voucher register in December, but goods were not
received until January.
Based on the above and the result of your audit, answer
the following: End of the Year
1. In relation to Note 1, the necessary adjusting journal 3. Sales of P43,000 (cost of P12,900) were made on
entry includes a credit to account on December 31 and goods delivered at that
e. Purchases of P100,000 time, but all entries relating to the sales were made
f. Inventory of P100,000 on January 2.
g. Accounts Payable of P100,000
h. None of the above 4. Invoices totaling P15,000 were entered in the voucher
register in January, but the goods were received in
2. In relation to Note 2, the necessary adjusting journal December.
entry includes a debit to
a. Purchases of P180,000 5. December invoices totaling P18,000 were entered in
b. Inventory of P180,000 the voucher register in December, but the goods were
c. Accounts Payable of P180,000 not received until January.
d. None of the above 6. Invoices totaling P12,000 were entered in the voucher
3. In relation to Note 3, the necessary adjusting journal register in January, and the goods were received in
entry does not include a debit to January, but the invoices were dated December.
a. Cost of Sales of P210,000
b. Inventory of P210,000 Based on the preceding information, determine the net
c. Sales of P420,000 working paper adjustment that should be made for each of
d. None of the above the following accounts:

4. Inventory as of December 31, 2020 is understated by 6. Retained earnings

a. P440,000 c. P230,000 a. P13,200 credit c. P25,000 debit
b. P370,000 d. P 50,000 b. P11,800 debit d. P38,200 debit

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EXCEL PROFESSIONAL SERVICES, INC.

7. Purchases b. The following is a summary of the cut-off made on

a. P27,000 debit c. P25,000 credit purchases transactions:
b. P28,000 debit d. P2,000 debit
December 2020 entries on the purchases journal
8. Beginning inventory Receiving
a. P25,000 credit c. P13,200 debit Receiving Report
b. P38,200 debit d. P11,800 debit Report no. Date Amount Remarks
RR813 Dec.15 18,100 FOB Shipping point
9. Accounts receivable
RR814 Dec.26 25,250 FOB Destination
a. P43,000 debit c. P30,000 debit
(from consignor)
b. P43,000 credit d. No adjustment
RR815 Dec.31 14,950 FOB Destination
10. Sales RR816 Jan.2 15,400 FOB Destination (in
a. P43,000 debit c. P30,000credit transit)
b. P43,000 credit d. No adjustment
January 2021 entries on the purchases journal
Receiving
PROBLEM NO. 3 Receiving Report
The following provide the details of a sales and purchases Report No. Date Amount Remarks
cut-off rendered by your audit staff in line with your audit RR817 Jan.2 12,750 FOB Shipping point
of Unfair Corporation’s financial statements as of and for (in transit)
the period ended December 31, 2020. The inventories RR818 Jan.4 16,250 FOB Destination
reported per books amounting to P339,900 is based on a RR819 Jan.5 20,700 FOB Shipping point
physical count conducted on the client’s warehouse on
December 30, 2020. All customers are a 3-5 days delivery c. The unadjusted balance of the accounts receivable and
area. Gross profit on sales is at 40%. accounts payable as of December 31, 2020 were at
P395,300 and P210,700, respectively.
Audit notes:
QUESTIONS:
a. The following is a summary of the cut-off made on sales
transactions: Based on the preceding information and the result of your
audit, answer the following:
December 2020 entries on the sales journal:
Invoice Invoice Shipment 11. What is the adjusted balance of inventories as of
No. date date Amount Remarks December 31, 2020?
SI817 Dec. 19 Dec.20 P38,250 FOB Shipping a. P337,600 c. P352,550
point b. P339,800 d. P367,730
SI818 Dec.21 Dec.21 40,450 FOB 12. What is the adjusted balance if accounts receivable as
Destination of December 31, 2020?
(to consignee) a. P309,600 c. P353,000
SI819 Dec.27 Dec.29 45,250 FOB b. P329,850 d. P398,250
Destination
(in transit) 13. What is the adjusted balance of accounts payable as of
SI820 Dec. 29 Dec.31 25,300 FOB Shipping December 31, 2020?
point a. P198,200 c. P179,850
(in transit) b. P182,800 d. P170,050
14. What is the net effect of the cut-off procedures to the
January 2021 entries on the sales journal: net income in 2020?
Invoice Invoice Shipment a. P1,750 decrease
No. date date Amount Remarks b. P13,430 increase
SI821 Dec.31 Dec.31 43,400 FOB Shipping c. P16,700 decrease
point d. P17,150 decrease
(in transit)
SI822 Jan.2 Jan.2 40,450 FOB 15. The audit of year-end inventories should include steps
Destination to verify that the client’s purchases and sales cutoffs
SI823 Jan.4 Jan.5 45,250 FOB Shipping were adequate. These audit steps should be designed
point to detect whether merchandise included in the physical
count at year-end was 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

J - end of AP.2901 - J

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