Audit Case A

You were engaged by Valentina Corporation for the audit of the company’s financial statements for
the year ended December 31, 2020. The company is engaged in the wholesale business
and makes all sales at 25% over cost.

The following were gathered from the client’s accounting records:

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P7,800,000 Balance forwarded P4,200,000
12/27 SI No. 60,000 12/28 RR #2059 36,000
865
12/28 SI No. 225,000 12/30 RR #2061 105,000
866
12/28 SI No. 15,000 12/31 RR #2062 63,000
867
12/31 SI No. 69,000 12/31 RR #2063 96,000
869
12/31 SI No. 102,000 12/31 Closing
870 entry (4,500,000)
12/31 SI No. 24,000 P -
871
12/31 Closing
entry (8,295,000)
P -
Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable P750,000

Inventory 900,000
Accounts payable 600,000

You observed the physical inventory of goods in the warehouse on December 31 and were
satisfied that it was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last
Receiving Report which had been used was No. 2063 and that no shipments had been
made on any Sales Invoices whose number is larger than No. 868. You also obtained the
following additional information:

a) Included in the warehouse physical inventory at December 31 were goods which had
been purchased and received on Receiving Report No. 2060 but for which the invoice
was not received until the following year. Cost was P27,000.

b) On the evening of December 31, there were two trucks in the company siding:
 Truck No. XXX 888 was unloaded on January 2 of the following year and received on
Receiving Report No. 2063. The freight was paid by the vendor.

 Truck No. MGM 357 was loaded and sealed on December 31

but leave the company premises on January 2. This order was sold for P150,000 per
Sales Invoice No. 868.

c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks
enroute to ABC Trading Corporation. ABC received the goods, which were sold on
Sales Invoice No. 866 terms FOB Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on
Receiving Report No. 2064. The goods were shipped FOB Destination, and freight of
P2,000 was paid by the client. However, the freight was deducted from the purchase
price of P800,000.

Instructions:

a. Prepare the necessary adjustments for the year ended December 31, 2020

1st Adjustment: Sales 195,000

Accounts Receivable 195,000
To adjust SI#869,870,871 not shipped until December 31, 2020

2nd Adjustment: Purchases 27,000

Accounts Payable 27,000
To record purchases received RR#2060

3rd Adjustment: Inventory 96,000

Cost of sales 96,000
To record inventory under RR#2063

4th Adjustment: Inventory 120,000

Cost of sales 120,000
To record inventory under SI#868

5TH Adjustment: Sales 225,000

Accounts Receivable 225,000
To record reversal entry for SI#866

6th Adjustment: Inventory 180,000

Cost of sales 180,000
To record goods under SI#866

b. Based on the above and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2020
Unadj Sales 8,295,000
Adj 1 (195,000)
Adj 5 (225,000)
Adj Sales 7,875,000

2. Purchases for the year ended December 31, 2020

Unadj Purchases 4,500,000
Adj 2 ( 27,000 )
Adj Purchases 4,527,000

3. Accounts receivable as of December 31, 2020

Unadj AR 750,000
Adj 1 (195,000)
Adj 5 (225,000)
Adj AR 330,000
 4. Inventory as of December 31, 2020
Unadj Inventory 900,000
Adj 3 96,000
Adj 4 120,000
Adj 6 180,000
Adj inventory 1,296,000

5. Accounts payable as of December 31, 2020

Unadj AP 600,000
Adj 2 27,000
Adj AP 627,000

c. The Board of Directors of Valentina Corporation asked your assistance to further

strengthen controls and inventory monitoring system. They requested you to make
some recommendations on this particular matter. Prepare a report/ response.

- A huge part where conflicts are taken up arise from their monitoring of stock in and
outs of inventories. There are unrecorded inventories and sales taken up which
occurred subsequent to the transaction dates. To avoid this unrecorded and
misappropriated transactions, strong monitoring of stocks are needed to be
implemented. Daily recording of transactions with schedule of inventories (stock in
and stock outs) specially in this area is advised.