Purchases and Sales Cut-off Examination

You are observing inventory as a part of the August 31 year-end audit of A Company, a
wholesale and retail engine parts company. Inventory includes a large number of diverse parts
varying from small bolts to large engines for earth-moving equipment.
The company has ceased operation during the physical count except for receiving goods
from suppliers and making shipments to essential wholesale customers. On the morning of the
physical count, which is Saturday, September 2, you record in your working papers the last
shipping document and receiving report number issued the previous day. They are 314 and
682, respectively.
You observe the client’s counting procedures and test count selected inventory
yourself. You conclude the counts and descriptions are accurate. Before you leave the
warehouse at the end of the day after all counting is completed, you do several things:
1. Examine the receiving report book. The last number used was 685. The receiving clerk
informs you all goods received on September 2 were kept in the receiving department
with other goods received during the past two or three days.
2. Examine the shipping document book. The last number used was 317. The shipping
department informs you that three shipments were made before noon, two were made
after noon, and one was still in the shipping department.
3. Ask the receiving department to identify all goods received September 1. He identifies
receiving reports 680 through 682 as having been received September 1.
4. Ask the shipping department to identify all goods shipped or sold over the counter
September 1. He informs you goods on shipping document 311 to 313 were shipped
September 1. He shows you approximately 300 duplicate sales slips for September 1
over-the-counter sales. September 1 retail sales totaled P12, 690, but they were not
included in August sales.
5. Examine the client’s inventory counts in the receiving department. Inventory has been
counted only for receiving reports 674 to 684.
6. Examine the client’s inventory counts in the shipping department. Inventory had been
counted only for shipping documents 316 and 317. Further examination shows that
inventory for all shipments made September 2 were included in the counts in the
department from which the inventory was taken.
During the year-end audit work you obtain selling prices, costs, terms, and recording data for
each receipt and shipment. They are as show below.
ACQUISITIONS OF INVENTORY
Included in (I) or
Receiving Excluded from (E) FOB Origin
Report Date Date Peso Amount August Acquisitions or
Number Shipped Received of Acqusition Journal Destination

679 8/29 8/30 860 I Destination

680 8/27 9/01 1,211 I Origin
681 8/20 9/01 193 I Origin
682 8/27 9/01 4,674 I Destination
683 8/30 9/02 450 E Destination
684 8/30 9/02 106 E Origin
685 9/02 9/02 2,800 E Origin
686 8/30 9/02 686 E Destination

SHIPMENTS OF INVENTORY

Included in (I) or
Shipping Excluded from (E)
Document Date Peso Amount from August
Number Shipped of Sale Sales Journal

310 8/31 780 I

311 9/01 56 I
312 9/01 3,194 I
313 9/01 635 I
314 9/01 193 I
315 9/02 1,621 E
316 9/02 945 E
317 9/02 78 E
318 9/02 3,611 E

REQUIRED:

Assume the information you have obtained from the receiving and shipping
departments about the September 1 receipts and shipments is accurate:
a. Prepare all adjustments for cut-off errors in accounts payable, assuming no acquisitions
are made for cash.
b. Prepare all adjustments for errors in sales.
c. What is the amount of the client’s error in inventory assuming a periodic inventory
method, and no adjustments in part (a) or (b) affected inventory? For retail sales,
assume the gross margin percentage is approximately 30%.
d. How would you determine whether the receiving and shipping departments have given
you accurate information about the September 1 receipts and shipments of goods?