Principles of Auditing (II)

Fall 2023
Excel Assignment II

Audit of the Inventory and Warehousing Cycle

Sea Gull Airframes Case
You are assigned to the December 31, 2019, audit of Sea Gull Airframes, Inc. The company
designs and manufactures aircraft superstructures and airframe components. You observed the
physical inventory at December 31 and are satisfied that it was properly taken. The inventory
at December 31, 2019, has been priced, extended, and totaled by the client and is made up of
about 5,000 inventory items with a total valuation of $8,275,000. In performing inventory price
tests, you have decided to stratify your tests and conclude that you should have two strata:
items with a value over $5,000 and those with a value of less than $5,000. The book values are
as follows:

No. of Items Total Value

More than $5,000 500 $4,150,000
Less than $5,000 4,500 4,125,000
5,000 $8,275,000

In performing pricing and extension tests, you have decided to test about 50 inventory items in
detail. You selected 40 of the over $5,000 items and 10 of those under $5,000 at random from
the population. You find all items to be correct except for items A through G below, which you
believe may be misstated. You have tested the following items, to this point, exclusive of A
through G:

No. of Items Total Value

More than $5,000 36 $360,000
Less than $5,000 7 2,600

Sea Gull Airframes uses a periodic inventory system and values its inventory at the lower of
FIFO cost or market. You were able to locate all invoices needed for your examination. The
seven inventory items in the sample you believe may be misstated, along with the relevant data
for determining the proper valuation, are shown in the next page. In addition, you noted a
freight bill for voucher 12-23 in the amount of $200. This bill was entered in the freight-in
account. Virtually all freight was for the metal formers.
This is the first time Sea Gull Airframes has been audited by your firm.

INSTRUCTION:
Review all information and determine the inventory misstatements of the seven items in
question. State any assumptions you consider necessary to determine the amount of the
misstatements. Prepare an audit schedule in Excel to summarize your findings (i.e., complete
Part I to IV).
 Principles of Auditing (II)
Fall 2023
Excel Assignment II
INVENTORY ITEMS POSSIBLY MISSTATED

Description Quantity Price Total1

A. L37 spars 3,000 meters $8.00/meter $24,000
B. B68 metal formers 10,000 inches 1.20/foot 12,000
C. R01 metal ribs 1,500 yards 10.00/yard 15,000
D. St26 struts 1,000 feet 8.00/foot 8,000
E. Industrial hand drills 45 units 20.00 each 900
F. L803 steel leaf springs 40 pairs 69.00 each spring 2,760
G. V16 fasteners 5.50 dozen 10.00/dozen 55
1
Amounts are as stated on client’s inventory.

INFORMATION FOR PRICING FROM INVOICES (SEA GULL AIRFRAMES)

Voucher Voucher Receiving
Date Paid Terms Invoice Description
Number Date Report Date
7-68 8-01-15 8-21-15 Net FOB destination 8-01-15 77 V16 fasteners at $10 per dozen
11-81 10-16-19 11-15-19 Net FOB destination 10-18-19 1,100 yards R01 metal ribs at $9.50 per yard; 2,000 feet St26
struts at $8.20 per foot
12-06 12-08-19 12-30-19 2/10, n/30 FOB S.P. 12-10-19 180 L803 steel leaf springs at $69 each
12-09 12-10-19 12-18-19 Net FOB destination 12-11-19 45 Industrial hand drills at $20 each; guaranteed for 4 years
12-18 12-27-19 12-27-19 2/10, n/30 FOB S.P. 12-21-19 4,200 meters L37 spars at $8 per meter
12-23 12-24-19 1-03-20 2/10, n/30 FOB dest. 12-26-19 12,800 inches B68 metal formers at $1.20 per foot
12-61 12-29-19 1-08-20 Net FOB destination 12-29-19 1,000 yards R01 metal ribs at $10 per yard; 800 feet St26
struts at $8 per foot
12-81 12-31-19 1-20-20 Net FOB destination 1-06-20 2,000 meters L37 spars at $7.50 per meter; 2,000 yards R01
metal ribs at $10 per yard