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FARAP-4403 (Inventories)
FARAP-4403 (Inventories)
INVENTORIES
Definition of inventories -these are assets that are (1) Held for sale in the normal course of business, or (2)
In the process of production for such sale, or (3) In the form of materials or supplies to be consumed in the
production process or in rendering of services
Measurement of inventories
A. Initial measurement – inventories are initially measured at historical cost, which includes all costs of
purchase, costs of conversion and other costs incurred in bringing the inventories to their present location
and condition.
The following are excluded from the cost of inventories:
a. Abnormal amounts of wasted materials, labor, or other production costs
b. Storage costs, unless these costs are necessary in the production process prior to a further production
stage
c. Administrative overheads that do not contribute to bringing inventories to their present location and
condition, and
d. Selling costs
B. Balance sheet measurement- should be measured at the lower of cost or net realizable value.
The net realizable value is the net selling price in the course of the business less the estimated cost of
completion and the estimated costs necessary to make the sale. Inventories are usually written down to
net realizable value on an individual basis. However, in the circumstance where items of inventory relate
to the same product line, have similar purposes and uses, and are produced and marketed in the same
geographical area, the group of similar items basis may be more appropriate. Whichever basis is used
shall be consistently applied.
Materials and other supplies held for use in the production of inventories are not written down below cost
if the finished products in which they will be incorporated are expected to be sold at cost or above cost.
However, when a decline in the price of materials indicates that the cost of the finished products exceeds
net realizable value, the materials are written down to net realizable value. In such circumstances, the
replacement cost of the materials may be the best available measure of their net realizable value. (PAS
2 par. 32)
When an item of inventory has been written-down to its net realizable value, and if in subsequent balance
sheet period the same item of inventory still on hand, a new assessment of net realizable value should
be made. If there is clear evidence of an increase in net realizable value because of change in economic
condition the amount of the write-down should be reversed. The amount of reversal should not exceed
the original amount of write-down that was recognized previously.
Establishment of the year-end inventory – a physical count is done at reporting date. Included in the
physical count are inventories owned and controlled by the enterprise that are in good, usable and salable
condition. Items to consider are:
a. Merchandise in transit – if the term of shipment is shipping point, include as inventory of the buyer but if
the term is destination, include as inventory of the seller.
b. Goods on consignment – include as inventory of the consignor.
c. Sales on approval – include as inventory of the seller
d. Special sales contract:
1. Product-financing (Sale with a buyback agreement) – also known as a park sale because the seller
parks (transfers) its inventory in the buyer’s premises thru sales contract that clearly specifies to
purchase back the same inventory over a specified period of time at a specified amount. Include as
inventory of the seller.
2. Sale but buyer given the right to return –considered as sale if all the following conditions are met:
(a) the seller’s price to the buyer is substantially fixed or determinable at the date of sale, (b) the
buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent
on resale of the product, (c) the buyer’s obligation to the seller would not be changed in the event of
theft or physical destruction or damage of the product, (d) the buyer acquiring the product for resale
has economic substance apart from that provided by the seller, (e) the seller does not have significant
obligations for future performance , and (f) the amount of future returns can be reasonably estimated.
3. Installment sales – goods should be considered sold or removed from inventory, even though legal
title has yet to pass to the buyer.
e. Segregated goods – mere segregation does not exclude such inventory, however, if the segregation is
due to sales contract such as special order, such inventory is excluded in the inventory of the seller.
4. Freight and other handling charges incurred in the transfer of goods from consignor to consignee are
a. Considered Expense on the part of the consignee
b. Considered Expense on the part of the consignor
c. Inventoriable by the consignee
d. Inventoriable by the consignor
7. The use of a “Purchase Discount Lost” account implies that recorded cost of a purchased inventory item is the
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
8. When using the moving average method of inventory valuation, a new unit cost must be computed after
each
a. Sales on account
b. Purchase and Sale of inventory
c. Purchase of inventory
d. Cash Sale
9. Which of the following cost formula will report the highest net income in periods of inflation?
a. Fist-in first-out
b. Moving average
c. Weighted average
d. Last-in last-out
13. Which of the following is true about direct method of accounting for write-down of cost of inventories to net
realizable value?
a. Inventories shall be stated at cost
b. Inventories shall be stated at net realizable value
c. A loss on inventory write-down and allowance account are recognized
d. Any write-down of inventories to NRV decreases Cost of Goods Sold
15. What is the treatment of inventory normal spoilage under the FIFO retail method?
a. Included in the computation of cost ratio
b. Deducted from sales
c. Deducted from goods available for sale at cost
d. Deducted from goods available for sale at retail
17. The retail inventory method includes all of the following in the calculation of the goods available for sale at
both cost and retail, except:
a. Freight in
b. Purchase returns
c. Departmental transfer-in
d. Abnormal shortage
18. The cost ratio computed under FIFO retail inventory method includes
a. Net markups but not markdowns
b. Net markdowns but not markups
c. Net markups and markdowns for purchases only
d. Net markups and markdowns for both purchases and opening stock
19. To produce an inventory valuation which approximates the lower of cost or market using the conventional
retail inventory method, the computation of the ratio of cost to retail should
a. Include markups but not markdowns.
b. Include markups and markdowns.
c. Ignore both markups and markdowns.
d. Include markdowns but not markups.
20. What will be the effect if the current year’s ending inventory amount is understated?
a. Cost of goods sold will be understated.
b. Gross profit will be understated.
c. Net income will be overstated.
d. Retained earnings will be overstated.
1. How much is the correct cost of inventories to be reported in Santa Claus’s Statement of Financial
Position on December 31, 2021?
a. P744,750 c. P793,750
b. P778,750 d. P796,750
Problem 2: Bella Company is selling a variety of products. The following items were included in its inventory
balance of P850,000 as of December 31, 2021:
[1.] An appliance costing P10,000 was sold on an instalment basis through credit card on December 10,
2021. It was delivered to the customer on the same day. The legal title has been transferred upon sale.
[2.] A motorcycle vehicle costing P90,000 was sold for P180,000 on an instalment basis (not through credit
card) on December 10, 2021. It was delivered to the customer on the same day and the company’s
experience suggests that full payment on instalment sales is reasonably assured/probable.
[3.] The entity sold goods worth P150,000 (costing P80,000) under a “lay away” sales arrangement at year-
end. Payments are to be made on a monthly basis for 12 months.
[4.] A specialized and customized product, fabricated to order for a particular customer, was completed at a
total cost of P65,000 and in the shipping room on December 31. Although it was shipped on January 5,
2022, the customer was billed on December 31, 2021.
[5.] Bella launched and sold a new product in the market on December 25, 2021. The contract provides that
the customers have 30 days to try the product without any commitment to pay. The total sales
recognized was P250,000 while cost of sales was P225,000. As of year-end, none of the customers
returned nor confirmed their purchases.
2. How much is the correct amount of inventory that should report in its Statement of Financial
Position on December 31, 2021?
a. P660,000 c. P800,000
b. P750,000 d. P840,000
Problem 3: The following items were reported as inventories by Sleigh Company as of December 31, 2021:
Goods purchased FAS, excluding cost alongside the vessel of P3,000
and cost of shipment of P5,000 P100,000
Goods purchased CIF including insurance of P5,000 and freight of P10,000 50,000
Goods purchased, in transit, shipped FOB Seller 250,000
Goods sold, in transit, shipped FOB Buyer 80,000
Goods held on consignment 20,000
Goods out on consignment 40,000
Freight paid on goods out on consignment 3,000
Storage cost of goods completed 60,000
Freight paid on goods sold 2,000
Unused office supplies 5,000
Goods purchased with a buyback agreement 50,000
3. How much is the total correct amount of inventories as of December 31, 2021?
a. a. P523,000 c. P578,000
b. b. P528,000 d. P592,000
Problem 4: On December 30, 2021, a flood destroyed the goods in process inventory and half the raw materials
inventory of the Carol Company. Finished goods inventory were not damaged. A physical inventory taken after
the flood disclosed the following:
Raw materials P35, 000 Finished goods P175,000
The accounting records of Carol showed the following transactions:
Raw Materials, 1/1/21 P65,000
Goods in process, 1/1/21 180,000
Finished goods, 1/1/21 272,000
Sales (up to December 30) 1,400,000
Raw materials purchases 100,000
Direct labor cost 230,000
Manufacturing overhead cost 150% of direct labor
Gross profit rate (on sales) 40%
4. How much is the amount of inventories in as of December 31, 2021 before the flood?
a. P245,000 c. P428,000
b. P352,000 d. P445,000
5. How much is the cost of sales for the year ended December 31, 2021?
a. P740,000 c. P807,000
b. P780,000 d. P982,000
Problem 5: On October 1, 2021, Belen Company consigned 50 freezers at a unit cost of P15,000 to King Company
and to be sold for P20,000 each. Belen paid P20,000 in transportation cost. On December 31, 2021, King
reported the sale of 25 freezers and the return of 10 units. Cost paid by the consignee on the returned units was
P4,000. The amount due to consignor was remitted on the same date. Commission rate as agreed upon was
15%.
6. How much inventory on consignment and net income related to the sold units should Belen report
on December 31, 2021?
a. P225,000 and P36,000
b. P231,000 and P32,000
c. P235,000 and P40,000
d. P375,000 and P44,000
The company sold 400 units on June 25 and 500 units on December 10.
7. What is the weighted average cost of the inventory on December 31, 2021?
a. P920,000 c. P 990,000
b. P982,500 d. P1,310,000
Problem 7: During January 2021, Argon Company recorded the following information pertaining to its inventory:
8. Using FIFO method, how much is the cost of inventory on January 31, 2021?
a. P240,000 c. P280,000
b. P260,000 d. P282,000
9. Using the moving average method, how much is the cost of inventory on January 31, 2021?
a. P240,000 c. P280,000
b. P260,000 d. P300,000
Problem 8: Nyx Company had determined its December 31, 2021 inventory on a FIFO basis at P 410,000. Nyx
records losses that result from applying the lower of cost or net realizable value. Below are data pertinent to its
inventory:
Estimated selling price P 400,000
Normal Profit margin 60,000
Estimated disposal costs 20,000
Current replacement cost 260,000
10. How much loss should Nyx recognize at December 31, 2021?
a. P0 c. P10,000
b. P30,000 d. P90,000
Problem 9: The Aphrodite Company uses the lower of cost or net realizable value inventory. Data regarding its
work-in-process inventory are presented below:
Beauty Desire
Historical cost P24,000 P18,800
Selling price 36,000 21,800
Estimated cost to complete 4,800 3,500
Estimated cost to sell 2,000 1,900
Replacement cost 20,800 16,800
Normal profit margin as a percentage of selling price 25% 25%
11. What amount should be reported as ending inventory using the LCNRV individual approach?
a. P45,600 c. P42,800
b. P40,400 d. P48,000
Problem 10: On September 30, 2021, a fire at Uranus Company’s only warehouse caused severe damages to its
entire inventory. Based on recent history, Uranus has a gross profit of 25% on cost. The following information
is available from Uranus’s records for the nine months ended September 30, 2021:
Inventory, January 1, 2020 was P300,000; Net Purchases was P4,200,000 and Net sales was P3,540,000. A
physical inventory disclosed usable damaged goods which Uranus estimates can be sold for P 50,000.
12. Using the gross profit method, what is the estimated cost of merchandise lost by the fire?
a. P1,618,000 c. P1,845,000
b. P1,668,000 d. P1,795,000
Additional information:
a. Purchases included goods with retail price of P46,520 from High Company shipped on November 29, 2021
terms FOB shipping point. The goods were still in transit as of December 2, 2021.
b. Sales included goods shipped to Happy Incorporated, terms FOB destination, on November 30, 2021 and
received on December 3, 2021. The retail price of the goods was P63,800.
A disastrous fire completely destroyed the inventory on December 1, 2021. (Round off the Cost-To-Retail ratio
into 2 decimal places e.g 12.12%).
AUDITING PRACTICE
Significant Business Processes: Plan to Inventory, Purchase to Pay and Order to Cash
(Formerly Production/Conversion, Revenue & Receipt and Purch. & Disbursement Cycles)
Presented below is a list of items that may or may not be reported as inventory in a company’s December 31,
balance sheet:
a. Cost of goods held on consignment P900,000
b. Goods sold on installment basis at selling price 300,000
c. Invoice price of goods in transit, sold FOB shipping point 360,000
d. Invoice price of goods in transit, sold FOB destination 600,000
e. Selling price of goods sold to a customer, for which the company has signed
an agreement to repurchase at selling price plus interest. 900,000
f. Selling price of goods sold under a “bill and hold
agreement”. As such, goods are still on hand as the company awaits
shipping instructions from the customer. 360,000
g. Invoice price of goods in transit, purchased FOB shipping point 200,000
h. Invoice price of goods in transit, purchased FOB destination point 600,000
i. Import duties and non-refundable taxes on goods purchased in item g. 49,000
j. Freight charges on goods purchased in item g. 24,000
k. Freight charges on goods sold 30,000
l. Cost of insurance while in -transit on the goods purchased in item g. 8,000
m. Raw materials on which the company has started production, but which are not
completely processed 840,000
n. Factory labor costs incurred on item m. 150,000
o. Factory overhead costs incurred on item m. 120,000
p. Interest cost incurred for inventories that are routinely manufactured 120,000
You are engaged to perform an audit of the accounts of Patron Company for its first year of operations ending
December 31, 2020. You have observed the taking of the physical inventory of the company on December 30,
2020. As a result, all goods delivered on or before December 30, 2020 were excluded from the physical count.
An excerpt of the company’s trial balance revealed the following information:
Accounts receivable P527,000
Inventory, physical count 327,000
Sales 5,749,000
Purchases 2,125,000
The following were the sales invoices recorded in the sales journal several days before and several days after
December 31, 2020. All purchases were correctly recorded.
DECEMBER 2020 SALES JOURNAL ENTRIES
Invoice # Selling Price Cost Date of Shipment Freight term and other remarks
20122 14,500 8,200 December 27, 2020FOB Destination
20123 3,000 2,000 December 28, 2020FOB Shipping Point, in Transit
20124 25,000 15,000 December 29, 2020Shipped to consignee, 60% unsold by
consignee as per consignee report.
Commission at 10% of sales.
20125 7,000 4,600 December 30, 2020 FOB Destination, in Transit
20126 12,000 8,000 December 31, 2020 FOB Buyer’s Warehouse, in Transit
20127 8,000 4,000 December 31, 2020 Free Alongside the Vessel, in Transit
20128 4,000 2,400 January 2, 2021 FOB Shipping Point
JANUARY 2021 SALES JORNAL ENTRIES
Invoice # Selling Price Cost Date of Shipment Freight term and other remarks
20129 6,000 3,800 December 30, 2020 FOB Destination, in Transit
20130 8,000 5,800 December 31, 2020 FOB Shipping Point, in Transit
20131 7,600 4,800 January 2, 2021 FOB Shipping Point
20132 9,600 6,200 January 2, 2021 Under bill and hold agreement
executed in 2020
What are the adjusted balances of the following?
1. Sales
2. Accounts Receivable
3. Inventories
PROBLEM 3: (SALES AND PURCHASES CUT-OFF)
You have been engaged to audit Sputnik Company for the year ended December 31, 2020. The Company sells at
30% gross profit based on sales price. Portions of the client’s sales and purchases accounts for the calendar
year 2020 follow:
Sales
DECEMBER SALES JOURNAL
Date Reference Amount Date Reference Amount
12/31 Closing entry 5,313,000 Balance Forwarded 4,910,000
12/26 SI # 706 90,000
12/27 SI # 707 60,000
12/28 SI # 708 80,000
12/28 SI # 709 50,000
12/31 SI # 710 40,000
12/31 SI # 711 45,000
12/31 SI # 712 38,000
P 5,313,000 P 5,313,000
Purchases
DECEMBER PURCHASES JOURNAL
Date Reference Amount Date Reference Amount
Balance forwarded P 2,200,000 12/31 Closing entry P 2,735,000
12/28 RR # 903 100,000
12/30 RR # 905 110,000
12/31 RR # 906 150,000
12/31 RR # 907 175,000
P 2,735,000 P 2,735,000
JANUARY PURCHASES JOURNAL
Date Reference Amount Date Reference Amount
1/02/21 RR # 908 89,000
1/02 RR # 909 100,000
1/02 RR # 910 76,000
1/03 RR # 911 95,000
1/04 RR # 912 75,000
Requirements:
1. What is the adjusted balance of sales?
2. What is the adjusted balance of purchases?
3. What is the net adjustment to accounts receivable account?
4. What is the net adjustment to accounts payable?
5. What is the net adjustment to inventory?
6. What is the net adjustment to the net income?
What is the correct carrying value of inventories as of December 31,2020 and the loss on inventory write-down
for the year ended December 31, 2020, assuming no allowance for write-down account was recognized in the
previous year, under the following independent assumptions?
Octagon Inc., a manufacturing company, had the following information about its inventories as of December 31,
2020:
Finished Goods Inventory:
Item Cost Selling Price Cost to Sell
A P500,000 P1,000,000 20% of Sales Price
B 1,200,000 1,500,000 30% of Sales Price
C 800,000 1,200,000 10% of Sales Price
Work-in-process Inventory:
Item Direct Direct Labor Overhead Cost to Selling
Materials Complete Price upon
Completion
A P30,000 P50,000 P25,000 P50,000 P200,000
B 45,000 65,000 40,000 60,000 250,000
C 75,000 25,000 80,000 40,000 240,000
Raw Materials Inventory: Finished Goods A: Raw Materials Inventory: Finished Goods B:
Required:
1. What is the correct carrying value of finished goods inventory?
2. What is the correct carrying value of work-in process inventories?
3. What is the correct carrying value of raw materials inventories?
4. Assuming the direct write-off method is used to account for inventory write-down, how much should be
recognized in the profit/loss as a result of the lower of cost or net realizable value valuation of inventories?
5. Assuming allowance method is used and assuming that the beginning balance of the allowance for inventory
write-down has a balance of P130,000, (FG – P60,000; WIP – P70,000; RM – 0), how much should be
recognized in the profit/loss as a result of the lower of cost or net realizable value valuation of inventories?
2. Which of the following questions would not be appropriate for an internal control questionnaire involving
inventories?
a. Are daily productions based on approved production orders?
b. Are disbursement vouchers approved before payment?
c. Are goods stored in locked storage areas and are access to the store room limited to authorized
personnel only?
d. Are there independent, periodic comparisons of inventory records with goods on hand?
3. The auditor, while understanding internal control over production/conversion cycle, noted that the client has
no production planning policy in place and that you have noted that most of the time the client had ran- over-
production, what is the possible implication of this information to the auditors planned substantive testing
audit program?
a. The auditor should schedule inventory count procedures at year-end in validating existence and
completeness assertion on inventories.
b. The auditor should schedule inventory count at an interim date in validating existence and
completeness’ assertion on inventories.
c. The auditor should plan to perform more extensive audit procedure to validate the valuation
assertion on inventories.
d. The auditor maybe allowed to heavily rely on analytical procedures, such as the use of inventory
estimation procedures in validating the valuation assertion on inventories.
4. What is the possible implication and which financial statement assertion would be affected if there is no
appropriate internal control policy regarding the authorization/approval of requisition of materials, labor and
overhead to be placed in production?
a. May lead to unauthorized production which may affect the existence assertion of inventories.
b. May lead to wastages which in turn may affect the valuation assertion of inventories.
c. May lead to pilferage/theft which in turn may affect the completeness assertion of inventories.
d. May lead to erroneous cost allocation which in turn may affect the valuation assertion.
5. Which of the following most likely would be an internal control procedure designed to detect errors and
irregularities concerning the custody of inventories?
a. Periodic reconciliation of work-in-process with job cost sheets.
b. Segregation of functions between general accounting and cost accounting.
c. Independent comparisons of finished goods records with counts of goods on hand.
d. Approval of inventory journal entries by bookkeeper.
6. The auditor, while reviewing cost accounting records, noted that there has been a recurring entry to close
over-applied overhead cost to cost of sales, work-in process inventory and finished goods inventories, what
is the possible implication of this observation to the auditor’s substantive testing audit program?
a. The auditor should determine, where applicable, that any over-applied overhead cost has been
closed to the appropriate accounts at year-end for all production during the year to ensure no
material misstatement in the valuation assertion for inventories.
b. The auditor should determine, where applicable, that any over-applied overhead cost has been
closed to the appropriate account at year-end for all production during the year to ensure no
material misstatement in the existence assertion for inventories.
c. Independent comparisons of finished goods records with counts of goods on hand to ensure no
material misstatement in the existence and completeness assertions for inventories.
d. Perform purchases and sales cut-of procedures at year-end to ascertain whether goods are
appropriately included in the records at year-end to ensure no material misstatements in the
existence and completeness assertions for inventories.
7. Which of the following internal control procedures most likely would be used to maintain accurate inventory
records?
a. Perpetual inventory records are periodically compared with the current cost of individual inventory
items.
b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
c. Requisitions, receiving reports and purchase orders are independently matched before payment
is approved.
d. Periodic inventory counts are used to adjust the perpetual records.
8. An essential procedural control to ensure the accuracy of the recorded inventory quantities is:
a. Performing a gross profit test.
b. Testing inventory extension.
c. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with
inventory policy.
d. Establishing cut-off for goods received and shipped.
9. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control
risk is high, an auditor would probably
a. Increase the extent of test of controls of the inventory cycle.
b. Request the client to schedule the physical inventory at the end of the year.
c. Insist that the client perform physical counts on inventories several times during the year.
d. Apply gross profit tests to ascertain the reasonableness of physical counts.
10. Which of the following is correct regarding an auditor’s findings while performing sales and purchases cut-off
in line with auditing a merchandising client’s inventories?
a. Goods received on or before the count date included in the physical count but is purchased on a
“sale with repurchase agreement” terms shall understate inventories as of the balance sheet date.
b. Goods delivered on or before the count date on an FOB shipping point, excluded from the physical
count, still in-transit as of the balance sheet date shall understate inventories as of the balance
sheet date.
c. Goods received after the count date included in the physical count but is purchased on a “bill and
hold agreement” terms shall overstate inventories as of the balance sheet date.
d. Goods delivered on or before the count date excluded in the physical count but are still in transit
as of the balance sheet date on an FOB destination term shall understate inventories as of the
balance sheet date.
11. Which of the following is incorrect regarding the conduct of the physical count of inventories?
a. The best timing for observing physical count of inventories is at year-end.
b. The primary responsibility of the independent auditor with regard inventory physical count is to
observe the conduct of the physical count done by the client personnel.
c. The auditor may decide to perform test-count on inventories as part of his substantive test
procedure.
d. The auditor traces test-counts noted during his count observation to the client’s inventory
summary and records in support of the existence assertion.
12. While observing a client’s annual physical inventory, an auditor noticed that certain test counts made were
higher than the recorded quantities in the client’s perpetual records. This situation could be the result of the
client’s failure to record
a. Purchase discounts.
b. Purchase returns
c. Sales
d. Sales returns.
13. To gain assurance that all inventory items in a client’s inventory listing are valid, an auditor most likely would
_____________. This procedure is necessary to audit ___________ assertion over inventories.
a. Trace inventory tags to items listed in the inventory listing schedule; Completeness.
b. Trace Inventory tags to items listed in the receiving reports and vendor invoices; Existence.
c. Vouch items listed in the inventory schedule to inventory tags and the auditor’s recorded count
sheet, Existence.
d. Vouch items listed in the receiving reports and vendors’ invoices to the inventory listing schedule;
Completeness.
14. Which of the following procedures carried out at an inventory count by an auditor is a test primarily for
overstatement of inventory?
a. Agree items that have been test-counted to inventory sheets.
b. Ensure completeness of sequence of pre-numbered inventory sheets at the conclusion of the
count.
c. Check that inventories held at third party locations are included in the count.
d. Agree items appearing in the inventory summary prepared by the client after the inventory count
to the test counts done the by the auditor.
15. Which of the following procedures carried out at an inventory count by an auditor is a test primarily for
overstatement of inventory?
a. Agree items that have been test-counted to inventory sheets.
b. Identify slow-moving obsolete inventory items.
c. Ensure completeness of sequence of pre-numbered inventory sheets at the conclusion of the
count.
d. Check that inventory held at third party locations is included in the count.
16. To measure how effectively an entity employs it resources, an auditor calculates inventory turnover by
dividing average inventory into cost of goods sold, this analytical procedure information is most helpful/useful
in assessing which of the following financial statement assertion on inventories?
a. Existence
b. Rights
c. Valuation
d. Completeness
17. You were assigned to audit a client’s inventory for the period ended December 31, 2020. After your review of
the internal control over inventories, you have ascertained that they were effective, thus, internal control risk
was maintained at below the maximum level. You decided, as a substantive test procedure, to simply test the
reasonableness of the reported inventory balance by performing inventory estimation using the gross profit
method. Which of the following is correct, if there is a material difference between the amount of the estimated
inventory and the inventory per books?
a. The auditor should propose to the client to adjust the books to equal the result of the analytical
procedure-inventory estimation.
b. The auditor should issue a qualified opinion due to the material misstatement in the inventory
and indicate in the audit report the extent of the material misstatement.
c. The auditor should extend further the audit procedure by rendering additional test of details of
account balance and transactions to ascertain the source of the material misstatement
d. The auditor should propose to the client that an audit adjustment is necessary and if the client is
not willing to make the necessary adjustment, consider the possible implication of the material
misstatement to the type of audit opinion you will issue
18. An auditor most likely would make inquiries from the production and sales personnel concerning possible
obsolete or slow-moving inventory to support management’s financial assertion of:
a. Valuation
b. Rights and obligations
c. Existence
d. Occurrence
19. Which of the following auditing procedures most likely would provide assurance about a manufacturing entities
inventory valuation?
a. Testing the entity’s computation of standard overhead rates.
b. Obtaining confirmation of inventories pledged under loan agreements.
c. Reviewing shipping and receiving cut-off procedures for inventories
d. Tracing test counts to the entity’s inventory listing.
20. An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most
likely relates to the auditor’s objective to obtain evidence about the financial statement assertions regarding
inventory:
a. Rights and obligation
b. Valuation
c. Existence
d. Completeness
21. PAS 2 requires that inventories be valued at lower of cost or net realizable value as at the balance sheet date.
Which of the following shall be the auditor’s best source of corroborating evidence to determine the
reasonableness of the client’s estimate of the net realizable value?
a. Vouching client estimates to the last sales invoices for finished goods inventory sold and supplier’s
purchase invoices for raw materials purchased.
b. Benchmarking by comparing client estimates against industry’s current prices for similar
inventories.
c. Tracing test counts noted during the physical count of inventories to the client’s inventory
summary.
d. Subsequent events review.
22. When auditing inventories, an auditor would least likely verify that:
a. The financial statement presentation of inventories is appropriate
b. Damaged goods and obsolete items have been properly accounted for
c. All inventories owned by the client are on hand by the time of the count.
d. The client has used proper inventory pricing.
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