Excel Professional Services, Inc.

Management Firm of Professional Review and Training Center (PRTC)

(Luzon) Manila 7339344/7347903

Calamba, Laquna (049) 5453807

(Visayas) Bacolod City (034) 4346214 * Cebu City (032) 2537900 loc. 218
(Mindanao) Cagayan De Oro City (088) 3093073 Davao City (082) 2250049

Since 1977

CPA REVIEW.

AUDITING PROBLEMS
AP .1601-Audit of Inventories

OCAMPO/CABARLES
AY 2014

The Use of Assertions in Ol>taining Audit Evidence

Assertions about classes of transactions and events for the
Completeness - all assets, liabilities and equity interests

period under audit: (COCA C)

Completeness - all transactions and events that should
have been recorded have been recorded.
Occurrence

transactions

and

events

V<'lluation and allocation - assets, liabilities, and equity

that

have

been

recorded have occurred and pertain to the entity.

.Cl assifiJ&ltion - transactions and
recorded in the proper accounts.

that should have been recorded have been recorded.

events

interests

are

appropriate

included

amounts

in
and

the

financial

any

resulting

statements

at

valuation

or

allocation adjustments are appropriately recorded.

have

been
Assertions about presentation and disclosure: (COCA)

Accuracy - amounts and other data relating to recorded

transactions and events have been recorded appropriately.

Completeness - all disclosures that should have been

included in the financial statements have been included.

Cutoff- transactions and events have been recorded in the

correct accounting period.

Occurrence ...9DP rights and obligations - disclosed events1

transactions1 and other matters have occurred and pertain
to the entity.

Assertions

(RECV)

about

account

balances at

the

period

end:

Classification and uoderstandability - financial information

is appropriately presented and described, and disclosures

Rights and obligations - the entity holds or controls the

rights to assets, and liabilities are the obligattons of the
entity.

are clearly expressed.

Accuracy and valuation - financial and other information
are disclosed fa>rly and at appropriate amounts.

2\istence - assets, liabilities, and equity interests extst.

INTERNAL CONTROL MEASURES

1.

Authority

and

responsibility

for

controlling

the

6.

There

should

be

careful

selection

of

inventory

7.

4.

forms and reports

related to the management of inventories should be

developed and implemented.
5.

Quantitative

controls

through

perpetual

specific

authorizations

and book reco rds by qualified employees.

Valuation on the basis of approved cost-mark-down

Adequate physical facilities for handling and storage of

Adequate system of procedures,

upon

Slow-movmg, obsolete and damaged stock should be

physical

policies, objectives and system of inventory control.

inventory shold be provided.

made only

identified and reported following periodic reviews of

personnel and intensive training of such personnel in

3.

be

emanating at authorized levels.

one person.
2.

Deliveries of materials, finished stock and merchandise

should

inventories should be centralized management and in

methods should be reviewed.

8.

Safegu,ards against that action of the element and

inaccuracies in recording receipts and issues should be
adopted. Example - Maintaining adequate insur<,mce
coverage.

mventory

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.

Page 1 of 8

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AP.1601

EXCEL PROFESSIONAL SERVICES, INC.

SUBSTANTIVE AUDIT OF INVENTORIES
Inventory Balances

Purchases

Existence: Recorded inventory exist

Completeness:

1.

Trace a sequence of receiving reports to entries in the

2.

Before the client takes the phys1cal inventory, review

and approve the client's written plan for taking it.

voucher reg,ster.

Observe

entries in the voucher register.

the

client

personnel

physically

counting

inventory.

3.

Confirm inventories on consignment and held in public

warehouses.

Obtain a copy of prenumbered inventory tags used by

the client in taking inventory and reconcile the tags to
the listing.
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

and

determine

that

the

item

is

included

Also, identify the last shipping document

and determine, based on shipping terms, whether the
item was properly recorded in sales or inventory.

authenticity

and

records. Scan voucher register for duplicate payments.

Classification: Purchase transactions have been recorded in

For a sample of entries in the purchases journal, verify the

accuracy of account coding.

Accuracy (Valuation):

Purchases are recorded at proper

amounts

order.
Production

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.

for

Recompute invoices and compare invoice price to purchase

Perform analytical procedures.

Rights and obligations: Inventory is owned by the entity

8.

documents

Scan voucher register for large or

Trace inventory purchased to perpetual

in

inventory.

7.

underlying

the proper accounts

5.

end

Account for a sequence of

Recorded purchases are for items that were

Occurrence:

reasonableness.
unusual items.

Completeness: All inventory of the entity recorded

Test cutoff.

acquired
Examine

4.

Purchases that occurred are recorded

valuation, examine invoices for Inventory on hand or

trace prior year's inventory listing to verify cost.
determine

net

realizable

value

NRV.

11. Verify computations in the inventory listing.

being alert while observing Inventory being taken
for damaged, slow-moving, or scrap inventory.
Scanning perpetual records for slow-moving items
and discussing their valuation with client.
Presentation and disclosure:

Recorded producUon transactions occurred

selected

requisitions,

transactions,
approved

examine

labor

tickets,

signed
and

materials

allocation

of

overhead.
Classification: Production transactions have be en recorded

For a sample of entries, verify the accuracy of account

coding.
Accuracy

12. Review the obsolescence of the inventory by:

b.

Occurrence:

in the proper accounts

(NRV) of the inventory and apply the lower of cost or

a.

Account for a sequence for production reports.

For

Considering the method the client uses for inventory

10. For selected items,

Completeness: All production transactions that occurred

are recorded

(Valuation):

Production

transactions

are

recorded at proper amounts

Test cost records by tracing to underlying documents, such

as bill of materials, labor tickets, authorized labor rates,
and standard overhead rates.

Review variances.

Inventory is classified and

disclosed in accordance with GAAP

-

en d

13. Determine whether accounts are classified and

disclosed in the financial statements in accordance
with GAAP.

Page 2 of 8

www.prtc.com.ph

AP.l60l

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- 11<'1!. l>Y fSJ. 9' I

- f"-r' ._- to " ea'--e'PC

EXCEL PROFESSIONAL SERVICES, INC.

\..+1.1 i<rf<'M4Vi.

. PROBLEM NO. 1

QUESTIONS.

lll'lky ')..l>l'l. Cf e*"")

Quezon Corporation

Based on the above and the result of your audit, determine

fo r the audit
You were engaged by
of the company's financ ial statements for the year ended

December 31, 2014.

the following:

The co mpany IS en gage d in the '

m over cost .
who I esaI e bus1ness anct makes a II sa1 es at 25a,

The

r
. s a I es for the year ended D ecem ber 31 , 2014
a.

records:

Date

ReL

Dec.
28
Dec.
10,000 . 29
Dec.
46,000
30
Dec.
68,000
31
Dec.
16,000
31
Dec.
(5,530,000)
31

Sale s Invoice

RR

observed

the

65,000
24,000

42,000
64,000
(1,000.000)

in v entory

of

l
f\

5.

31, t he

last

goods

1n

On the evening of December 31, there were two trucks

loaded and

two delivery

Cor porat ton .

enroute

to Brooks

rece1ved .the

goods,

which were sold on Sales Invo1ce No. 966 terms FOB

Destination, the next day.

d)

b.

The goods were shipped FOB Destination, and

was

deducted

from

2014,

you

found

the

following

Goods costing P180,000 were received from

vendor

The goods were

Goods

costing

P200,000,

sold for

P300,000,

were

the customer on January 2, 2015.

The terms of the

invotce were FOB shipping point.

The goods were

included in the endmg inventory for 2014 and the sale

was recorded in 2015.

c.

The in voi ce for goods costing P150,000 was received

and recorded as a purchase on December 31, 2014.

related goods, shi pped FOB destination were
received on January 2, 2015, but were included in the

The

physical inventory as goods in transit.

d.

shipment

P600,000

December

30,

2014,

of goods to
terms

FOB

: :... ",)

:'l

custo mer

destination,

on
was

recorded as a sale upon shipment. The goods, costing

P400,000 and delivered to the customer on January 6,
2015, we re not included in the 2014 ending inventory.
Goods valued at P250,000 are on cons i gn ment from a
vendor.

I nventory .

f.

These go od s are incLuded in the physical

Goods valued at P160,000 are on con st gn men t with a

cust omer.

physical

These

inventory.

goods

are

not

Included

in

the

QUESTIONS:
Based on the above and the result of your audit, answer

the following:

freight of P2,000 was paid by the client.

freight

31,

shipped on December 31, 2014, and were received by

Enroute to the client on December 31 was a truckload

(' 1
of goods., which was received on Receiving Report No. v

1064.

December

point.

' r".:<-?c;l;'

trucks

Brooks

P 400,000
P1,218,000

shipped on De cember 31, 2014, terms FOB shipping

Temporarily stranded at D ecembe r 31 at the railroad

Trading

Accounts payable as of December 31, 2014

and recorde d on De cember 30, 2014.

December 31 but leave the company premises on

siding were

P120,000

your observation of the client's physical count and review

/--

c)

P370,000

information relating to certain inventory transactions from

sealed on

January 2. This order was sold for P100,000 per

Sales Invoice No. 968. l .io- - ,,r_':, ')"" .::.. . :
-, - '

c.
d.

Dunng your audit of the Makati Corporation for the year

e.

vendor.
was

P350,000
P220,000

ended

T ruck No. CPA 123 was unloaded on January 2 of

the following year and received on Receiving
Report No. 1063.
The freight was paid by the
143

P814,000

a.

in the co m pany siding:

ILU

P968,000

b.

which the invoice was not received until the following

No.

c.

d.

AccoJnts receivable as of December 31, 2014

/vBLEM NO.

Receiving Report

yea r. Cost was P18,000.

Truck

PSOO,OOO

c.

and received on Receiving Report No. 1060 but for

P864,000

b.

d.

the

a) Included in the warehouse physical inventory at

December 31 were goods which had been purcha sed

+'

Inventory as of Dece mb e r 31, 20i4

a.

on January 3, 2015. The goods were not included in

the physical count. The related invoice was r ece ived

had been made on any Sales Invoices whose numbet is

larger than No. 968.
You al so obtained the following
additional informat ion :

P3,018,000
P3,818,000

c.

_cj,.

P354,000

which had been used was No. 1063 and that no shipments

b)

P3, 754,000

P41S,OOO

a.

When performing sales and purchases cut-off tests, you

D ecember

P3,000,000

b.

b.

warehouse on December 31 and were satisfied that it was

that at

P5,350,000

P u rc h a ses for the year ended December 31, 2014

a.

a.

properly taken.

found

PS,400,000

_cl.c

of sales and p u rchases c utoff :

P600,000
500,000
400,000

physical

3.

70,000

!'__ ---=
Receiving Report

Accounts receivable
Accoun\S payable

35,000 .

1058
RR No ..
1059
RR No.
1061
RR No.
1062
RR No.
1063
Closing
entry

Inventory

You

P2,700,000

1057
RR No.

150,000

27

40,000

965
51 No.
966
51 No.
967
51 No.
969
51 No.
970
Sl No.
971
Closing
entry

Note: 51

Bala nce
forwa rded
RR No.
Dec.

P5,200,000

51 No.

27
Dec.
28
Dec.
28
Dec .
31
Dec.
31
Dec
31
Dec.
31

Amount

PURCHASES
Date
Ref.

Balance
forwarded
Dec.

v 2.

c.

PS,2SO,OOO
PS,1SD,OOO

b.

following were gathered from the client's ac count i ng11

SALES

fl Li>t4hnAl o:;- trl\lf"Y,

the

However, the

purchase

price

of

The inventory as of December

by
a.

P230,000

b.

P190,000

31, 2014 IS understated

c.

d.

P140,000
P290,000

PBOO,OOO.

Page 3 of 8

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AP.1601

EXCEL PROFESSIONAL SERVICES, INC.

The cost of sales for the year ended December 31,
2014 is overstated by
a. P290,000
c. P440,000
b. PllO,OOO
d. P380,000

e)

The profit for the year ended December 31, 2014 is

misstated by
a. P190,000 over
c. P140,000 under
b. P 10,000 over
d. P290,000 under

Through the carelessness of the

receiving department shipment in
early December 2014. was damaged
by rain. This shipment was later sold
in the last week of December at cost.

150,000

REQUIRED:

1.

Gross profit rate for 11 months ended November 30,

2014.

2-c-;.

The working capital as of December 31, 2014 IS

misstated by
a. P190,000 over
c. P140,000 under
b. P 10,000 over
d. P290,000 under

SOLUTION GUIDE

2.

Cost of goods sold during the month of December

2014 using the gross profit method. l1"ff0,1160

3.

December 31, 2014 inventory using the gross profit

method. /1 7' )11 b

Over Under)
SOLUTION GUIDE:
Requirement No. 1

Sales, up to 11/30
Less COS, up to 11/30:
Inventory, 1/1
Net purchases, 11/30
TGAS
Inventory, 11/30
Gross profit

PROBLEM NO. 3

OV\ $0)-; MH '),01'1,/ oc; I),,o(,

Your client, Mandaluyong Company, is an importer and
wholesaler.
Its merchandise is purchased from several
suppliers and is warehoused until sold to customers.

Unadjusted

Your audit disclosed the following information;

a)

b)

c)

* d)

Shipments received in November and

included in the physical inventory but
recorded as December purchases.
Shipments received in Ltnsalable
condition and excluded from physical
inventory. Credit memos had not
been received nor chargebacks to
vendors been recorded:
Total at November 30, 2014
Total at December 31, 2014
(including the November
unrecorded chargebacks)
Deposit made with vendor and charged
to purchases in October, 2014.
Product was shipped in January,
2015.
Deposit. made with vendor and charged
to purchases in November, 2014.
Product was shipped FOB destination,
on November 29, 2014 and was
included in November 30, 2014
physical inventory as goods in.
transit.

Page

4 of 8

112,500

22,500

30,000

<,.Vo"

___;

--
I.P.,ll/30 :
Ll.Lmos.)

10,125,000

-----,

N.P.,12/31 i
'
(12 mos.) ;
12,000,000

ji'2,_0D
/

"\

(r-.--

. .,::I

--

i, -_,_.r,, s:-"J)
2

Sales, up to 12/31
Less sales, up to 11/30
Sales- December
Sales without profit
Sales with profit
x Cost ratio
COS with profit
COS without profit
Total C - f.\" '}-, ;_.1

1_ '1

i: . :.:.. :J

0 :t<io

P14,400,000
_1600,000
1,800,000
150,000)
1,650,000
"'

'

,-Pi,,

i I 3J72

'i)':.

,.iu; iC. 0
I IL'=lv, 0;;:-

2t->t'/r

No. 3

Inventory, 1/1
Net purchases, 12/31
TGAS
Less cost of sales:
With profit
[(14.4M -.15M)x.8]
Without profit
Estimated inventory, 12/31

1,312,500
,,_ ;::;::; '"::YJ

;-.:- r'\.>

'!,p,<:::0 -,if,')'-r">,-s:--!O,,'[b"-

-': (! . ..f.':'i:J)

82,500

www.prtc.com.ph

- _____j

--i----

Requirement No.

:l>i:o'

'' ' .
'&

t:;.. cue:
-

Adjusted

Requirement

15,000

L{,7'2, -pi)

\_ ____::__:

12,000,000

1:.

, ) 7,!..r

1,425,000

10,125,000

1,1;11,500

JJLD"

Inventory,
11/30

In conducting your audit for the year ended December 31,

2014, you were satisfied that the system of internal control
. Accordingly, you observed the physical
was good.
inventory at an interim date, November 30, 2014 instead
of at year end. You obtained the following information
from your client's general ledger:
1,312,500
1,425,000
12,600,000
14,400,000

Computation of adjusted amounts:

Inventory, January 1, 2014

Physical inventory, November 30, 2014
Sales for 11 months ended Nov. 30, 2014
Sales for the year ended Dec. 31, 2014
Purchases for 11 months ended Nov. 30,
2014 (before audit adjustments)
Purchases for the year ended Dec. 31,
2014 (before audit adjustments)

P12,600,000

AP.1601

EXCEL PROFESSIONAL SERVICES, INC.

!(A,!.

-tll\,.>J<

J - : M NO.4

n
On

April

warehouse

QUESTIONS.

:\
J:ged

21, 2014, 2
of
Muntinlupa

the

office and
The
only

Com pany.

accounting record saved was the

general ledger, from

which the trial balance below was prepared.

Based on the above and the result of your audit, answer

the following:

{ 1 /"'H ow much is the adjusted balance of Accounts Payable

fl/ as of April 21, 2014?

Muntinlupa Company
Trial Balance

P237,000

d.

P343,000

a.

P650,500

b.

P673,500

c.

P660,000

d.

P683,000

400,000

Inventory, Dec. 31, 2013

750,000

Land

350,000

a.

P400,000

c.

P360,000

1,100,000

b.

P440,000

d.

P354,000

(,;-.-1i ow

Accounts payable

237,000

Accrued expenses

180,000

Share capital, PlOD par

1,000,000

Retained earnings

520 ' 000

Sales

Operating expenses

344 000

Totals

An examination of th'e April o statement and

cancelled checks revealed that checks written during

other expenses.

Deposits

P130,000:

P57,000

P39,000 paid for

during

the

same period

consisted of receipts on

amounted to P129,500, which

account from customers with the exception of a P9, 500

refund

from a

vendor

for merchandise returned

in

April.

c.
.,.

Correspondence
obligations

merchandise

at

with

suppliers

April 21

of

purchases,

d.

revealed

unpaid

for

P106,000

P;2 3,000

including

shipments in trans1t on that date .

April

'

Mv

for

Customers ack nowl edged indebtedness of P360,000 at

April 21. It was also estimated that customers owed

another P80,000 that will never be acknowledged or

recovered. Of the acknowledged indebtedness, P6,000

will probably be unco llect i b l e.

!/

e.

c.

P1,510,000

d.

P1,506,000

to April 21, 20147

a.

P786,500

b.

P835,725

a.

paid to accounts payable as of March 31, P34,000 for

and

P1,430,000

is the

c.

P830,500

d.

P828,300

estimated inventory on April 21,

P570,000
P587,775

c.

P623,500

d.

P579,500

\:>0ow much is the estimated inventory Fire l oss?

b.

April merchandise purchases,

Accounts

P1,519,500

a.

The company's y is December 31.

1 to 21 totaled

of

b.

b.

a.

't

P3 700.00Q

the period April

balance

a.

6 . /How much
f"'/ 2014?

The following data and information have been gathered:

4,

adjusted

L,_ 5/'}i ow much is the cost of sales for the period January 1

1,350,000
520,000

the

21, 2014?

56,000

Purc h ases

is

u-/How much is the sales for the period January 1 to April

P 413,000

Other assets

much

Receivable as of April 21, 2014?

Ace. depreciation

ow much is the net purchases for the period January

Accounts receivable

Building

b.

c.

P579,500
P477,000

ftLEM

NO. 5

d.

P535,000
P512,000

(00( Jl) c,.,.

.
You are engaged rn the regular annual exa

ination of the

accounts and records of Valenzuela Manufacturing Co,

for the year ended December 31, 2014.

workload

at

year . .e_nd,

recommendation,
November 30,

the

took rts annual

2014.

l9..

company,

reduce the

upon

your

physical i nventor y on

You observed the taking of the

inventory and made tests of the inventory count and the

inventory records .

The company's inventory account, which inc!udes raw

materials and work-in-process is on perpetual basis.
Inventories are valued at cost, first-in, first-out method.
There is no finished goods inventory.
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 insurance comp a ny agreed that t he fire loss claim

the company decided not to adjust the book inventory until

should be based on the assumption that the overall

year - end except for obsolete inventory items.

gross profit ratio for the past two years was rn effect
the current year.
The company's audited

during

financial

sttements

disclosed

the

following

Your examination disclosed the following

regarding the November 30 inventory:
a.

information:
Net sales
Net purchases

Beginning inventory

2013

2012

P5,300,000

P3,900,000
2, 350,000

2,800,000
500,000

Ending inventory

f.

c.

P106,000

1 to April 21, 2014?

CREDIT

p 180,000

Cash

P286,000

b.

March 31, 2014

DEB!'(

a.

660,000

750,000

500,000

.;

b.

--"-.--!_

Page 5 of 8

An understatement of the physical inventory by P4,200

due to errors in foo tings 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 h ave ascertained that the amount
of direct labonvas co rrect and that the overhead rate
was proper.

d.

{'{u'

Pricing tests showed that the physical inventory was

overstated by P61,600.

Inventory with a cost of P70,000 was salvaged. and

sold for P35,000. T he balance of the i n ven tory was a
total l oss.

information

The physi cal 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.

n!

_-;,

'

("

-------'

'c

- www.prtc.com.ph

AP.1601

EXCEL PROFESSIONAL SERVICES, INC.

Your audit also disclosed the following information about
the December 31 inventory:

a.

were:

Apply

691,600

Request

a.

d.

P1,631,560

6.
.

c.

P1,715,560

b.

P1,509,760

P1,516,760

d.

P819,560

c.

b.

d.

P812,560

./'i'he amount of direct

tl/ as of December 31

ll.4

a.
b.

Cs. ..xhe

P618,800
P232,400

d.

a.

b.
+

c.

772,800

d.

P1,237,600

PROBLEM NO.

P1,425,760

P338,800

P464,800

P777;600

hand.

Ordered before year-end was received.

Purchased

recorded.

count at yearend was not recorded as a

a.

Sale in the subsequent period

5sJ..

Sale In the current period

Purchase in the subsequent period

Jl.

8.

Purchase in the current period

What form of analytical review might

)i.

Inventory turnover rates.

Decrease in the ratio of gross profit to sales.

'Cl.

Valuation or allocation.

a.

observing a client's physical inventory.

b.
<"'

<f
_..

57
g.r

Completeness.

>-

d.

The auditor

test counts to the client's inventory

Existence.

:..

while

This procedure most likely obtained evidence

concerning
a.

counts

Ratio of inventory to accounts payable.

Comparison

of

invoices.

inventory

values

rJ1ost _jikeJy to learn

Rights.

Valuation.
=

to

purchase

of slowmoving

Inquiry of sales personnel

Inquiry of warehouse personnel

Physical observation of inventory

Review of perpetual inventory records.

\t) 10. The auditor tests the quantity of materials charged to

_:.Jt l.lmpt,(

"'IIW'1

uncover the

existence of obsolete merchandise?

, Pi->'-"' _9..

test

was

These audit steps should be designed

inventory through

for

year-end

to detect whether merchand'1se included in the physical

An auditor is

listing:

before

Owned by the company,is in the possession o(the

were adequate.

Presentation and disclosure.

then traced the

received

e audit of yearend inventories should include steps

Existence or occurrence.

items

and

company at year-end.

Completeness.

selected

by

Purchas.ed and received before year-end was paid

6.

auditor

returned

Vl""v.r..c. >"-'i'; IL:

for.

c.

An

-4<

Purchase cut-off procedures should be designed to test

aud1tor is most likely to inspect loan agre ments

under which an entity's inventories are pledged to
support management's financial statement assertion of

'C

items

to verify that the client's purchases and sales cutoffs

Verifying that the client has used proper inventory

Verifying that all inventory owned by the client is

a..

several

iilg the audit of inventories?

d.

. /An
C,"'

for

whether all inventory

d.

Verifying that inventory counted is owned by the

client.

the count.

memos

arrived at the date of the inventory count and had

b.

d at the time of
;."'"""'

Which of the

No journal entry had been made on the retailer's

books for several items returned to its suppliers.
An item purchased "FOB shipping point" had not

c.

c.

Credit

customers had not been recorded.

<)_,

P386,400

pricing.
Ascertaining the physical quantities of inventory on

,.'

physical

not been reflected in the perpetual recordsct

auditor's objectives regard

..r

sheets.

P942,760

Which of the fol owing is not one of the independent

a.

the

Inventory item has been counted but the tags

d.

P728,560

schedule

placed on the items had not been taken off the

c.

Select the best answer for each of the following:

\) /

to

than shown by the perpetual records.

b.

P1,502,760

amount of factory overhead included in work in

/ brocess as of December 31

client

.items and added to the inventory accumulation

labor included in work in process r

"-" 6.
c.

the

The physical count of inventory of a retailer was bigber

P1,722,560

b,3. M st of materials on hand, and materials included in

U/ work in process as of December 31

a.

the

Insist that the client perform physical counts of

a.

P1,845,760

justed amount of inventory at December 31

c.

ascertain

following could explain the difference?

djusted amount of physical inventory at November 30

a.

to

inventory items several times during the year.

QI)ESTIONS:

tests

inventory count at the end of the year.

d.

5.

profit

Increase the extent of tests of controls. relevant to

...- <

P386,400.

gross

the inventory cycle.

c.

The cost of sales of P1,920,800 included direct labor of

Based on the above and the result of your audit, determine

the following:

If the assessed level of control

reasonableness of the physical counts.

b.

338,800

Purchases

quantities and pesos.

a.

P1,920,800

Cost of sales

A client maintains perpetual inventory, records in both

risk is high an auditor will probably

Total debits to the following accounts during December

Direct labor

b.

(/ 4.

Cl>s

work in process by tracmg these quant1t1es to

a.

Cost ledgers.

c.

Receiving reports.

j1
d.

Perpetual inve:ntory records.

Material requisitions.

.....)
su"'"""" ....- ::. ""-1S1f!IJL<'
'Vi!U

- now do

the DIY

drill -

\..>'II...<

Page 6 of8

www.prtc.com.ph

AP.1601

EXCEL

PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

PROBLEM NO. 1

Jay Roy Retailmg Ltd is a food wholesaler that supplies independent grocery stores.

The company operates a perpetual

inventory system, with the first-in, first-out m"ethod used to assign costs to inventory items. Transactions and other
related information regarding two of the items (baked beans and plain flour) carried by lay Roy Ltd are given below for

June 2014 the last month of the company's reporting period.

Baked beans

Unit of packaging

Plain flour

Case containing 25 x 410g cans

Inventory@ 1 June 2014

35,000 cases@ P19.60

Purchases

1. 10 June: 20,000 cases@

Box containing 12 x 4kg bags

62,500 boxes @ P38.40

P9.50 per

1. 3 June: 15,000 boxes@ P38.45

2. 1 5 June: 20,000 boxes@

case

2. 19 June: 47,000 cases@ P19.70 per

case

Purchase terms

2/10, n/30, FOB destination

73,000 cases@

June sales
Returns and allowances

n/30, FOB destination

'
95,000 boxes@ 4o.oo

P28.50

A customer returned 5,000 cases that had

been shipped in error. The customer's

account was credited for

As June 15 purchase was unloaded, 1,000

boxes were discovered damaged. A credit

P142,500.

of P38,450 was received byJay Roy

Retailing Ltd.

Physical count at 30 June

2014

32,600 cases on hand

1,500 boxes on hand

No explanation found assumed stolen

Explanation of variance

Boxes purchased on 29 June still in transit

on 30 June

Net realizable value at 30

June 2014

P29.00 per case

P38.50 per box

The following are some of the transactions that affected

QUESTIONS:

the inventory of the Bolinao Company during 2014.

Ba.sed on the above and the result of your audit, answer

the following:

Jan. 8

Bolinao purchased
pnce

The inventory of baked beans as of June 30, 2014 at

cost, as adjusted is

a.

!7

c.

P641,860

d.

P642,220

cost, as adjusted is

b.

'

"3.

4.

P134,575

..

d.

P993,675

a.

"b?,

c.

P27,440

P27,580

d.

Which

of

the

following

is

P641,360

payment.

P57,675

P57,725

be

c.

be

d.

P1,623,970

best

procedure

b.

list

trade

net

invoice

The repossessed merchandise is to

refinished

and

placed

on

sale.

It

is

P24,000

c.

Compare inventory turnover rates with prevailing

rates from previous years.
Estimates inventory quantities by using the gross

d_

profit method.
Review internal controls for the physical. protection

P3,200
.

Refmishing costs of P6,400 were incurred on

The repossessed item was resold for

P24,000

Aug. 30

A sale on account was made of finished goods

on account, 20% down.

that have a list price of

P38,400.

materials with perpetual inventory records.

P59,200 and a cost

A reduction of PS,OOO off the list

pnce was granted as a trade-in allowance. The

trade-in item is to be priced to sell at P6,400 as
is. The nor-mal profit on this type of inventory
IS 25% of the sales price.

QUESTIONS:

of inventories.

Based on the above and the result of your audit, answer

the
.

/,

\ll!'f !/.011 <;\

The Bolinao Company values its inve'ntory at the lower of

FIFO cost or net realizable value (NRV)

.
accounts at December 31, 2013, had

The Inventory
the following

balances.

Page 7 of 8

Apr. 3
for

Compare the results of a physiCal inventory of raw

Finished goods

given

the repossessed item.

699,535

a.

Work in process

was

after estimated refinishing costs of

P6,800.
The normal profit for this item is considered to

P168,560
p
0

raw materials?

Raw materials

materials with a

The unpaid balance on the sale is

'P15,200.

identifying shortages of specific items in an inventory of

PROBLEM NO. 2

and

Bolinao repossessed an inventory item from a

customer
who
was
overdue
in
making

Feb. 1 4

Mar.

the

raw

Bolin ao values i nventory at the

price

P642,360

The total inventory to be recognized in the balance

sheet as ofJune 30, 2014 is

P200,000

expected that the item can be sold for

The amount of inventory shortage is

-{. :
5.

_s.

of

discount of 20% and 10%; terms 2/15, n/30.

The inventory of plain flour as of June 30, 2014 at

a.

P38.45
P39. 00

3. 29 June: 24,000 boxes@

p 650,000

1,200,000
1,640,000

(Assume

following:

the client is using

perpetual

inventory system)

C,s.

The entry

on Jan.

Materials Inventory of
a.
P200,000
b.
P144,000

J /The repossessed
II'
be valued at
a.
b.

P14,000
P24,000

www.prtc.com.ph

will include a debit

.e.
__..
d.

to

Raw

P 1 4 1,120
P1 96,00 0

inventory on Feb. 14 is most likely to

S
d.

P17,200
P14,400

AP.1601

EXCEL PROFESSIONAL SERVICES, INC.

lJr

he journal entries on April 3 will include a

a.

b.
c.

d.

Debit to Cash of P24,000.

Debit

to

Cost

P14,000.

of

Repossessed

7'

b,

\;;

Sold

of

End of the Year

3.

30 is most likely to be
c.

PS,OOO

P6,000

d.

P4,800

ow much will be recorded as Sales on Aug. 30?

a.

"1).'

c.

P51,200

Invoices totaling PJ 5,000

ere entered in the voucher

register in January, but the goods were received in

December.

P57 ,200

d.

P56,000

Sales of P43,000 (cost of P12,900) were made on

account on December 31 and goods delivered at that

time, but all entries relating to the sales were made
on January 2.

+4.

P6,400

December invoices totaling P'13,200 were entered in

the voucher register in December, but goods were not

received until January

Credit to Profit on Sale of Repossessed Inventory

valued at
a.

Goods

of P3,600.
Credit to Repossessed Inventory of P20,400.

.'6 o/The trade-in inventory on Aug.

2.

5.

P57,600

December invoices totaling P18,000 were entered in

the voucher register in December, but the goods were

not received until January.

PROBLEM NO.

6.

(Oct Mt) I tJ(}f 1-bll\

seion of "-ftle '-income !tatement

The cost

goods sold
prepared by your client for the year ended December

31

appears as follows:

Inventory, January 1

Purchases

100,000

Inventory, December 31
Cost of goods sold

trial balance is prepared

during the year.

an

examination.

showing all accounts with activity

January

\) 12.

shipping point.

P13,200 credit

a.

P27,000 debit

b.

P25,000 credit

the following facts:

ac.

'b.

P43,000 debit

P25,000 credit

c.

P13,200 debit

c.

P30,000 debit

c.

P30,000credit

d.

P43,000 credit

15. Sales
a. P43,000 debit
b.

Beginning of the Year

c.

Cl.

P38,200 debit

f\ 14. Accounts receivable

both at the beginning and end of the year, you discovered

P25,000 debit

d.
---

P28,000 debit

Beginning inventory
a.

c.

d.

P38,200 debit

P2,000 debit

P11,800 debit

In the course of your examination of the inventory cutoff,

1.

a.

Pll,SOO debit
b.
/
Purchases
b.

(_" 13.

All purchases are FOB

det:rmine the net

7 11. Retained earnings

and December 31 .
inventories appearing above were determined by physical
count of the goods on hand on those dates and no

reconciling items were considered.

entered in the voucher

the following accounts:

This is the first time your firm has made

The

e re

working paper adjustment that should be made for each of

f'1 58Q,_QQQ

Although the books have been closed, your working paper

Based on the preceding inf"orrnatlon,

80,000

1.600.000
1,680,000

Cost of goods available for sale

Invoices totaling P12,000

register tn January, and the goods were received in

January, but the invoices were dated December.

d.

P43,000 credit

No adjustment

No adjustment

Invoices totaling P25,000 were entered in the voucher

register in January,

during December.

but

the

goods

were

received

- end of

AP.1601

f;;OC

'

:.t:.'

J Y':- :;;.--- -: --

Page 8 of 8

www.prtc.com.ph

AP.1601

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