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Assertions about classes of transactions and events for the Existence - assets, liabilities, and equity interests exist.
period under audit: (COCAC)
Completeness - all assets, liabilities and equity interests
Completeness - all transactions and events that should
that should have been recorded have been recorded.
have been recorded have been recorded.
Valuation and allocation - assets, liabilities, and equity
Occurrence - transactions and events that have been
interests are included in the financial statements at
recorded have occurred and pertain to the entity.
appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.
Classification - transactions and events have been
recorded in the proper accounts.
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 and rights and obligations - disclosed events,
transactions, and other matters have occurred and pertain
to the entity.
Assertions about account balances at the period end:
(RECV) Classification and understandability - financial information
is appropriately presented and described, and disclosures
Rights and obligations - the entity holds or controls the
are clearly expressed.
rights to assets, and liabilities are the obligations of the
entity.
Accuracy and valuation - financial and other information
are disclosed fairly and at appropriate amounts.
1. Authority and responsibility for controlling the 6. Deliveries of materials, finished stock and merchandise
inventories should be centralized management and in should be made only upon specific authorizations
one person. emanating at authorized levels.
2. There should be careful selection of inventory 7. Slow-moving, obsolete and damaged stock should be
personnel and intensive training of such personnel in identified and reported following periodic reviews of
policies, objectives and system of inventory control. physical and book records by qualified employees.
Valuation on the basis of approved cost-mark-down
3. Adequate physical facilities for handling and storage of
methods should be reviewed.
inventory should be provided.
8. Safeguards against that action of the element and
4. Adequate system of procedures, forms and reports
inaccuracies in recording receipts and issues should be
related to the management of inventories should be
adopted. Example – Maintaining adequate insurance
developed and implemented.
coverage.
5. Quantitative controls through perpetual inventory
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.
Existence: Recorded inventory exist Completeness: Purchases that occurred are recorded
1. Before the client takes the physical inventory, review Trace a sequence of receiving reports to entries in the
and approve the client’s written plan for taking it. voucher register. Test cutoff. Account for a sequence of
2. Observe the client personnel physically counting entries in the voucher register.
inventory.
Occurrence: Recorded purchases are for items that were
3. Confirm inventories on consignment and held in public acquired
warehouses.
Examine underlying documents for authenticity and
reasonableness. Scan voucher register for large or
Completeness: All inventory of the entity recorded unusual items. Trace inventory purchased to perpetual
records. Scan voucher register for duplicate payments.
4. Obtain a copy of prenumbered inventory tags used by
the client in taking inventory and reconcile the tags to Classification: Purchase transactions have been recorded
the listing. in the proper accounts
5. For selected items, trace from tags to listing.
For a sample of entries in the purchases journal, verify the
6. Perform cutoff procedures. Obtain the receiving report accuracy of account coding.
number for the last shipment received prior to year-
end and determine that the item is included in
inventory. Also, identify the last shipping document Accuracy (Valuation): Purchases are recorded at proper
and determine, based on shipping terms, whether the amounts
item was properly recorded in sales or inventory.
Recompute invoices and compare invoice price to purchase
7. Perform analytical procedures.
order.
Rights and obligations: Inventory is owned by the entity
Production
8. Determine that consigned inventory has been excluded
from inventory and that inventory pledged has been Completeness: All production transactions that occurred
properly disclosed. Examine confirmations from are recorded
financial institutions and read minutes of the board of
Account for a sequence for production reports.
directors’ meetings.
Occurrence: Recorded production transactions occurred
Valuation and allocation: Recorded inventory is valued in
accordance with GAAP For selected transactions, examine signed materials
requisitions, approved labor tickets, and allocation of
9. Considering the method the client uses for inventory
overhead.
valuation, examine invoices for inventory on hand or
Classification: Production transactions have been recorded
trace prior year’s inventory listing to verify cost.
in the proper accounts
10. For selected items, determine net realizable value
(NRV) of the inventory and apply the lower of cost or For a sample of entries, verify the accuracy of account
NRV. coding.
11. Verify computations in the inventory listing. Accuracy (Valuation): Production transactions are
12. Review the obsolescence of the inventory by: recorded at proper amounts
a. being alert while observing inventory being taken
Test cost records by tracing to underlying documents, such
for damaged, slow-moving, or scrap inventory.
as bill of materials, labor tickets, authorized labor rates,
b. Scanning perpetual records for slow-moving items
and standard overhead rates. Review variances.
and discussing their valuation with client.
PROBLEM NO. 1
Based on the above and the result of your audit, determine
You were engaged by Quezon Corporation for the audit the following:
of the company’s financial statements for the year ended
1. Sales for the year ended December 31, 2015
December 31, 2015. The company is engaged in the
a. P5,250,000 c. P5,400,000
wholesale business and makes all sales at 25% over cost.
b. P5,150,000 d. P5,350,000
The following were gathered from the client’s accounting 2. Purchases for the year ended December 31, 2015
records: a. P3,000,000 c. P3,018,000
b. P3,754,000 d. P3,818,000
SALES PURCHASE S
Date Ref. Amount Date Ref. Amount 3. Inventory as of December 31, 2015
Balance Balance a. P864,000 c. P968,000
forwarded P5,200,000 forwarded P2,700,000 b. P800,000 d. P814,000
Dec. SI No. Dec. RR No.
27 965 40,000 27 1057 35,000 4. Accounts receivable as of December 31, 2015
Dec. SI No. Dec. RR No. a. P350,000 c. P370,000
28 966 150,000 28 1058 65,000 b. P220,000 d. P120,000
Dec. SI No. Dec. RR No.
5. Accounts payable as of December 31, 2015
28 967 10,000 29 1059 24,000
a. P418,000 c. P 400,000
Dec. SI No. Dec. RR No.
b. P354,000 d. P1,218,000
31 969 46,000 30 1061 70,000
Dec. SI No. Dec. RR No.
31 970 68,000 31 1062 42,000
Dec. SI No. Dec. RR No. PROBLEM NO. 2
31 971 16,000 31 1063 64,000 During your audit of the Makati Corporation for the year
Dec. Closing Dec. Closing
ended December 31, 2015, you found the following
31 entry (5,530,000) 31 entry (3,000,000)
information relating to certain inventory transactions from
P - P -
your observation of the client’s physical count and review
Note: SI = Sales Invoice RR = Receiving Report
of sales and purchases cutoff:
a. Goods costing P180,000 were received from a vendor
Inventory P600,000
on January 3, 2016. The goods were not included in
Accounts receivable 500,000
the physical count. The related invoice was received
Accounts payable 400,000
and recorded on December 30, 2015. The goods were
shipped on December 31, 2015, terms FOB shipping
You observed the physical inventory of goods in the
point.
warehouse on December 31 and were satisfied that it was
properly taken. b. Goods costing P200,000, sold for P300,000, were
shipped on December 31, 2015, and were received by
When performing sales and purchases cut-off tests, you the customer on January 2, 2016. The terms of the
found that at December 31, the last Receiving Report invoice were FOB shipping point. The goods were
which had been used was No. 1063 and that no shipments included in the ending inventory for 2015 and the sale
had been made on any Sales Invoices whose number is was recorded in 2016.
larger than No. 968. You also obtained the following
additional information: c. The invoice for goods costing P150,000 was received
and recorded as a purchase on December 31, 2015.
a) Included in the warehouse physical inventory at The related goods, shipped FOB destination were
December 31 were goods which had been purchased received on January 2, 2016, but were included in the
and received on Receiving Report No. 1060 but for physical inventory as goods in transit.
which the invoice was not received until the following
year. Cost was P18,000. d. A P600,000 shipment of goods to a customer on
December 30, 2015, terms FOB destination, was
b) On the evening of December 31, there were two trucks recorded as a sale upon shipment. The goods, costing
in the company siding: P400,000 and delivered to the customer on January 6,
Truck No. CPA 123 was unloaded on January 2 of 2016, were not included in the 2015 ending inventory.
the following year and received on Receiving
Report No. 1063. The freight was paid by the e. Goods valued at P250,000 are on consignment from a
vendor. vendor. These goods are included in the physical
Truck No. ILU 143 was loaded and sealed on inventory.
December 31 but leave the company premises on f. Goods valued at P160,000 are on consignment with a
January 2. This order was sold for P100,000 per customer. These goods are not included in the
Sales Invoice No. 968. physical inventory.
c) Temporarily stranded at December 31 at the railroad
siding were two delivery trucks enroute to Brooks QUESTIONS:
Trading Corporation. Brooks received the goods, Based on the above and the result of your audit, answer
which were sold on Sales Invoice No. 966 terms FOB the following:
Destination, the next day.
1. The inventory as of December 31, 2015 is understated
d) Enroute to the client on December 31 was a truckload by
of goods, which was received on Receiving Report No. a. P230,000 c. P140,000
1064. The goods were shipped FOB Destination, and b. P190,000 d. P290,000
freight of P2,000 was paid by the client. However, the
freight was deducted from the purchase price of
P800,000.
QUESTIONS:
EXCEL PROFESSIONAL SERVICES, INC.
2. The cost of sales for the year ended December 31, e) Through the carelessness of the
2015 is overstated by receiving department shipment in
a. P290,000 c. P440,000 early December 2015 was damaged
b. P110,000 d. P380,000 by rain. This shipment was later
sold in the last week of December at 150,000
3. The profit for the year ended December 31, 2015 is
cost.
misstated by
a. P190,000 over c. P140,000 under
REQUIRED:
b. P 10,000 over d. P290,000 under
1. Gross profit rate for 11 months ended November 30,
4. The working capital as of December 31, 2015 is
2015.
misstated by
a. P190,000 over c. P140,000 under 2. Cost of goods sold during the month of December
b. P 10,000 over d. P290,000 under 2015 using the gross profit method.
3. December 31, 2015 inventory using the gross profit
SOLUTION GUIDE
method.
Over (Under)
Inventory COS Profit WC
a (180) 180 (180) (180) SOLUTION GUIDE:
b 200 (200) (100) (100) Requirement No. 1
c 150 - - -
d (400) 400 200 200 Sales, up to 11/30 P12,600,000
e 250 (250) 250 250 Less COS, up to 11/30:
f (160) 160 (160) (160) Inventory, 1/1 P 1,3,500
(140) 290 10 10 Net purchases, 11/30 10,110,000
TGAS 11,422,500
Inventory, 11/30 ( 1,342,500) 10,080,000
PROBLEM NO. 3 Gross profit P 2,520,000
Your audit also disclosed the following information about 4. A client maintains perpetual inventory records in both
the December 31 inventory: quantities and pesos. If the assessed level of control
a. Total debits to the following accounts during December risk is high an auditor will probably
were: a. Apply gross profit tests to ascertain the
Cost of sales P1,920,800 reasonableness of the physical counts.
Direct labor 338,800 b. Increase the extent of tests of controls relevant to
Purchases 691,600 the inventory cycle.
c. Request the client to schedule the physical
b. The cost of sales of P1,920,800 included direct labor of
inventory count at the end of the year.
P386,400.
d. Insist that the client perform physical counts of
inventory items several times during the year.
QUESTIONS:
Based on the above and the result of your audit, determine 5. The physical count of inventory of a retailer was higher
the following: than shown by the perpetual records. Which of the
following could explain the difference?
1. Adjusted amount of physical inventory at November 30
a. Inventory item has been counted but the tags
a. P1,715,560 c. P1,845,760
placed on the items had not been taken off the
b. P1,631,560 d. P1,722,560
items and added to the inventory accumulation
2. Adjusted amount of inventory at December 31 sheets.
a. P1,509,760 c. P1,502,760 b. Credit memos for several items returned by
b. P1,516,760 d. P1,425,760 customers had not been recorded.
c. No journal entry had been made on the retailer’s
3. Cost of materials on hand, and materials included in books for several items returned to its suppliers.
work in process as of December 31 d. An item purchased “FOB shipping point” had not
a. P819,560 c. P728,560 arrived at the date of the inventory count and had
b. P812,560 d. P942,760 not been reflected in the perpetual records.
4. The amount of direct labor included in work in process
as of December 31 6. Purchase cut-off procedures should be designed to test
a. P618,800 c. P338,800 whether all inventory
b. P232,400 d. P386,400 a. Purchased and received before year-end was paid
for.
5. The amount of factory overhead included in work in b. Ordered before year-end was received.
process as of December 31 c. Purchased and received before year-end was
a. P 772,800 c. P464,800 recorded.
b. P1,237,600 d. P777,600 d. Owned by the company is in the possession of the
company at year-end.
PROBLEM NO. 1
Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery stores. The company operates a perpetual
inventory system, with the first-in, first-out method used to assign costs to inventory items. Transactions and other
related information regarding two of the items (baked beans and plain flour) carried by Jay Roy Ltd are given below for
June 2015 the last month of the company's reporting period.
Baked beans Plain flour
Unit of packaging Case containing 25 x 410g cans Box containing 12 x 4kg bags
Inventory @ 1 June 2015 35,000 cases @ P19.60 62,500 boxes @ P38.40
Purchases 1. 10 June: 20,000 cases @ P19.50 per 1. 3 June: 15,000 boxes @ P38.45
case 2. 15 June: 20,000 boxes @ P38.45
2. 19 June: 47,000 cases @ P19.70 per 3. 29 June: 24,000 boxes @ P39.00
case
Purchase terms 2/10, n/30, FOB destination n/30, FOB destination
June sales 73,000 cases @ P28.50 95,000 boxes @ 40.00
Returns and allowances A customer returned 5,000 cases that had As June 15 purchase was unloaded, 1,000
been shipped in error. The customer's boxes were discovered damaged. A credit
account was credited for P142,500. of P38,450 was received by Jay Roy
Retailing Ltd.
Physical count at 30 June
2015 32,600 cases on hand 1,500 boxes on hand
Explanation of variance No explanation found assumed stolen Boxes purchased on 29 June still in transit
on 30 June
Net realizable value at 30
June 2015 P29.00 per case P38.50 per box
c. Credit to Profit on Sale of Repossessed Inventory 2. December invoices totaling P13,200 were entered in
of P3,600. the voucher register in December, but goods were not
d. Credit to Repossessed Inventory of P20,400. received until January.
9. The trade-in inventory on Aug. 30 is most likely to be
End of the Year
valued at
a. P8,000 c. P6,000 3. Sales of P43,000 (cost of P12,900) were made on
b. P4,800 d. P6,400 account on December 31 and goods delivered at that
time, but all entries relating to the sales were made
10. How much will be recorded as Sales on Aug. 30?
on January 2.
a. P51,200 c. P57,200
b. P56,000 d. P57,600 4. Invoices totaling P15,000 were entered in the voucher
register in January, but the goods were received in
December.
PROBLEM NO. 3
5. December invoices totaling P18,000 were entered in
The cost goods sold section of the income statement the voucher register in December, but the goods were
prepared by your client for the year ended December 31 not received until January.
appears as follows:
6. Invoices totaling P12,000 were entered in the voucher
Inventory, January 1 P 80,000 register in January, and the goods were received in
Purchases 1,600,000 January, but the invoices were dated December.
Cost of goods available for sale 1,680,000
Inventory, December 31 100,000 Based on the preceding information, determine the net
Cost of goods sold P1,580,000 working paper adjustment that should be made for each of
the following accounts:
Although the books have been closed, your working paper
11. Retained earnings
trial balance is prepared showing all accounts with activity
a. P13,200 credit c. P25,000 debit
during the year. This is the first time your firm has made
b. P11,800 debit d. P38,200 debit
an examination. The January 1 and December 31
inventories appearing above were determined by physical 12. Purchases
count of the goods on hand on those dates and no a. P27,000 debit c. P25,000 credit
reconciling items were considered. All purchases are FOB b. P28,000 debit d. P2,000 debit
shipping point.
13. Beginning inventory
In the course of your examination of the inventory cutoff, a. P25,000 credit c. P13,200 debit
both at the beginning and end of the year, you discovered b. P38,200 debit d. P11,800 debit
the following facts: 14. Accounts receivable
a. P43,000 debit c. P30,000 debit
Beginning of the Year b. P43,000 credit d. No adjustment
1. Invoices totaling P25,000 were entered in the voucher 15. Sales
register in January, but the goods were received a. P43,000 debit c. P30,000credit
during December. b. P43,000 credit d. No adjustment
- end of AP.1901 -