2014 05 PRTC AUDP LECS AP.1601 Audit of Inventories.pdf

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

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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

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82,500

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Requirement No.

:l>i:o'

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t:;.. cue: -

Adjusted

Requirement

15,000

L{,7'2, �-pi)

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e

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12,000,000

1:.

, ) 7,!..£r

1,425,000

a

c

p

10,125,000

1,1;11,500

J�JL��D"¢�

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

p

Computation of adjusted amounts:

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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.

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J ·- �:� M NO.4 � n On

April

warehouse

QUESTIONS.·

:\ J:��ged

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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.

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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 i·nc!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

st�tements

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.

�0

March 31, 2014 DEB!'(

a.

660,000

750,000

500,000

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b.

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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.

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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. +

P

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 year�end 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. �'-"·'� _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 year�end 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 owne·d by the client is

a..

several

0

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.

C

�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.

�s

work in process by tracmg these quant1t1es to

a.

Cost ledgers.

c.

Receiving reports.

j1 d.

Perpetual inve:ntory records. Material requisitions.

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Page 6 of8

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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

P�9.50 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.

� i·

f

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.

p

be

d.

P1,623,970

best

1

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 .

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