EMILIO AGUINALDO COLLEGE – CAVITE

CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

HANDOUT 5
AUDIT OF INVENTORY

Problem 2
In the event of your audit, you found the following information related to the
inventories on December 31, 20X5.

a. An invoice for P90,000, FOB shipping point, was received on December 15, 20X5. The
receiving report indicates that the goods were received on December 18, 20X5, but
across the face of the report is the notation “Merchandise not of the same quality as
ordered, returned for credit, December 19”. The merchandise was included in the
inventory.

b. Included in the physical count were inventories billed to customer FOB shipping point on
December 31, 20X5. These inventories had a cost of P28,000 and were billed at
P35,000. The shipment was in loading dock waiting to be picked by the common carrier.

c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on

December 31, 20X5, were recorded on a receiving report dated January 2, 20X6. The
goods were not included in the physical count, but invoice was included in accounts
payable at December 31, 20X5.

d. Merchandise costing P15,000 to the company FOB shipping point on December 26,
20X5. The purchase was recorded, but the merchandise was excluded from the ending
inventory because it was not received until January 4, 20X6.

e. The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost
was P10.00 per unit.

The adjusting entries for:

1. Item letter “a” is;

Debit Credit
a. Cost of sales 90,000 Inventory 90,000
b. Inventory 90,000 Cost of Sales 90,000
c. Retained earnings 90,000 Inventory 90,000
d. No adjustment

2. Item letter “b” is:

Debit Credit
a. Cost of sales 28,000 Inventory 28,000
b. Inventory 28,000 Cost of sales 28,000
c. Cost of sales 35,000 Inventory 35,000
d. No adjustment

3. Item letter “c” is;

Debit Credit
a. Inventory 50,000 Cost of sales 50,000
b. Cost of sales 50,000 Inventory 50,000
c. Inventory 50,000 Retained earnings 50,000
d. No adjustment

4. Item letter “d” is:

Debit Credit
a. Cost of sales 15,000 Inventory 15,000
b. Inventory 15,000 Cost of sales 15,000
c. Inventory 15,000 Retained earnings 15,000
d. No adjustment

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

5. Item letter “e” is:

Debit Credit
a. Cost of sales 500 Inventory 500
b. Inventory 500 Cost of sales 500
c. Cost of sales 10,000 Inventory 10,000
d. Inventory 10,000 Cost of sales 10,000

Answer -
1. a 2. d 3. a 4. b 5. b

Problem 4
The PRINCE COMPANY’S year-end inventory based on physical count conducted on
December 31, 20X5, amounted to P885,000. Your cut-off examination disclosed the
following information”:

1. Included in the physical count were goods billed to customer FOB shipping point on
December 31, 20X5. These goods had a cost of P28,000 and were billed at P35,000.
The shipment was on PRINCE’S loading dock waiting to be picked up by the common
carrier.

2. Goods were in transit from a vendor to PRINCE on December 31, 20X5. The invoice cost
was P50,000 and the goods were shipped FOB Shipping on Dec. 29,20X5.

3. Work in process inventory costing P20,000 was sent to an outside processor for plating
on Dec. 30, 20X5.

4. Goods returned by customers and held pending inspection in the returned goods area on
Dec. 31, 20X5, were not included in the physical count. On January 8, 20X6, the goods
costing P26,000 were inspected and returned to inventory. Credit memos totaling
P40,000 were issued.
5. Goods shipped to customer FOB destination on Dec. 26, 20X5, were in transit at Dec.
31, 20X5 and had a cost of P25,000. Upon notification of receipt by the customer on
January 2, 20X6, the company issued a sales invoice for P42,000.

6. Goods received from a vendor on Dec. 26, 20X5, were included in the physical count.
However the related P60,000 vendor invoice was not included in Accounts Payable as
December 31, 20X5, because the Accounts Payable copy of the receiving report was
lost.

7. On January 3, 20X6, a monthly freight bill in the amount of P4,000 was received. This
was specifically related to merchandise purchased in Dec. 31, 20X5. The freight charges
were not included in either the inventory or in accounts payable at Dec. 31, 20X5.

Question:
1. Sales at year-end is overstated by:
a. P 75,000 b. P 40,000 c. P 35,000 d. P 33,000

2. Purchases at year-end is understated by:

a. P 110,000 b. P 84,000 c. P 64,000 d. P 60,000

3. Cost of sales at year-end is overstated by:

a. P 46,000 b. P 21,000 c. P 11,000 d. P 7,000

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

4. The inventory per audit at year-end is:

a. P 981,000 b. P 959,000 c. P 1,006,000 d. P 1,010,000

Solution
1. Sales 35,000
Accounts receivable 35,000
2. Inventory 50,000
Cost of sales 50,000
Purchases 50,000
Accounts payable 50,000
3. Inventory 20,000
Cost of sales 20,000
4. Inventory 26,000
Cost of sales 26,000
Sales 40,000
Accounts receivable 40,000
5. Inventory 25,000
Cost of sales 25,000
6. Purchases 60,000
Accounts payable 60,000
7. Inventory 4,000
Accounts payable 4,000
Answer:
1. a 2. a 3. c 4. d
Problem 6
Marlisa Company’s December 31, 20X4 and December 31, 20X5 inventory is P35,000 and
P27,000, respectively. The beginning and ending inventories were determined by physical
count of the goods on hand on those dates, and no reconciling items were considered. All
purchases are f.o.b. shipping point. In the course of your examination of the inventory cut-
off, both the beginning and ending of each year, you discover the following facts:

Beginning of the year

a. Invoices totaling P3,260 were entered in the voucher register on January, but the goods
were received during December.
b. December invoices totaling P4,100 were entered in the voucher register in December,
but the goods were not received until January.

End of the Year

c. Invoices totaling P7,260 were entered in the voucher register in January but the goods
were received in December.
d. December invoices totaling P3,600 were entered in the voucher register in December,
but the goods were not received until January.
e. Invoices totaling P1,500 were entered in the voucher register in January, and the goods
were received in January, but the invoices were dated December.

Question:
Based on your analysis and the information above, answer the following:

1. The adjusted balance of the Jan. 1, 20X5 inventory is:

a. P 35,000 b. P 35,840 c. P 39,100 d. P 59,100

2. How much is the adjusted balance of the Purchases account at December 31, 20X5

assuming the amount of Purchases in the trial balance is P5,176,000?

a. P 5,170,566 b. P 5,180,000 c. P 5,181,500 d. P 5,185,200

3. The corrected December 31, 20X5 inventory is

a. P 52,100 b. P 50,600 c. P 32,100 d. P 28,500

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

4. When auditing inventories, an auditor would least likely verify that

a. All inventory owned by the client is on hand at the time of the count.
b. The client has used properly inventory pricing.
c. Damaged goods and obsolete items have been properly accounted for.
d. The financial statement presentation of inventories is appropriate.

Solution
a. Retained earnings 3,260
Purchases 3,260
b. Beginning inventory 4,100
Retained earnings 4,100
c. Purchases 7,260
Accounts payable 7,260
d. Inventory 3,600
Cost of sales 3,600
e. Inventory 1,500
Cost of sales 1,500
Purchases 1,500
Accounts payable 1,500
Answer: 1. c 2. c 3. c 4. a
Problem 8
CHARMAINE COMPANY is a manufacturer of small tools. The following information
was obtained from the company’s accounting records for the year ended December
31, 20X5:
Inventory at December 31, 20X5 (based on
physical count in Charmaine’s warehouse at cost
on December 31, 20X5) 1,870,000
Accounts payable at December 31, 20X5 1,415,000
Net sales (sales less sales returns) 9,693,400

Your audit reveals the following information:

 The physical count included tools billed to a customer FOB shipping

point on December 31, 20X5. These tools cost P64,000 billed at P78,500.
They were in the shipping area waiting to be picked up by the customer.

 Goods shipped FOB shipping point by a vendor were in transit on

December 31, 20X5.These goods with invoice cost of P93.400 were shipped
on December 29, 20X5.

 Work in process inventory costing P27,000 was sent to a job

contractor for further processing.

 Not included in the physical count were goods returned by

customers on December 31, 20X5. These goods costing P49,000 were
inspected and returned to inventory on January 7, 20X6. Credit memos for
P67,800 were issued to the customers at that date.

 In transit to a customer on December 31, 20X5, were tools costing

P17,740 shipped FOB destination on December 26, 20X5. A sales invoice for
P29,400 was issued on January 3, 20X6, when Charmaine Company was
notified by the customer that the tools had been received.
 At exactly 5:00 pm on December 31, 20X5, goods costing P31,200
were received from a vendor. These were recorded on a receiving report
dated January 2, 20X6. The related invoice was recorded on December 31,
20X5, but the goods were not included in the physical count.

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

 Included in the physical count were goods received from a vendor

on December 27, 20X5. However, the related invoice for P36,000 was not
recorded because the accounting department’s copy of the receiving report
was lost.

 A monthly freight bill for P16,000 was received on January 3, 20X6.

It specifically related to merchandise bought in December 20X5, one half of
which was still in the inventory at December 31, 20X5. The freight was not
included in either the inventory or in accounts payable at December 31,
20X5.

Question:
Based on your analysis and the information above, answer the following:

1. The inventory at year-end is:

a. Understated by P170,340 c. Understated by P126,340
b. Understated by P162,340 d. Understated by P82,140

2. The accounts payable at year-end is:

a. Understated by P93,400 c. Understated by P137,400
b. Understated by P106,200 d. Understated by P145,400

3. The amount of sales at year-end is:

a. Overstated by P67,800 c. Overstated by P29,400
b. Overstated by P38,400 d. Correctly stated

4. The adjusted balance of inventory at year-end is:

a. P 1,952,140 b. P 1,996,340 c. P 2,032,340 d. P 2,040,340

5 The adjusted balance of accounts payable at year-end is:

a. P 1,560,400 b. P 1,552,400 c. P 1,521,200 d. P 1,508,400

1. The adjusted balance of sales at year-end is:

a. P 9,722,800 b. P 9,693,400 c. P 9,655,000 d. P 9,625,600

Solution
Adjusting entry:
Cost of sales 64,000
Inventory 64,000
Inventory 93,400
Cost of sales 93,400
Purchases 93,400
Accounts payable 93,400
Inventory 27,000
Cost of sales 27,000
Inventory 49,000
Cost of sales 49,000
Sales 67,800
Accounts receivable 67,800
Inventory 17,740
Cost of sales 17,740
Inventory 31,200
Cost of sales 31,200

Purchases 36,000
Accounts payable 36,000
Inventory 8,000
Accounts payable 8,000
Answer:
1. b 2. c 3. a 4. c 5. b 6. d
Problem 10
Raffy Corporation reported income before income taxes as follows:

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

20X4 P525,000
20X5 630,000

The company uses the periodic inventory system. Ending inventories for 20X4 and 20X5
were properly recorded. The following additional information became available following an
analysis of the inventories:

(a) Merchandise with a gross invoice price of P7,500 was shipped FOB shipping point by a
supplier on terms of 2/10, n/30 in 20X4 and was recorded as a purchase by Raffy
Corporation in 20X4 when the invoice was received: however, the goods were not
included in the ending inventory because they were not received until 20X5. The
company always takes advantage of the early payment discounts and accordingly,
records its purchases using the net method.

(b) Merchandise that cost P3,000 was purchased FOB shipping point by Raffy Corporation on
December 31, 20X4 and was shipped by the supplier that day. The merchandise was not
included in the 20X4 ending inventory and was not recorded as a purchase until 20X5.

(c) Merchandise costing P2,850 was shipped FOB shipping point to a customer in 20X4 and
not included in the ending inventory for 20X4. The sale of P4,260 was recorded in 20X5
when the invoice was sent.

(d) Goods being held by Raffy Corporation on consignment from a supplier in the amount of
P4,950 were included in the physical inventory for 20X4.

(e) Retailers were holding P6,750 of goods at cost (P9,000 at retail), on consignment from
Raffy, at their stores on December 31, 20X4. These goods were not included in the
ending inventory of Raffy Corporation for 20X4.

Question:
1. How much is the correct income before taxes for 20X4?
a. P 643,410 b. P 616,590 c. P 538,410 d. P 511,590

2. How much is the correct income before taxes for 20X5?

a. P 643,410 b. P 616,590 c. P 538,410 d. P 511,590

3. The cost of sales at December 31, 20X5 is understated by:

a. P 12,150 b. P 9,750 c. P 9,150 d. P 6,750

4. The Retained earnings – beginning at December 31, 20X5 is understated by:

a. P 13,410 b. P 12,150 c. P 10,410 d. P 9,150

5. The beginning inventory (January 1, 20X5) of Raffy Corporation is understated by:

a. P 13,410 b. P 12,150 c. P 9,150 d. P 5,400

Solution
a. Beginning inventory (COS) 7,350 20X4 20X5
Retained earnings – beg 7,350 Net income 525,000 630,000
(a) 7,350 ( 7,350)
b. Beginning inventory (COS) 3,000 (b) 3,000 ( 3,000)
Retained earnings – beg 3,000 ( 3,000) 3,000
(c) 4,260 ( 4,260)
Retained earnings – beg 3,000 (d) ( 4,950) 4,950
Purchases (COS) 3,000 (e) 6,750
( 6,750)
Adjusted NI 538,410 616,590
c. Sales 4,260
Retained earnings – beg 4,260
d. Retained earnings – beg 4,950
Beginning inventory (COS) 4,950
e. Beginning inventory (COS) 6,750
Retained earnings – beg 6,750

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

Answer:
1. c 2. b 3. c 4. a 5. b
Problem 12
On December 15, 20X5, under your observation, your client took a complete physical
inventory and adjusted the financial perpetual inventory control accounts to agree with the
physical inventory.

As of December 31, 20X5, you decided to accept the balance of the control account after
examining transactions recorded in that account between December 15 and December 31,
20X5. The audit was for the year ended December 31, 20X5.

In the course of conducting your examination of the sales cutoffs as of December 15 and
December 31, 20X5, you discovered the following items:
Date Inventory
Item Cost Price Sales Price Date Shipped Date Billed Control Credited
A P 60,000 P 78,000 12-13-06 12-17-06 12-17-06
B 77,000 101,400 01-02-07 12-29-06 12-29-06
C 52,000 67,600 12-17-06 12-29-06 12-29-06
D 87,000 113,100 12-14-06 12-16-06 12-16-06
E 49,500 64,500 12-25-06 01-02-07 01-02-07

Question:
Based on the information above and your analysis, answer the following

1. The inventory at year-end is over/(under) by:

a. P 174,500 over c. P 114,500 over
b. P 174,500 under d. P 114,500 under

2. The cost of sales at year-end is over/(under) by:

a. P 174,500 over c. P 114,500 over
b. P 174,500 under d. P 114,500 under

3. The sales at year-end is over/(under) by:

a. P 36,900 over c. P 101,400 over
b. P 36,900 under d. P 101,400 under

4. The accounts receivable at year-end is over/(under) by:

a. P 36,900 over c. P 101,400 over
b. P 36,900 under d. P 101,400 under

Solution

AJEs as of December 31, 20X1

Item Debit Credit

A Inventory 60,000
Cost of Goods Sold 60,000
This item was not included in the physical inventory and
was credited to the Inventory account on 12.17.06; a
physical inventory cutoff error.

B Sales 101,400
Inventory 77,000
Accounts Receivable 101,400
Cost of goods sold 77,000
This item is a year-end sales cut-off error.
C Properly recorded; no AJE needed.
D Inventory 87,000
Cost of goods sold 87,000
(same as Item A)
E Accounts Receivable 64,500
Cost of goods sold 49,500

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CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

Sales 64,500
Inventory 49,500
This item is a year-end sales cut-off error.

Answer:
1. b 2. a 3. a 4. a
Problem 14
Kitkat Company operates a wholesale oil products company. Kitkat believes that an
employee and a customer are conspiring to steal gasoline. The employee records sales to
the customer not less than the amount actually placed in the customer’s tank truck. In
order to confirm or refuse these suspicions, Kitkat has collected the following data for the
past 10 working days.
Quantity Cost per
(gallons) unit (gal) Total Cost
Inventory, September 1 220,000 P1.45 P 319,000
Purchases 1,560,000 1.45 2,262,000
Goods available for sale 1,780,000 2,581,000

Kitkat had sales of P2,512,000 during this 10-day period. All sales were made at P1.60 per
gallon. A physical inventory indicates that there are 192,000 gallons of gasoline in inventory
at the close of business on September 10.

Questions:
1. How much inventory should be present at the end of the 10-day period (in gallons)?
a. 220,000 b. 210,000 c. 200,000 d. 192,000

2. What is the cost of missing inventory?

a. P 304,500 b. P 40,600 c. P 26,100 b. P 0

Answer
1 b 1,780,000 – (2,512,000/1.60) = 210,000 gallons
2 c 210,000 – 192,000 = 18,000 x P1.45 = P26,100

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