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AUDITING PROBLEMS
Audit of Inventories

You were engaged by Quezon Corporation for the audit d) Enroute to the client on December 31 was a truckload
of the company’s financial statements for the year ended of goods, which was received on Receiving Report No.
December 31, 2020. The company is engaged in the 1064. The goods were shipped FOB Destination, and
wholesale business and makes all sales at 25% over cost. freight of P2,000 was paid by the client. However, the
freight was deducted from the purchase price of
The following were gathered from the client’s accounting P800,000.
records:
QUESTIONS:
SALES PURCHASES
Date Ref. Amount Date Ref. Amount 1. When inventory is material to the financial statements,
Balance Balance the auditor shall obtain sufficient appropriate audit
forwarded P5,200,000 forwarded P2,700,000 evidence regarding the existence and condition of
Dec. SI No. Dec. RR No. inventory by:
27 965 40,000 27 1057 35,000 a. Attendance at physical inventory counting, unless
Dec. SI No. Dec. RR No. impracticable.
28 966 150,000 28 1058 65,000 b. Performing audit procedures over the entity’s final
Dec. SI No. Dec. RR No.
inventory records to determine whether they
28 967 10,000 29 1059 24,000
accurately reflect actual inventory count results.
Dec. SI No. Dec. RR No.
c. Both a and b.
31 969 46,000 30 1061 70,000
Dec. SI No. Dec. RR No. d. Neither a nor b.
31 970 68,000 31 1062 42,000
Dec. SI No. Dec. RR No. 2. Attendance at physical inventory counting involves:
31 971 16,000 31 1063 64,000 a. Inspecting the inventory to ascertain its existence
Dec. Closing Dec. Closing and evaluate its condition, and performing test
31 entry (5,530,000) 31 entry (3,000,000) counts.
P - P - b. Observing compliance with management’s
Note: SI = Sales Invoice RR = Receiving Report instructions and the performance of procedures for
recording and controlling the results of the physical
inventory count.
Inventory P600,000
c. Obtaining audit evidence as to the reliability of
Accounts receivable 500,000
management’s count procedures.
Accounts payable 400,000
d. All of these.
You observed the physical inventory of goods in the
3. The procedures involve in the attendance at physical
warehouse on December 31 and were satisfied that it was
inventory counting
properly taken.
a. Serve as risk assessment procedures.
b. Serve as test of controls.
When performing sales and purchases cut-off tests, you
c. Serve as substantive procedures.
found that at December 31, the last Receiving Report
d. May serve as test of controls or substantive
which had been used was No. 1063 and that no shipments
procedures depending on the auditor’s risk
had been made on any Sales Invoices whose number is
assessment, planned approach and the specific
larger than No. 968. You also obtained the following
procedures carried out.
additional information:
a) Included in the warehouse physical inventory at 4. In which of the following cases is attendance at
December 31 were goods which had been purchased physical inventory counting impracticable?
and received on Receiving Report No. 1060 but for a. Where inventory is held in a location that may
which the invoice was not received until the following pose threats to the safety of the auditor.
year. Cost was P18,000. b. Where the auditor will be inconvenienced because
of the difficulty, time and cost involved in doing
b) On the evening of December 31, there were two trucks the procedures.
in the company siding: c. Both a and b.
• Truck No. CPA 123 was unloaded on January 2 of d. Neither a nor b.
the following year and received on Receiving
Report No. 1063. The freight was paid by the 5. If attendance at physical inventory counting is
vendor. impracticable, the auditor shall
• Truck No. ILU 143 was loaded and sealed on a. Perform alternative audit procedures to obtain
December 31 but leave the company premises on sufficient appropriate audit evidence regarding the
January 2. This order was sold for P100,000 per existence and condition of inventory.
Sales Invoice No. 968. b. Modify the opinion in the auditor’s report.
c) Temporarily stranded at December 31 at the railroad c. Make or observe some physical counts on an
siding were two delivery trucks enroute to Brooks alternative date, and perform audit procedures on
Trading Corporation. Brooks received the goods, intervening transactions.
which were sold on Sales Invoice No. 966 terms FOB d. Do nothing and just rely on the result of physical
Destination, the next day. inventory counting conducted by the client.

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6. Which of the following may provide sufficient 9. An auditor is most likely to inspect loan agreements
appropriate audit evidence about the existence and under which an entity’s inventories are pledged to
condition of inventory if attendance at physical support management’s financial statement assertion of
inventory counting is impracticable? a. Existence or occurrence.
a. Inspection of documentation of the subsequent b. Completeness.
sale of specific inventory items purchased prior to c. Presentation and disclosure.
the physical inventory counting. d. Valuation or allocation.
b. Inspection of documentation of the subsequent
sale of specific inventory items purchased after the 10. An auditor selected items for test counts while
physical inventory counting. observing a client’s physical inventory. The auditor
c. Both a and b. then traced the test counts to the client’s inventory
d. Neither a nor b. listing. This procedure most likely obtained evidence
concerning
7. When inventory under the custody and control of a a. Existence. c. Rights.
third party is material to the financial statements, the b. Completeness. d. Valuation.
auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of that
inventory by Based on the given information and the result of your
a. Requesting confirmation from the third party as to audit, determine the following:
the quantities and condition of inventory held on
11. Sales for the year ended December 31, 2020
behalf of the entity.
a. P5,250,000 c. P5,400,000
b. Performing inspection or other audit procedures
b. P5,150,000 d. P5,350,000
appropriate in the circumstances.
c. Performing one or both of the procedures in (a) 12. Purchases for the year ended December 31, 2020
and (b). a. P3,000,000 c. P3,018,000
d. Relying only on the written representations made b. P3,754,000 d. P3,818,000
by the client’s management.
13. Inventory as of December 31, 2020
8. Which of the following is not one of the independent a. P864,000 c. P968,000
auditor's objectives regarding the audit of inventories? b. P800,000 d. P814,000
a. Verifying that inventory counted is owned by the 14. Accounts receivable as of December 31, 2020
client. a. P350,000 c. P370,000
b. Verifying that the client has used proper inventory b. P220,000 d. P120,000
pricing.
c. Ascertaining the physical quantities of inventory on 15. Accounts payable as of December 31, 2020
hand. a. P418,000 c. P 400,000
d. Verifying that all inventory owned by the client is b. P354,000 d. P1,218,000
on hand at the time of the count.

J - end - J

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