UL COA

ACC412/415: AUDITING PROBLEMS

AUDIT OF INVENTORY
PROBLEM 1
The Maria Company is a wholesale distributor of automotive replacement parts. Initial
amounts taken from Maria’s accounting records are as follows:
Inventory at December 31, 2018 (based on physical count of goods
in Maria’s warehouse on December 31, 2018)P1,250,000
Accounts payable at December 31, 2018:

Vendor Terms Amount

Baker Company 2%/10 days, net 30 P265,000
Charlie Company net 30 210,000
Dolly Company net 30 300,000
Eager Company net 30 225,000
Full Company net 30 -
Greg Company net 30 -
P1,000,000

Sales in 2018 P9,000,000

Additional information:
1. Parts held on consignment from Charlie to Allen, the consignee, amounting to
P155,000, were included in the physical count of goods in Allen’s warehouse on
December 31, 2018.
2. P22,000 of parts which were purchased from Full and paid for in December 2018
sold in the last week of 2018 and appropriately recorded as sales of P28,000.
The parts were included in the physical count of goods in Allen’s warehouse on
December 31, 2018, because the parts were on the loading dock waiting to the
picked up by customers.
3. Parts in transit on December 31, 2018, to customers, shipped F.O.B. shipping
point, on December 28, 2018, amounted to P34,000. The customers received
the parts on January 2, 2019. Sales of P40,000 to the customers for the parts
were recorded by Allen on January 2, 2019.
4. Retailers were holding P210,000 at cost (P250,000 at retail), of goods on
consignment from Allen, the consignor, at their stores on December 31, 2019.
5. Goods were in transit from Greg to Allen on December 31, 2018. The cost of the
goods was, P25,000, and they were shipped F.O.B. shipping point on December
29, 2018.
6. A quarterly freight bill in the amount of P2,000 specifically relating to
merchandise purchases in December 2018, all of which was still in the inventory
at December 31, 2018, was received on January 3, 2019. The freight bill was not
included in either the inventory or in accounts payable at December 31, 2018.
7. All of the purchases from Baker occurred during the last seven days of the year.
These items have been recorded in accounts payable and accounted for in the
physical inventory at cost before discount. Allen’s policy is to pay invoices in
time to take advantage of all cash discounts, adjust inventory accordingly, and
record accounts payable, net of cash discounts.

Required: Prepare a schedule of adjustments to the initial amounts using the format
shown below. Show the effect, if any, of each of the transactions separately and if the
transactions would have no effect on the amount shown, state NONE.
Inventory Accounts Payable Sales
Initial amounts P1,250,000 P1,000,000 P9,000,000
Adjustments –
Increase (Decrease)
1 (155,000) (155,000)
2 (22,000)
3 40,000
4 210,000
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 UL COA
ACC412/415: AUDITING PROBLEMS
5 25,000 25,000
6 2,000 2,000
7 _________ __________ __________
Total adjustments 60,000 (128,000) 40,000

Adjusted amounts P 1,310,000 . P 872,000 .

P9,040,000 .

PROBLEM 2 (HIGHLIGHT YOUR ANSWER)

You are engaged in an audit of the Roche Mfg. Company for the year ended December
31, 2019. To reduce the workload at year end, the company took its annual physical
inventory under your observation on November 30, 2019. The company’s inventory
account, which includes raw materials and work in process, is on a perpetual basis,
and it uses the FIFO method of pricing. It has no finished goods inventory. The
company’s physical inventory revealed that the book inventory of P 60,570 was
understated by P 3,000. To avoid distorting the interim financial statements, the
company decided not to adjust the book inventory until year-end except for obsolete
inventory items. Your audit revealed this information about the November 30
inventory:

a. Pricing tests showed that the physical inventory was overpriced by P 2,200.
b. Footing and extension errors resulted in a P150 understatement of the physical
inventory.
c. Direct labor included in the physical inventory amounted to P10, 000. Overhead
was included at the rate of 200 % of direct labor. You determined that the
amount for direct labor was correct and the overhead rate was proper.
d. The physical inventory included obsolete materials recorded at P250. During
December, these materials were removed from the inventory account by a
charge to cost of sales.

Your audit also discloses the following information about the December 31, 2019
inventory.
a. Total debits to certain accounts during December are

Purchases P24,700
Direct Labor 12,100
Manufacturing overhead expense 25,200
Cost of Sales 68,600

f. The cost of sales of P68, 600 included direct labor of P13,800.

g. Normal scrap loss on established product lines is negligible. However, a special
order started and completed during December had excessive scrap loss of P800,
which was charged to Manufacturing Overhead Expense.

1. The corrected physical inventory on November 30, 2019 is:

a. P63,720 c. P61,520
b. P61,270 d. P63,570

2. Assume that the correct amount of physical inventory on November 30, 2019 was
P57,700. What is the inventory on December 31, 2019?
a. P52,400 c. P49,550
b. P24,900 d. P49,300

3. Which of the following is not one of the independent auditor's objectives regarding
the examination of inventories?
a. Verifying that inventory counted is owned by the client
b. Verifying that the client has used proper inventory pricing
c. Ascertaining the physical quantities of inventory on hand
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 UL COA
ACC412/415: AUDITING PROBLEMS
d. Verifying that all inventory owned by the client is on hand at the time of the
count.

4. The auditors will usually trace the details of the test counts made during the
observation of the physical inventory taking to a final inventory schedule. This audit
procedure is undertaken to provide evidence that items physically present and
observed by the auditors at the time of the physical inventory count are:
a. Owned by the client
b. Not obsolete
c. Physically present at the time of the preparation of the final inventory schedule
d. Included in the final inventory schedule

5. Which of the following is not a reason for the special significance attached by the
auditors to the verification of inventories?
a. The determination of inventory valuation directly affects net income
b. The existence of inventories is inherently difficult to substantiate
c. Special valuation problems often exist for inventories
d. Inventories are often the largest current asset of an enterprise

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