AP-003-C.

2 (Audit of Inventories and Related Accounts) Problem #1

The inventory control account balance of NEVERGIVEUP CORP. at June 30, 2020 was P221,020 using the perpetual
inventory system. A physical count conducted on that day found inventory on hand worth P220,200. Net realizable value
for each inventory item held for sale exceeded cost. An investigation of the discrepancy revealed the following:

a) Goods worth P6,600 held on consignment for Port Company had been included in the physical count.
b) Goods costing P1,200 was purchased on credit from Rome, Inc. on June 27, on FOB shipping point terms. The
goods were shipped on June 28, 2020 but, as they had not arrived by June 30, 2020, were not included in the
physical count. The purchase invoice was received and processed on June 30, 2020.
c) Goods costing P2,400 sold on credit to ALTHEA Co. for P3,900 on June 28, 2020 on FOB destination terms. The
goods were still in transit on June 2016. The sales invoice was processed on June 29, 2020.
d) Goods costing P2,730 were purchased on credit (FOB destination) from Sanmig Co. on June 28, 2020. The goods
were received on June 29, 2020 and included in the physical count. The purchase invoice was received on July 2,
2020.
e) On June 30, 2020, NEVERGIVEUP sold goods costing P6,300 on credit (FOB shipping point) to Pizza Co. for
P9,600. The goods were dispatched from the warehouse on June 30, 2020 but the sales invoice had not been
processed at that date.
f) Damaged inventory items valued at P2,650 were discovered during the physical count. These items were still
recorded on June 30, 2020 but were omitted from the physical count records pending their write-off.

Based on the preceding information, answer the following:

1) The adjusting entry for the consigned goods included in the physical count (Item a) should include
a. Debit to inventory for P6,600 c) Credit to purchases for P6,600
b. Credit to inventory for P6,600 d) No adjusting entry is necessary
2) The error described in (item e) will
a. Overstate gross profit by P3,300. c) Overstate sales revenue by P9,600.
b. Understate gross profit by P3,300. d) Understate inventory by P6,300
3) The Inventory control account balance should be increased (decreased) by
a. (P3,820) c) (P3,000)
b. P3,820 d) P3,000
4) If the perpetual inventory records show lower of inventory than the physical count, an explanation of the difference
might be unrecorded
a. Purchases c) Sales discounts
b. Sales. d) Purchase discounts

5) The internal control that requires that "checks are prenumbered and accounted for" satisfies the objective of:
A) accuracy
B) existence
C) completeness.
D) posting and summarization
Answer: C
6) Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash
disbursements, it is common in this audit area to use:
A) block sampling
B) variables sampling
C) attributes sampling.
D) probability proportional to size sampling
Answer: C
7) Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to
occurrence?
A) Examine documents in voucher package for occurrence
B) Examine supporting documents for indication of approval
C) Account for sequence of vouchers.
D) Attempt to input transactions with valid and invalid vendors
Answer: C
8) You are performing the audit of Jenkins and Company. Your tests of controls and tests of transactions for accounts
payable demonstrate that the controls are operating effectively. This would normally allow you to:
A) eliminate the need for substantive testing of balances for accounts payable
B) reduce the need for substantive testing of balances for accounts payable.
C) reduce control tests in other transactions cycles
D) increase the need for substantive testing of balances for accounts payable
Answer: B
9) An auditor is using audit sampling to test transactions in the acquisition and payment cycle. She would normally set the
tolerable exception rate at what level?
A) low.
B) medium
C) high
D) indeterminate
Answer: A
10) Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment
of goods that were not received?
A) Count goods upon receipt in storeroom
B) Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department.
C) Compare goods received with goods requisitioned in receiving department
D) Verify vouchers for accuracy and approval in internal audit department
Answer: B
11) Which of the following should sign checks under conditions of effective internal control?
A) Treasurer.
B) Purchasing agent
C) Accounts payable clerk
D) Person preparing the checks
Answer: A
12) In an examination of vendor statements or vendor confirmations when doing substantive tests of balances the auditor
needs to perform the following:
A) reconciliation with the accounts payable master file.
B) reconciliation with vendor invoices
C) reconciliation with purchase orders
D) reconciliation with receiving reports
Answer: A
13) Internal controls that are likely to prevent the client from including as a business expense those transactions that
primarily benefit management or other employees rather than the entity being audited satisfy the control objective
that:
A) acquisitions are correctly valued
B) existing acquisitions are recorded
C) acquisitions are correctly classified
D) recorded acquisitions are for goods and services received.
Answer: D
14) A company failed to record an acquisition of merchandise and its related liability, but the merchandise was included in
ending inventory. The effect on the financial statements was to:
A) understate both assets and liabilities
B) understate net income and owners' equity
C) understate assets and owners' equity
D) understate liabilities, and overstate both net income and owners' equity.
Answer: D
15) The test of transactions which requires one to "reconcile recorded cash disbursements with the cash disbursements on
the bank statement" satisfies the objective of:
A) occurrence
B) completeness.
C) accuracy
D) posting and summarization
Answer: B
16) For effective internal control purposes, the vouchers payable department generally should:
A) obliterate the quantity ordered on the receiving department copy of the purchase order
B) stamp, perforate, or otherwise cancel supporting documentation after payment is mailed
 C) establish the agreement of the vendor's invoice with the receiving report and purchase order.
D) ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee
Answer: C
17) An auditor performs a test to determine whether all merchandise for which the client was billed was received. The
population for this test consists of all:
A) merchandise received
B) vendors' invoices.
C) canceled checks
D) receiving reports
Answer: B
18) Matching the supplier's invoice, the purchase order, and the receiving report prior to preparing the voucher would
normally be the responsibility of the:
A) warehouse receiving function
B) purchasing function
C) general accounting function.
D) treasury function
Answer: C
19) A CPA learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and
once based upon the monthly statement. A control procedure that should have prevented this duplicate payment is:
A) attachment of the receiving report to the disbursement report.
B) prenumbering of disbursement vouchers
C) use of a limit or reasonableness test
D) prenumbering of receiving reports
Answer: A
20) With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain
satisfaction that supplies ordered and paid for have been:
A) requested by and approved by authorized individuals who have no incompatible duties
B) used in the course of business and solely for business purposes during the year under audit
C) received, counted, and checked to quantities and amounts on purchase orders and invoices.
D) properly recorded as assets and systematically amortized over the estimated useful life of the supplies
Answer: C
21) Authorization for accepting goods in the receiving department should be based on:
A) Vendor Invoice
B) Requisition Request
C) Purchase order from the purchasing department.
D) Vendor Statement
Answer: C
22) Auditors need to distinguish between accounts payable and accrued liabilities in designing the appropriate control and
substantive tests. A liability is properly accounted for as an account payable if:
A) the amount is known and owed as of the balance sheet date.
B) the amount can be estimated and is owed at the balance sheet date
C) the amount is known at the balance sheet date and owed by the end of the next fiscal year
D) the amount is estimated and owed within 90 days of the balance sheet date
Answer: A
23) The overall objective in the audit of accounts payable is to determine whether accounts payable:
A) is fairly stated and properly disclosed.
B) is overstated
C) is understated
D) is accurately stated
Answer: A
24) At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are
shipped FOB Destination?
A) the issuance of a purchase order
B) receipt of acknowledgement of order by vendor
C) receipt of goods or services.
D) the receipt of a vendor invoice
Answer: C
25) Cutoff procedures for inventory purchased should be designed by companies to assure the company that:
A) inventory owned by the company has been received
 B) inventory included in the year-end inventory count has been paid
C) inventory received before year end was recorded before year end.
D) inventory was correctly valued at year end
Answer: C
26) You are the in-charge auditor and are designing audit procedures for accounts payable. Which of the following
management assertions would you normally be most concerned about?
A) Occurrence
B) Accuracy
C) Completeness.
D) Existence
Answer: C
27) The main focus taken by the auditor in verifying liability balances is on the discovery of:
A) understated liabilities
B) overstated liabilities
C) unrecorded liabilities.
D) overstated or extraneous liabilities
Answer: C
28) By tracing receiving reports issued at and before year-end to vendors' invoices and making sure they are included in
accounts payable, the auditor is testing for:
A) theft of merchandise by employees
B) unrecorded obligations.
C) lapping
D) kiting
Answer: B
29) The extent of a search for unrecorded liabilities largely depends on:
A) materiality and inherent risk
B) materiality and control risk.
C) materiality only
D) inherent risk only
Answer: B

30) A document review of which of the following is most likely to yield evidence of any unrecorded liabilities?
A) Receiving reports
B) Vendor Memorandums
C) Unpaid accounts payable.
D) Sales invoices out of sequence
Answer: C