GENSANTOS FOUNDATION COLLEGE, INC.

Bulaong Extension, General Santos City 9500
BSA/BSAT/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
AUDIT OF INVENTORIES
Cut-off problems (Sales/Purchase)

1. Identify validity of the purchases or sales transactions**

2. If a valid purchase or sale transaction, determine whether Sales (Receivables) or Purchase (Payable) have been
recorded.
3. Determine whether inventories were Excluded or Included:
a. If it is a valid purchase, the payable should be recorded, and the inventory should be included.
b. If it is not a valid purchase, the payable should not be recorded, and the inventory should be excluded.
c. If it is a valid sale, the receivable should be recorded, and the inventory should be excluded.
d. If it is not a valid sale, the receivable should not be recorded, the inventory should be included.

**In determining the validity of sale or purchase transaction, consider the ff. items:

1. As a rule of thumb assumption, a sale is valid upon delivery and a purchase is valid upon receipt.
2. Goods in transit
a. FOB Shipping Point/FOB Seller or Seller’s Location include as inventory of buyer (plus freight in)
b. FOB Destination/FOB Buyer or Buyer’s Location include as inventory of seller (exclude freight out)
c. Cost of insurance and freight (CIF) include as inventory of buyer upon delivery to carrier (plus cost of
insurance and freight)
d. Free Alongside (FAS) the vessel include as inventory of buyer upon possession of the carrier (exclude freight
cost to vessel, include cost of loading to vessel, include cost of shipment, include freight cost from vessel to
customer).
3. Goods on consignment – include as inventory of consignor/seller. Include freight and handling charges from consignor
to consignee.
4. Sales on approval – include as inventory of seller, unless information identified that a manifestation of approval has
already been made.
5. Inventory financing/Park sale/Product financing – include as inventory of seller.
6. Sale with right of return – include as inventory of seller, not unless the right of return is considered normal in the
industry (e.g. retail) or time for right of return has already lapsed for the return.
7. Installment sales – goods considered sold upon delivery, therefore inventory of buyer.
8. Segregated goods – mere segregation of goods does not exclude the same from the seller’s inventory, unless the
problem identified that sale is covered by a special sale agreement (BILL AND HOLD) as in when goods were already
billed and awaiting the pick-up of the customer.

Inventory count:

 All receipts (on purchases) of goods on or before the count date were to be included in the count unless specified in
the problem that they were not counted.
 All receipts after the count were excluded from the count.
 All deliveries (on sale) made on or before the count date were excluded from the count.
 All deliveries made after the count date were included in the count.

Inventory Estimation Problems – Gross Profit Method

Cost of Goods Available for Sale (Actual)* xx

Less: Cost of Sales (Estimate)** (xx)
Estimated Ending Inventory xx
*Cost of Goods Available for Sale is actual (consider all items normally included in the computation of Cost of Goods available
for sale).

**Cost of sales is estimated by:

Gross sales x Cost Rate (if GP is based on sales) Cost rate = 1 – GP Rate
Gross sales / Selling Price Rate (if GP is based on cost) Selling price rate = 1 + GP Rate
For the purpose of estimating cost of sales:

 Assume that all sales were made under the normal GP rate thus:
o Gross sales shall not include sales discounts
o Add back special discounts (employee discounts)
 Gross sales shall not include sales allowance
 Deduct from gross sales the sales return (deduct if “sales returns and allowances”)

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PROBLEM 1. PURCHASES CUT-OFF

You are engaged in an audit of the financial statements of Cara Company for the year ended October 31, 2022, and have
observed the physical inventory count on that date.

No perpetual inventory receipts are maintained and physical inventory count is to be used as a basis for the financial
statements.

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         GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSAT/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
All merchandise received up to and including October 30, 2022 has been included in the physical count. The ff. lists of invoices
are for purchases of merchandise and are entered in the purchases journal for the months of October and November 2022,
respectively:

Amount FOB Date of Invoice Date Merchandise Received

October 2022 P13,600 Destination October 21 October 30
3,900 Destination October 28 November 3
10,250 Shipping Point October 29 October 30
9,200 Shipping Point October 30 October 31
12,820 Shipping Point October 31 November 3

November 2022 P6,420 Shipping Point October 27 October 30

7,220 Shipping Point November 2 October 30
4,850 Destination October 30 October 31
22,500 Destination November 4 October 31
15,000 Destination October 27 November 3
2,000 Destination October 29 November 4

Required: After examining the above information, you are to answer the ff. questions:

1. Accounts payable should be debited for erroneous recording of purchases in October 2022 by? Prepare the adjusting
entry.
2. Accounts payable should be credited for unrecorded purchases in October 2022 by? Prepare the adjusting entry.
3. The physical inventory at October 31, 2022 should be increased by? Prepare the adjusting entry.

PROBLEM 2. SALES AND PURCHASE CUT-OFF

You were engaged by Silver Corporation for the audit of the company’s financial statements for the year ended December 31,
2022. The company is engaged in the wholesale business and makes all sales at 25% over cost.

The ff. was gathered from the client’s accounting records:

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P5,200,000 Balance forwarded P2,800,000
Dec. 27 SI No. 965 40,000 Dec. 28 RR No. 1059 24,000
Dec. 28 SI No. 966 150,000 Dec. 30 RR No. 1061 70,000
Dec. 28 SI No. 967 10,000 Dec. 31 RR No. 1062 42,000
Dec. 31 SI No. 969 46,000 Dec. 31 RR No. 1063 64,000
Dec. 31 SI No. 970 68,000 Dec. 31 Closing entry (3,000,000)
Dec. 31 SI No. 971 16,000 P---
Dec. 31 Closing entry (5,530,000)
P---
Note: SI = Sales Invoice; RR = Receiving Report

Accounts Receivable P500,000 Inventory P600,000 Accounts Payable P400,000

You observed the physical inventory of goods in the warehouse on December 31, and were satisfied that it was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last receiving report which had been
used was No. 1063 and that no shipments had been made on any sales invoices whose number is larger than No. 968.

You also obtained the ff. additional information:

a) Included in the warehouse physical inventory at December 31, were goods which had been purchased and received
on Receiving Report No. 1060 but for which the invoice was not received until the ff. year. Cost was P18,000.
b) On the evening of December 31, there were two trucks in the company loading bay:
a. Truck 123 was unloaded on January 2 of the ff. year and received on RR No. 1063. The freight was paid by
the vendor.
b. Truck 126 was loaded and sealed on December 31 but left the company premises on January 2. This order
was sold for P100,000 per SI No. 968.
c) At December 31, two delivery trucks were enroute to Brooks Trading Corporation. Brooks received the goods, which
were sold on SI No. 966, terms FOB Destination, the next day.

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         GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSAT/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
d) Enroute to the client on December 31 was a truckload of goods, which was received on RR No. 1064. The goods were
shipped FOB Destination and freight of P2,000 was paid by the client. However, the freight was deducted from the
purchase price of P800,000.

Required: Based on the above and the result of your audit, determine the ff.

1. Sales for the year ended December 31, 2022

2. Purchases for the year ended December 31, 2022
3. Inventory as of December 31, 2022
4. Accounts receivable as of December 31, 2022
5. Accounts payable as of December 31, 2022

PROBLEM 3. INVENTORY VALUATION (NRV)

The Snowball Company is a leading distributor of kitchen wares. The company uses FIFO method of calculating the cost of
goods sold. The ff. information concerning two of the company’s products is taken from the month of October:

PANS KETTLES
No. of units Unit cost No. of units Unit cost
Oct. 1, beg. Inv. 10,000 P60 6,000 P40
Purchases:
Oct. 15 14,000 65 9,000 42
Oct. 25 6,000 75
Sales for the month 20,000 10,000
(@P80) (@P44)
On October 31, Snowball’s suppliers reduced their price from the last purchase price by the ff. percentages:

Pans 25%
Kettles 20%
Accordingly, the company agreed to reduce selling prices by 15% on all items beginning June 1.

Snowball’s selling costs are calculated at 10% of selling price. Both products have a normal profit of 30% on sales prices (after
selling costs)

Required: Based on the above and the result of your audit, answer the ff.:

1. Total cost of Pans as of October 31

2. Total cost of Kettles as of October 31
3. The inventory at October 31 should be valued at
4. The loss on inventory write-down for the month of October is
5. The cost of sales, before loss on inventory write-down, for the month of October is

PROBLEM 4. INVENTORY ESTIMATION

VIRIDIAN Company is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused until
sold to customers.

In conducting an audit for the year ended December 31, 2022, the company’s CPA determined that the system of internal
control was good. Accordingly, the CPA observed the physical inventory at an interim date, November 30, 2022, instead of at
year end. The ff. information was obtained from the general ledger:

Inventory, January 1, 2022 P1,312,500

Physical inventory, November 30, 2022 P1,425,000
Sales for 11 months ended November 30, 2022 12,600,000
Sales for the year ended December 31, 2022 14,400,000
Purchases for 11 months ended Nov. 30, 2022 (before audit adjustments) 10,125,000
Purchases for the year ended December 31, 2022 (before audit adjustments) 12,000,000
The CPA’s audit disclosed the ff. information:

a) Shipments received in November and included in the physical inventory but recorded as December purchases,
P112,500.
b) Shipments received in unsalable condition and excluded from physical inventory. Credit memos had not been
received nor chargeback to vendors been recorded: Total at November 30, 2022, P15,000; Total at December 31,
2022 (including the November unrecorded chargebacks), P22,500.
c) Deposits made with vendor and charged to purchases in October 2022. Product was shipped in January 2023,
P30,000.
d) Deposit made with vendor and charged to purchases in November 2022. Product was shipped FOB Destination on
November 29, 2022 and was included in November 30, 2022 physical inventory as goods in transit, P82,500.
e) Through the carelessness of the receiving department, shipment in early December 2022 was damaged by rain. This
shipment was later sold in the last week at cost, P150,000.

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         GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSAT/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
Required:

1. Gross profit rate for 11 months ended November 30, 2022.

2. Cost of goods sold during the month of December 2022 using the gross profit method.
3. December 31, 2022 inventory using the gross profit method.

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