ACCTG 4230 – IAR in Auditing and Assurance: Concepts and Applications Janssen Tongco

Exercise: Audit of Expenditure and Disbursement Cycle February 1, 2023

Problem I. Analytical procedures are performed to determine whether the account balances appear reasonable. A
portion of the analytical review you performed during the December 31, 2022 audit of Tony Stark Company
shows the following:

Disbursements for purchases ....................................................... P380,000

Collections from sales .................................................................... 840,000
Increase in trade accounts payable .............................................. 115,000
Decrease in trade accounts receivable ......................................... 95,000
Decrease in merchandise inventory ............................................. 100,000

Q1: Based on the foregoing data, cost of goods sold for the year amounted to __________.

Problem II. At the close of its fiscal year on March 31, 2022, Natasha Romanova Industries, Inc. was in the process
of relocating its plant. This resulted in some confusion relating to the inventory cutoff, as indicated by the
following:
(1) Merchandise on hand costing P24,000 was included in the inventory although the purchase
invoice was not recorded until April 12, 2022.
(2) Merchandise shipped on April 1, 2022, was included in inventory--the cost of this merchandise
was P11,000, and the sale was recorded as P17,000 on March 31, 2022.
(3) Merchandise costing P14,000 was included in the inventory although it was shipped to a
customer on March 31, 2022, FOB shipping point; the company recorded the sale of P20,000 on
that date.

(4) Merchandise costing P2,000 was not counted.

(5) Merchandise in transit (shipped to the company FOB destination) was recorded as a purchase as
of April 2, 2022, and its cost of P18,000 was not included in the March 31, 2022, inventory.
Q2: You ascertained that the company does not maintain a perpetual inventory system and that the books for
the fiscal year have been closed, how much is the net adjustment on Retained Earnings? (Ignore income taxes.)

Problem III. You are engaged in the audit of the inventory of the Johnny Blaze Company as of December 31, 2022.
As taken, the physical inventory included only merchandise received through December 28. Merchandise
received on December 29, 30, and 31, 2022 were segregated on the receiving dock and were not included in the
physical count. The subsequent compilation of the inventory includes only the merchandise physically
counted amounting to P15,000 while the Purchases account in the ledger showed a balance of P226,000 as of
December 31, 2022.

Listed on the table on the following page are certain matters that developed in the course of your tests.

Voucher register entries for December and January are as follows:

Purchase
Invoice No. Shipped Received Amount
--------------- ------------ ------------- ------------
December Register - 2022
----------------------------------
203 Shipping point 12-24 12-29 P 100
204 Destination 12-24 12-30 500
205 Shipping point 12-26 01-02 600
206 Destination 12-26 12-31 400
207 Destination 12-26 01-03 700
208 Shipping point 12-27 01-06 250
209 Shipping point 01-02 01-04 300

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 Purchase
Invoice No. Shipped Received Amount
--------------- ----------- ------------ -----------
January Register - 2023
-------------------------------
210 Destination 12-26 01-02 660
211 Shipping point 12-27 12-30 410
212 Destination 12-27 12-29 770
213 Destination 12-28 01-02 200
214 Shipping point 12-28 01-03 390
215 Shipping point 12-29 12-31 580
216 Destination 12-28 12-31 610
217 Destination 12-31 01-04 370

The physical inventory compilation includes P900 of merchandise received on consignment from a
supplier.

The company has other consigned stocks on hand which were not included in the physical inventory
compilation and which cost P1,200 if purchased.

Shipments of December 31, 2022 were properly recorded on the books as sales. You computed the cost
of these sales as being P1,000.

REQUIRED:
Q3: The correct inventory to be presented on the audited financial statements on Dec. 31, 2022 is:

Q4: The adjusted purchases for the year 2022 amounted to:

Problem IV. The following information was obtained from the balance sheet of Peter Parker, Inc.:
Dec. 31, 2022 Dec. 31, 2021
Cash P706,600 P 200,000
Notes Receivable 0 50,000
Inventory ? 399,750
Accounts Payable ? 150,000

All operating expenses are paid by Peter Parker, Inc. with cash and all purchases of inventory are made on
account. Peter Parker, Inc. sells only one product. All sales are cash sales which are made for P100 per unit.
Peter Parker Inc. purchases 1,500 units of inventory per month and values its inventory using periodic FIFO.
The unit cost of inventory during January 2022 was P65.20 and increased P0.20 per month during the year.
During 2022, payments to suppliers totaled P943,400 and operating expenses totaled P440,000. The ending
inventory for 2021 was valued at P65.00 per unit.

Based on the above determine the following for the year 2022:
Q5: Number of units sold during 2022.

Q6: Accounts Payable balance at December 31, 2022.

Q7: January 1, 2022, inventory quantity.

Q8: December 31, 2022, inventory quantity

Q9: December 31, 2022, inventory amount

Problem V. Bruce Banner Inc. reported income before taxes of P843,600 for 2022 and P965,400 for 2023. The
Company takes its annual physical count of inventory every Dec. 31. Your audit revealed the following
information:

a. The price used for 1,500 units included in the 2022 ending inventory was P109. The correct cost was P190 per
unit.
b. Goods costing P23,600 was received from a vendor on Jan. 5, 2023. The shipment was made on Dec. 26, 2022
under FOB shipping point term. The purchase was recorded in 2022 but the shipment was not included in
the 2022 ending inventory.

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 c. Merchandise costing P64,750 was sold to a customer on December 20, 2022. Bruce Banner was asked by the
customer to keep the merchandise until Jan. 3, 2023, when the customer would come and pick it up.
Although the sale was properly recorded in 2022, the merchandise was included in the ending inventory.
d. A supplier sold merchandise valued at P14,000 to Bruce Banner Inc. The merchandise was shipped FOB
shipping point on Dec. 29, 2022 and was received by Bruce Banner on December 31, 2022. The purchase was
recorded in 2023 and the merchandise was not included in the 2022 ending inventory.

QUESTIONS: Compute for the following:

Q10: The adjusted income before income taxes for the year 2022:

Q11: The adjusted income before income taxes for the year 2023:

Problem VI. Please match the audit objective with the appropriate audit procedure.
Q12: Consigned inventories represent assets that actually exist at the balance sheet date.
A. Physically examine a sample of inventory items.
B. Determine that any impairments in the price of inventory have been properly recorded.
C. Verify that transfers from work in progress to finished good status have been properly recorded.
D. Obtain positive confirmations as of the balance sheet date of inventory held by independent custodians.

Q13: Inventories are properly valued at the lower of cost or net realizable value at the balance sheet date.
A. Determine that the responsibility for maintaining the inventory records is segregated from the responsibility
for custody of property equipment.
B. Recalculate inventory balances and trace to financial statements.
C. Physically examine a sample of inventory items.
D. Determine that any impairments in the price of inventory have been properly recorded.

Problem VII. Steve Rogers Company sells TVs. The perpetual inventory was stated as $28,500 on the books at
December 31, 2021. At the close of the year, a new approach for compiling inventory was used and apparently
a satisfactory cut-off for preparation of financial statements was not made. Some events that occurred are as
follows.
1. TVs shipped to a customer January 2, 2022, costing $5,000 were included in inventory at December 31,
2021. The sale was recorded in 2022.
2. TVs costing $12,000 received December 30, 2021, were recorded as received on January 2, 2022.
3. TVs received during 2021 costing $4,600 were recorded twice in the inventory account.
4. TVs shipped to a customer December 28, 2021, f.o.b. shipping point, which cost $10,000, were not received
by the customer until January, 2022. The TVs were included in the ending inventory.
5. TVs on hand that cost $6,100 were never recorded on the books.

REQUIRED:
Q14: Compute the correct inventory at December 31, 2021.

Problem VIII. On April 15, 2011, fire damaged the office and warehouse of Stanislaw Corporation. The only
accounting record saved was the general ledger, from which the trial balance on the next page was prepared.

The following data and information have been gathered.

1. The fiscal year of the corporation ends on December 31.

2. An examination of the April bank statement and canceled checks revealed that checks written during the
period April 1–15 totaled $13,000: $5,700 paid to accounts payable as of March 31, $3,400 for April merchandise
shipments, and $3,900 paid for other expenses. Deposits during the same period amounted to $12,950, which
consisted of receipts on account from customers with the exception of a $950 refund from a vendor for
merchandise returned in April.

3. Correspondence with suppliers revealed unrecorded obligations at April 15 of $15,600 for April merchandise
shipments, including $2,300 for shipments in transit (f.o.b. shipping point) on that date.

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4. Customers acknowledged indebtedness of $46,000 at April 15, 2011. It was also estimated that customers
owed another $8,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, $600
will probably be uncollectible.

5. The companies insuring the inventory agreed that the corporation’s fire-loss claim should be based on the
assumption that the overall gross profit ratio for the past 2 years was in effect during the current year. The
corporation’s audited financial statements disclosed this information:

6. Inventory with a cost of $7,000 was salvaged and sold for $3,500. The balance of the inventory was a total
loss.

REQUIRED:
Q15: Determine the amount of inventory fire loss per audit.

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