1.

Which of the following control procedures would most

likely be used to maintain accurate perpetual
inventory records?
a. Independent matching of purchase orders, receiving
reports, and vendors' invoices.
b. Independent storeroom count of goods received.
c. Periodic independent reconciliation of control and
subsidiary records.
d. Periodic independent comparison of records with
goods on hand.
2. The accuracy of perpetual inventory records may be
established in part by comparing perpetual inventory
records with
a. Purchase requisitions.
c. Receiving
reports.
b.
Purchase
orders.
d.
Vendor
payments.
3. The auditor tests the quantity of materials charged to
work in process by tracing these quantities to
a. Receiving reports.
c. Materials
requisition forms.
b. Perpetual inventory records.
d. Cost ledgers.
4. An auditor would analyze inventory turnover rates to
obtain evidence concerning managements assertion1.
about
a. Valuation or allocation.
c. Presentation
and
disclosure.
b.
Rights
and
obligations.
d. 2.
Completeness
5. In auditing inventories, a major objective relates to
the existence assertion. Of the following audit3.
procedures relating to inventories, which does not
support the existence assertion?
a. The auditor reviews the client's inventory-taking
instructions for such matters as proper arrangement
of goods, separation of consigned goods, and limits
on movements of goods during inventory.
b. The auditor observes the client's inventory and
performs test counts as appropriate.
c. The auditor confirms inventories not on the premises.
d. The auditor performs a lower of cost or market test
for major categories of inventory.
6. In a manufacturing company, which one of the
following audit procedures would give the least
assurance of the valuation of inventory at the audit
date?
a. Obtaining confirmation of inventories pledged under
loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.
7. When auditing merchandise inventory at year end,
the auditor performs a purchase cutoff test to obtain
evidence that
a. No goods held on consignment for customers are
included in the inventory balance.
b. No goods observed during the physical count are
pledged or sold.

c.

All goods owned at year end are included in the

inventory balance
d. All goods purchased before year end are received
before the physical inventory count.
8. Which of the following items should not be included in
a physical inventory?
a. Materials in transit from vendors.
b. Goods in a private warehouse.
c. Goods received for repairs under warranty.
d. Consignment to an agent.

PROBLEM1
The following accounts were included in the unadjusted
trial balance of Bani Company as ofDecember 31, 2006:
Cash
Accounts receivable
Inventory
Accounts payable
Accrued expenses

P 481,600
1,127,000
3,025,000
2,100,500
215,500

During your audit, you noted that Bani held its cash
books open after year-end. In addition, your audit
revealed the following:
Receipts for January 2007 of P327,300 were recorded in
the December 2006 cash receipts book. The receipts of
P180,050 represent cash sales and P147,250 represent
collections from customers, net of 5% cash discounts.
Accounts payable of P186,200 was paid in January 2007.
The payments, on which discounts of P6,200 were taken,
were included in the December 2006 check register.
Merchandise inventory is valued at P3,025,000 prior to
any adjustments. The following information has been
found relating to certain inventory transactions.

a.

Goods valued at P137,500 are on consignment

with a customer. These goods are not included in the
inventory figure.

b.

Goods costing P108,750 were received from a

vendor on January 4, 2007. The related invoice was
received and recorded on January 6, 2007. The goods
were shipped on December 31, 2006, terms FOB shipping
point.

c.

Goods
costing
P318,750
were
shipped
on December 31, 2006, and were delivered to the
customer on January 3, 2007. The terms of the invoice
were FOB shipping point. The goods were included in the
2006 ending inventory even though the sale was
recorded in 2006.

d.

A P91,000 shipment of goods to a customer on

December 30, terms FOB destination are not included in
the year-end inventory. The goods cost P65,000 and
were delivered to the customer on January 3, 2007. The
sale was properly recorded in 2007.

e.

The invoice for goods costing P87,500 was

received and recorded as a purchase on December 31,

2006. The related goods, shipped FOB destination were

received on January 4, 2007, and thus were not included
in the physical inventory.

Manufacturing overhead at an applied rate of 150% of

direct labor cost
QUESTIONS:
Based on the above and the result of your audit, answer
the following:

f.

Goods valued at P306,400 are on consignment

from a vendor. These goods are not included in the
physical inventory.
1. 14. The raw materials inventory as of December 31,
2006 is
QUESTIONS:
2. 15. The work in process inventory as of December 31,
Based on the above and the result of your audit,
2006 is
determine the adjusted balances of the following as of
December 31, 2006:
3. 16. The finished goods inventory as of December 31,
2006 is
9. Cash
10. Accounts receivable
4. 17. The cost of goods sold for the year ended December
11. Inventor
31, 2006 is
12. Accounts payable
13. Current ratio

PROBLEM 3

In conducting your audit of Mangatarem Corporation, a

company engaged in import and wholesale business, for
the fiscal year ended June 30, 2006, you determined that
its internal control system was good. Accordingly, you
observed the physical inventory at an interim date,May
31, 2006 instead of at June 30, 2006.

PROBLEM 2
During your audit of the records of the Manaoag
Corporation for the year ended December 31, 2006, the
following facts were disclosed:
Raw materials inventory, 1/1/2006
Raw materials purchases
Direct labor
Manufacturing overhead applied (150% of direct
labor)
Finished goods inventory, 1/1/2006
Selling expenses
Administrative expenses

You obtained the following

companys general ledger.

information

from

the

Sales for eleven months ended May 31, 2006

Sales for the fiscal year ended June 30, 2006
Purchases for eleven months ended May 31,
2006 (before audit adjustments)
Purchases for the fiscal year ended June 30, 2006
Inventory, July 1, 2005
Physical inventory, May 31, 2006

Your examination disclosed the following additional

information:
a) Purchases of raw materials

Your audit disclosed the following additional

Unit Price
information.
P17.76 (1) Shipments costing P12,000 were received in May and
20.00
included in the physical inventory but recorded as June
19.60
purchases.
20.00
20.40
20.80 (2) Deposit of P4,000 made with vendor and charged to
purchases in April 2006. Product was shipped in July
2006.
b) Data with respect to quantities are as follows:
Month
January February
March April
May June
July August
September October
November December

Explanation
Raw materials
Work in process (80%
completed)
Finished goods
Sales, 200,000 units
c)

Units
55,000
45,000
25,000
35,000
45,000
60,000
265,000

Units
1/1/06

(3)

35,000
-

12/31/0
6
?
25,000

15,000

40,000

Raw materials are issued at the beginning of the

manufacturing process. During the year, no returns,
spoilage, or wastage occurred. Each unit of finished
goods contains one unit of raw materials.
1.

A shipment in June was damaged through the

carelessness of the receiving department.
This
shipment was later sold in June at its cost of P16,000.

QUESTIONS:
In audit engagements in which interim physical
inventories are observed, a frequently used auditing
procedure is to test the reasonableness of the year-end
inventory by the application of gross profit ratio. Based
on the above and the result of your audit, you are to
provide the answers to the following:
18. The gross profit ratio for eleven months ended May
31, 2006 is

d) Inventories are stated at cost as follows:

Raw materials according to the FIFO method

2. 19. The cost of goods sold during the month of June, 2006
Direct labor at an average rate determined by
using the gross profit ratio method is
correlating total direct labor cost with effective
production during the period

P1,
1,

1,
1,

3. 20. The June 30, 2006 inventory using the gross profit
method is