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III AUDIT OF INVENTORIES

PROBLEM NO. 1
1. In connection with your audit of the Banaria Manufacturing Company,
you reviewed its year-end inventory and found the following items:
(a) A packing case containing a product costing P100,000 was
standing in the shipping room when the physical inventory was
taken. It was not included in the inventory because it was marked
Hold for shipping instructions. The customers order was dated
December 18, but the case was shipped and the costumer billed on
January 10, 2006.
(b) Merchandise costing P600,000 was received on December 28, 2005,
and the invoice was recorded. The invoice was in the hands of the
purchasing agent; it was marked On consignment.
(c) Merchandise received on January 6, 2006, costing P700,000 was
entered in purchase register on January 7. The invoice showed
shipment was made FOB shipping point on December 31, 2005.
Because it was not on hand during the inventory count, it was not
included.
(d) A special machine costing P200,000, fabricated to order for a
particular customer, was finished in the shipping room on
December 30. The customer was billed for P300,000 on that date
and the machine was excluded from inventory although it was
shipped January 4, 2006.
(e) Merchandise costing P200,000 was received on January 6, 2006,
and the related purchase invoice was recorded January 5. The
invoice showed the shipment was made on December 29,2005, FOB
destination.
(f) Merchandise costing P150,000 was sold on an installment basis on
December 15. The customer took possession of the goods on that
date. The merchandise was included in inventory because Banaria
still holds legal title. Historical experience suggests that full
payment on installment sale is received approximately 99% of the
time.
(g) Goods costing P500,000 were sold and delivered on December 20.
The goods were included in the inventory because the sale was
accompanied by a purchase agreement requiring Banaria to buy
back the inventory in February 2006.

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Question:
Based on the above and the result of your audit, how much of these items
should be included in the inventory balance at December 31, 2005?
a. P1,300,000 c. P1,650,000 b. P 800,000 d. P1,050,000

Suggested Solution:
Unshipped goods P 100,000
Purchased merchandise shipped
FOB shipping point 700,000
Goods used as collateral for a loan 500,000
Total P1,300,000
Reasons for including and excluding the items:
a) Included - Merchandise should be included in the inventory until shipped. An
exception would be special orders.
b) Excluded - Banaria Manufacturing has the merchandise on a consignment
basis and therefore does not possess legal title.
c) Included - The merchandise was shipped FOB shipping point and therefore
would be included in the inventory on the shipping date.
d) Excluded - Title may pass on special orders when segregated for shipment.
e) Excluded - The merchandise was shipped FOB destination and was not
received until January 3, 2006.
f) Excluded - Historical experience suggests that Banaria will collect the full
purchase price, so the sale is recognized even though legal title has not
passed.
g) Included - This is not a sale of inventory but instead is a loan with the
inventory as collateral.

PROBLEM NO. 2
The Pobre Company is on a calendar year basis. The following data were
found during your audit:
a. Goods in transit shipped FOB destination by a supplier, in the amount
of P100,000, had been excluded from the inventory, and further testing
revealed that the purchase had been recorded.
b. Goods costing P50,000 had been received, included in inventory, and
recorded as a purchase. However, upon your inspection the goods were
found to be defective and would be immediately returned.
c. Materials costing P250,000 and billed on December 30 at a selling price
of P320,000, had been segregated in the warehouse for shipment to a
customer. The materials had been excluded from inventory as a signed
purchase order had been received from the customer. Terms, FOB
destination.

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d. Goods costing P70,000 was out on consignment with Hermie Company.
Since the monthly statement from Hermie Company listed those
materials as on hand, the items had been excluded from the final
inventory and invoiced on December 31 at P80,000.
e. The sale of P150,000 worth of materials and costing P120,000 had been
shipped FOB point of shipment on December 31. However, this
inventory was found to be included in the final inventory. The sale was
properly recorded in 2005.
f. Goods costing P100,000 and selling for P140,000 had been segregated,
but not shipped at December 31, and were not included in the
inventory. A review of the customers purchase order set forth terms as
FOB destination. The sale had not been recorded.
g. Your client has an invoice from a supplier, terms FOB shipping point
but the goods had not arrived as yet. However, these materials costing
P170,000 had been included in the inventory count, but no entry had
been made for their purchase.
h. Merchandise costing P200,000 had been recorded as a purchase but
not included as inventory. Terms of sale are FOB shipping point
according to the suppliers invoice which had arrived at December 31.

Further inspection of the clients records revealed the following December


31, 2005 balances: Inventory, P1,100,000; Accounts receivable, P580,000;
Accounts payable, P690,000; Net sales, P5,050,000; Net purchases,
P2,300,000; Net income, P510,000.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted
balances of following as of December 31, 2005:
1. Inventory
a. P1,230,000 b. P1,550,000 c. P1,650,000 d. P1,480,000
2. Accounts payable
a. P710,000 b. P810,000 c. P540,000 d. P760,000
3. Net sales
a. P4,550,000 b. P4,7300,000 c. P4,650,000 d. P4,970,000
4. Net purchases
a. P2,370,000 b. P2,150,000 c. P2,420,000 d. P2,320,000
5. Net income
a. P220,000 b. P540,000 c. P290,000 d. P550,000

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Suggested Solution:

Questions No. 1 to 5
Accounts Net Net
Inventory Payable Net Sales Purchases Income
Unadjusted
balances P1,100,000 P690,000 P5,050,000 P2,300,000 P510,000
(a) - (100,000) - (100,000) 100,000
(b) (50,000) (50,000) - (50,000) -
(c) 250,000 - (320,000) - (70,000)
(d) 70,000 - (80,000) - (10,000)
(e) (120,000) - - - (120,000)
(f) 100,000 - - - 100,000
(g) - 170,000 - 170,000 (170,000)
(h) 200,000 - - - 200,000
Adjusted
balances P1,550,000 P710,000 P4,650,000 P2,320,000 P540,000

Answers: 1) B; 2) A; 3) C; 4) D, 5) B

PROBLEM NO. 3
You were engaged by De Guia Corporation for the audit of the companys
financial statements for the year ended December 31, 2005. The company
is engaged in the wholesale business and makes all sales at 25% over cost.

The following were gathered from the clients accounting records:


SALES PURCHASE S
Date Reference Amount Date Reference Amount
Balance forwarded P7,800,000 Balance forwarded P4,200,000
12/27 SI No. 965 60,000 12/28 RR #1059 36,000
12/28 SI No. 966 225,000 12/30 RR #1061 105,000
12/28 SI No. 967 15,000 12/31 RR #1062 63,000
12/31 SI No. 969 69,000 12/31 RR #1063 96,000
12/31 SI No. 970 102,000 12/31 Closing
entry (4,500,000)
12/31 SI No. 971 24,000 P -
12/31 Closing
entry (8,295,000)
P -
Note: SI = Sales InvoiceRR = Receiving Report

Accounts receivable P750,000


Inventory 900,000

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Accounts payable 600,000
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 following 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 following year.
Cost was P27,000.
b) On the evening of December 31, there were two trucks in the company
siding:
Truck No. XXX 888 was unloaded on January 2 of the following
year and received on Receiving Report No. 1063. The freight was
paid by the vendor.
Truck No. MGM 357 was loaded and sealed on December 31 but
leave the company premises on January 2. This order was sold for
P150,000 per Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding were two
delivery trucks enroute to ABC Trading Corporation. ABC received the
goods, which were sold on Sales Invoice No. 966 terms FOB
Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which
was received on Receiving Report 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.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2005
a. P8,100,000 b. P7,875,000 c. P7,725,000 d. P8,025,000
2. Purchases for the year ended December 31, 2005
a. P4,500,000 b. P5,631,000 c. P5,727,000 d. P4,527,000
3. Accounts receivable as of December 31, 2005
a. P330,000 b. P525,000 c. P555,000 d. P180,000
4. Inventory as of December 31, 2005

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a. P1,452,000 b. P1,200,000 c. P1,221,000 d. P1,296,000
5. Accounts payable as of December 31, 2005
a. P600,000 b. P531,000 c. P627,000 d. P1,827,000

Suggested Solution:

Questions No. 1 to 5

Sales Purchases AR Inventory AP


Unadjusted
balances P8,295,000 P4,500,000 P750,000 P900,000 P600,000
AJE No. 1 (195,000) - (195,000) - -
AJE No. 2 - 27,000 - - 27,000
AJE No. 3 - - - 96,000 -
AJE No. 4 - - - 120,000 -
AJE No. 5 (225,000) - (225,000) - -
AJE No. 6 - - - 180,000 -
Adjusted
balances P7,875,000 P4,527,000 P330,000 P1,296,000 P627,000
Adjusting entries:
1) Sales (P69,000+P102,000+P24,000) P195,000
Accounts receivable P195,000
To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971)
2) Purchases P27,000
Accounts payable P27,000
To take up unrecorded purchases (RR No. 1060)
3) Inventory P96,000
Cost of sales P96,000
To take up goods under RR No. 1063
4) Inventory (P150,000/1.25) P120,000
Cost of sales P120,000
To take up unshipped goods under SI No. 968
5) Sales P225,000
Accounts receivable P225,000
To reverse entry made to record SI No. 966
6) Inventory (P225,000/1.25) P180,000
Cost of sales P180,000
To take up goods under SI No. 966

Answers: 1) B; 2) D; 3) A; 4) D, 5) C

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PROBLEM NO. 4
Evangelista Company engaged you to examine its books and records for the
fiscal year ended June 30, 2005. The companys accountant has furnished
you not only the copy of trial balance as of June 30, 2005 but also the copy
of companys balance sheet and income statement as at said date. The
following data appears in the cost of goods sold section of the income
statement:
Inventory, July 1, 2004 P 500,000
Add Purchases 3,600,000
Total goods available for sale 4,100,000
Less Inventory, June 30, 2005 700,000
Cost of goods sold P3,400,000

The beginning and ending inventories of the year were ascertained thru
physical count except that no reconciling items were considered. Even
though the books have been closed, your working paper trial balance show
all account with activity during the year. All purchases are FOB shipping
point. The company is on a periodic inventory basis.

In your examination of inventory cut-offs at the beginning and end of the


year, you took note of the following:

July 1, 2004
a. June invoices totaling to P130,000 were entered in the voucher register
in June. The corresponding goods not received until July.
b. Invoices totaling P54,000 were entered in the voucher register in July
but the goods received during June.

June 30, 2005


c. Invoices with an aggregate value of P186,000 were entered in the
voucher register in July, and the goods were received in July. The
invoices, however, were date June.
d. June invoices totaling P74,000 were entered in the voucher register in
June but the goods were not received until July.
e. Invoices totaling P108,000 (the corresponding goods for which were
received in June) were entered the voucher register, July.
f. Sales on account in the total amount of P176,000 were made on June
30 and the goods delivered at that time. Book entries relating to the
sales were made in June.

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QUESTIONS:
Based on the above and the result of your cut-off tests, answer the
following:
1. How much is the adjusted Inventory as of July 1, 2004?
a. P500,000 b. P576,000 c. P630,000 d. P370,000
2. How much is the adjusted Purchases for the fiscal year ended June 30,
2005?
a. P3,840,000 b. P3,894,000 c. P3,600,000 d. P3,914,000
3. How much is the adjusted Inventory as of June 30, 2005?
a. P784,000 b. P892,000 c. P500,000 d. P960,000
4. How much is the adjusted Cost of Goods Sold for the fiscal year ended
June 30, 2005?
a. P3,316,000 b. P3,510,000c. P3,970,000 d. P3,564,000
5. The necessary compound adjusting journal entry as of June 30, 2005
would include a net adjustment to Retained Earnings of
a. P130,000 b. P76,000 c. P184,000 d. P54,000

Suggested Solution:

Questions No. 1 to 3
Inventory Inventory
7/1/04 Purchases 6/30/05
Unadjusted balances P500,000 P3,600,000 P700,000
Add (deduct) adj.:
Item a 130,000 - -
Item b - (54,000) -
Item c - 186,000 186,000
Item d - - 74,000
Item e - -
Item f - 108,000 -
Net adjustments 130,000 240,000 260,000
Adjusted balances P630,000 P3,840,000 P960,000

Question No. 4
Inventory, July 1, 2004 P 630,000
Add Purchases 3,840,000
Total goods available for sale 4,470,000
Less Inventory, June 30, 2005 960,000
Cost of goods sold P3,510,000

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Question No. 5
Compound adjusting entry:
Inventory, 7/1/04 P130,000
Purchases 240,000
Inventory, 6/30/05 260,000
Retained earnings (P130,000 - P54,000) P76,000
Vouchers payable (P186,000 + P108,000) 294,000
Cost of sales 260,000

Answers: 1) C; 2) A; 3) D; 4) B, 5) B

PROBLEM NO. 5
The following accounts were included in the unadjusted trial balance of
Damondon Company as of December 31, 2005:
Cash P 481,600
Accounts receivable 1,127,000
Inventory 3,025,000
Accounts payable 2,100,500
Accrued expenses 215,500

During your audit, you noted that Damondon held its cash books open
after year-end. In addition, your audit revealed the following:
1. Receipts for January 2006 of P327,300 were recorded in the December
2005 cash receipts book. The receipts of P180,050 represent cash
sales and P147,250 represent collections from customers, net of 5%
cash discounts.
2. Accounts payable of P186,200 was paid in January 2006. The
payments, on which discounts of P6,200 were taken, were included in
the December 2005 check register.
3. 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,
2006. The related invoice was received and recorded on January 6,
2006. The goods were shipped on December 31, 2005, terms FOB
shipping point.

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c. Goods costing P318,750 were shipped on December 31, 2005, and
were delivered to the customer on January 3, 2006. The terms of
the invoice were FOB shipping point. The goods were included in
the 2005 ending inventory even though the sale was recorded in
2005.
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, 2006. The sale was properly recorded in 2006.
e. The invoice for goods costing P87,500 was received and recorded as
a purchase on December 31, 2005. The related goods, shipped
FOB destination were received on January 4, 2006, and thus were
not included in the physical inventory.
f. Goods valued at P306,400 are on consignment from a vendor.
These goods are not included in the physical inventory.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted
balances of the following as of December 31, 2005:
1. Cash
a. P481,600 b. P334,300 c. P340,500 d. P346,700

2. Accounts receivable
a. P1,454,300 b. P1,127,000 c. P1,282,000 d. P1,274,250

3. Inventory
a. P3,017,500 b. P2,930,000 c. P3,040,000 d. P2,505,000

4. Accounts payable
a. P2,395,450 b. P2,286,500 c. P2,307,950 d. P2,301,750

5. Current ratio
a. P2.00 b. P1.84 c. P1.83 d. P2.01

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Suggested Solution:

Questions No. 1 to 4
Accounts Accounts
Cash Receivable Inventory Payable
Unadjusted balances P481,600 P1,127,000 P3,025,000 P2,100,500
Add (deduct):
AJE No. 1 (327,300) 155,000 - -
AJE No. 2 180,000 - - 186,200
AJE No. 3.a - - 137,500 -
AJE No. 3.b - - 108,750 108,750
AJE No. 3.c - - (318,750) -
AJE No. 3.d - - 65,000 -
AJE No. 3.e - - - (87,500)
Adjusted balances P334,300 P1,282,000 P3,017,500 P2,307,950
Adjusting entries:
1) Accounts receivable (P147,250/.95) P155,000
Sales 180,050
Cash P327,300
Sales discount (P147,250/.95 x .05) 7,750
2) Cash P180,000
Purchase discount 6,200
Accounts payable P186,200
3.a) Inventory P137,500
Cost of sales P137,500
3.b) Inventory P108,750
Accounts payable P108,750
3.c) Cost of sales P318,750
Inventory P318,750
3.d) Inventory P 65,000
Cost of sales P 65,000
3.e) Accounts payable P 87,500
Cost of sales P 87,500
3.f) No adjusting entry

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Question No. 5
Current assets
Cash P 334,300
Accounts receivable 1,282,000
Inventory 3,017,500 P4,633,800
Divide by current liabilities
Accounts payable 2,307,950
Accrued expenses 215,500 2,523,450
Current ratio 1.84

Answers: 1) B; 2) C; 3) A; 4) C, 5) B

PROBLEM NO. 6
In conducting your audit of Manabat Corporation, a company engaged in
import and wholesale business, for the fiscal year ended June 30, 2005,
you determined that its internal control system was good. Accordingly, you
observed the physical inventory at an interim date, May 31, 2005 instead of
at June 30, 2005.

You obtained the following information from the companys general ledger.
Sales for eleven months ended May 31, 2005 P1,344,000
Sales for the fiscal year ended June 30, 2005 1,536,000
Purchases for eleven months ended May 31, 2005
(before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30, 2005 1,280,000
Inventory, July 1, 2004 140,000
Physical inventory, May 31, 2005 220,000

Your audit disclosed the following additional information.


(1) Shipments costing P12,000 were received in May and included in the
physical inventory but recorded as June purchases.
(2) Deposit of P4,000 made with vendor and charged to purchases in April
2005. Product was shipped in July 2005.
(3) 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:

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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:
1. The gross profit ratio for eleven months ended May 31, 2005 is
a. 20% b. 30% c. 35% d. 25%
2. The cost of goods sold during the month of June, 2005 using the gross
profit ratio method is
a. P132,000 b. P148,000 c. P144,000 d. P160,000
3. The June 30, 2005 inventory using the gross profit method is
a. P264,000 b. P268,000 c. P340,000 d. P260,000

Suggested Solution:

Question No. 1
Sales for 11 months
ended 5/31/05 P1,344,000
Less cost of sales for 11
months ended 5/31/05:
Inventory, July 1, 2004 P 140,000
Add adjusted purchases:
Unadjusted P1,080,000
Item no. 1 12,000
Item no. 2 (4,000) 1,088,000
Goods available for sale 1,228,000
Less inventory, 5/31/05 220,000 1,008,000
Gross profit 336,000
Divide by sales for 11 months
ended 5/31/05 1,344,000
Gross profit rate for 11
months ended 5/31/05 25%

Question No. 2
Sales for the fiscal year ended June 30, 2005 P1,536,000
Less sales for 11 months ended May 31, 2005 1,344,000
Sales for June, 2005 192,000
Less sales without profit 16,000
Sales with profit 176,000
Multiply by cost ratio (100% - 25%) 75%
Cost of sales with profit 132,0000
Add cost of sales without profit 16,000

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Total cost of sales for June, 2005 P 148,000

Question No. 3
Inventory, 7/1/04 P 140,000
Add adjusted purchases:
Unadjusted P1,280,000
Item no. 2 (4,000) 1,276,000
Total goods available for sale 1,416,000
Less cost of sales:
Sales without profit 16,000
Sales with profit
[(P1,536,000 - P16,000) x 75%] 1,140,000 1,156,000
Inventory, 6/30/05 P 260,000

Answers: 1) D; 2) B; 3) D

PROBLEM NO. 7
On March 31, 2005 Ibe Company had a fire which completely destroyed the
factory building and inventory of goods in process; some of the equipment
was saved.

After the fire, a physical inventory was taken. The material was valued at
P750,000 and the finished goods at P620,000.

The inventories on January 1, 2005 consisted of:


Materials P 310,000
Goods in process 1,215,000
Finished goods 1,700,000
Total P3,225,000

A review of the accounting records disclosed that the sales and gross profit
on sales for the last three years were:
Sales Gross profit
2002 P8,000,000 P2,400,000
2003 7,600,000 2,215,000
2004 5,000,000 1,776,000

The sales for the first three months of 2005 were P3,000,000. Material
purchases were P1,250,000, transportation on purchases was P100,000
and direct labor cost for the three months was P1,000,000. For the past
two years, factory overhead cost has been 80% of direct labor cost.

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QUESTIONS:
Based on the above and the result of your audit, compute the following:
1. The most likely gross profit rate to be used in estimating the inventory
of goods in process destroyed by fire
a. 31.55% b. 35.52% c. 32.76% d. 36.00%
2. Total cost of goods placed in process
a. P2,710,000 b. P3,925,000 c. P973,500 d. P4,375,000
3. Total cost of goods manufactured
a. P3,133,500 b. P854,400 c. P973,500 d. P3,014,400
4. Inventory of goods in process lost
a. P791,500 b. P119,100 c. P1,360,600 d. P2,951,500

Suggested Solution:

Question No. 1
2002 2003 2004
Gross profit P2,400,000 P2,215,000 P1,776,000
Divide by Sales P8,000,000 P7,600,000 P5,000,000
Gross profit rate 30.00% 29.14% 35.52%
Average gross profit rate 31.55%

Questions No. 2 to 4
Raw materials, 1/1/05 P 310,000
Purchases 1,250,000
Freight-in 100,000
Raw materials available for use 1,660,000
Raw materials, 3/31/05 (750,000)
Raw materials used 910,000
Direct labor 1,000,000
Factory overhead (P1,000,000 x 80%) 800,000
Total manufacturing cost 2,710,000
Work-in-process, 1/1/05 1,215,000
Total cost placed in process 3,925,000 (2)
Less work-in-process, 3/31/05 (squeeze) (2,951,500) (4)
Cost of goods manufactured 973,500 (3)
Finished goods, 1/1/05 1,700,000
Total goods available for sale 2,673,500
Less finished goods, 3/31/05 (620,000)
Cost of goods sold (P3,000,000 x 68.45%) P2,053,500

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Answers: 1) A; 2) B; 3) C; 4) D
PROBLEM NO. 8
Select the best answer for each of the following:
1. Otso Manufacturing Corporation mass produces eight different
products. The controller, who is interested in strengthening internal
controls over the accounting for materials used in production, would be
most likely to implement
a. A separation of duties among production personnel.
b. A perpetual inventory system.
c. An economic order quantity (EOQ) system.
d. A job order cost accounting system.

2. 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.

3. 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.

4. 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.

5. An auditor would analyze inventory turnover rates to obtain evidence


concerning managements assertion about
a. Valuation or allocation. c. Presentation and disclosure.
b. Rights and obligations. d. Completeness

6. In auditing inventories, a major objective relates to the existence


assertion. Of the following audit 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

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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.

7. 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.

8. 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.

9. 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.

10. You were engaged to conduct an annual examination for the fiscal year
ended October 31, 2005. Because of the expected holiday, you were able
to convince your client to take a complete physical inventory, in which
you were present on October 15. Perpetual inventory records are kept
and the client considers a sale to be made in the period in which goods
are shipped. You had a sales cut-off test worksheet prepared. Which
item among those listed below will not require an adjusting entry to
reconcile the client's detailed inventory record with the physical
inventory?
a. b. c. d.

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Date Goods Shipped Oct 31 Nov 2 Oct 14 Oct 10
Transaction Recorded as Sale Nov 2 Oct 31 Oct 16 Oct 19
Date Inventory Control Credited Oct 31 Oct 31 Oct 16 Oct 12

Answers: 1) B; 2) D; 3) C; 4) C, 5) A; 6) D; 7) A; 8) C; 9) C; 10) D

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