AUDITING PROBLEMS

AP.0101-Audit of Inventories MAY 2020

The Use of Assertions in Obtaining Audit Evidence

Assertions about classes of transactions and events for the period under
audit: (COCAC)

Completeness - all transactions and events that should have been recorded
have been recorded.

Occurrence - transactions and events that have been recorded have occurred
and pertain to the entity.

Classification - transactions and events have been recorded in the proper

accounts.

Accuracy - amounts and other data relating to recorded transactions and

events have been recorded appropriately.

Cutoff - transactions and events have been recorded in the correct accounting
period.

Assertions about account balances at the period end: (RECV)

Rights and obligations - the entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.

Existence - assets, liabilities, and equity interests exist.

Completeness - all assets, liabilities and equity interests that should have
been recorded have been recorded.

Valuation and allocation - assets, liabilities, and equity interests are included
in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded.

Assertions about presentation and disclosure: (COCA)

Completeness - all disclosures that should have been included in the financial
statements have been included.

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Occurrence and rights and obligations - disclosed events, transactions, and
other matters have occurred and pertain to the entity.

Classification and understandability - financial information is appropriately

presented and described, and disclosures are clearly expressed.

Accuracy and valuation - financial and other information are disclosed fairly
and at appropriate amounts.

INTERNAL CONTROL MEASURES

1. Authority and responsibility for controlling the inventories should be

centralized management and in one person.

2. There should be careful selection of inventory personnel and intensive

training of such personnel in policies, objectives and system of inventory
control.

3. Adequate physical facilities for handling and storage of inventory should be

provided.

4. Adequate system of procedures, forms and reports related to the

management of inventories should be developed and implemented.

5. Quantitative controls through perpetual inventory records; book quantities

verified with physical counts at least once a year and differences being
investigated, promptly adjusted and reported to higher authority should be
implemented.

6. Deliveries of materials, finished stock and merchandise should be made

only upon specific authorizations emanating at authorized levels.

7. Slow-moving, obsolete and damaged stock should be identified and

reported following periodic reviews of physical and book records by
qualified employees. Valuation on the basis of approved cost-mark-down
methods should be reviewed.

8. Safeguards against that action of the element and inaccuracies in recording

receipts and issues should be adopted. Example – Maintaining adequate
insurance coverage.

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 SUBSTANTIVE AUDIT OF INVENTORIES

Inventory Balances

Existence: Recorded inventory exist

1. Before the client takes the physical inventory, review and approve the
client’s written plan for taking it.

2. Observe the client personnel physically counting inventory.

3. Confirm inventories on consignment and held in public warehouses.

Completeness: All inventory of the entity recorded

4. Obtain a copy of pre-numbered inventory tags used by the client in taking

inventory and reconcile the tags to the listing.

5. For selected items, trace from tags to listing.

6. Perform cutoff procedures. Obtain the receiving report number for the last
shipment received prior to year-end and determine that the item is
included in inventory. Also, identify the last shipping document and
determine, based on shipping terms, whether the item was properly
recorded in sales or inventory.

7. Perform analytical procedures.

Rights and obligations: Inventory is owned by the entity

8. Determine that consigned inventory has been excluded from inventory and
that inventory pledged has been properly disclosed. Examine confirmations
from financial institutions and read minutes of the board of directors’
meetings.

Valuation and allocation: Recorded inventory is valued in accordance with

GAAP

9. Considering the method the client uses for inventory valuation, examine
invoices for inventory on hand or trace prior year’s inventory listing to
verify cost.

10. For selected items, determine net realizable value (NRV) of the inventory
and apply the lower of cost or NRV.

11. Verify computations in the inventory listing.

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12. Review the obsolescence of the inventory by:
a. being alert while observing inventory being taken for damaged, slow-
moving, or scrap inventory.
b. Scanning perpetual records for slow-moving items and discussing their
valuation with client.

Presentation and disclosure: Inventory is classified and disclosed in

accordance with GAAP

13. Determine whether accounts are classified and disclosed in the financial
statements in accordance with GAAP.

Purchases

Completeness: Purchases that occurred are recorded

Trace a sequence of receiving reports to entries in the voucher register. Test

cutoff. Account for a sequence of entries in the voucher register.

Occurrence: Recorded purchases are for items that were acquired

Examine underlying documents for authenticity and reasonableness. Scan

voucher register for large or unusual items. Trace inventory purchased to
perpetual records. Scan voucher register for duplicate payments.

Classification: Purchase transactions have been recorded in the proper

accounts

For a sample of entries in the purchases journal, verify the accuracy of

account coding.

Accuracy (Valuation): Purchases are recorded at proper amounts

Recompute invoices and compare invoice price to purchase order.

Production

Completeness: All production transactions that occurred are recorded

Account for a sequence for production reports.

Occurrence: Recorded production transactions occurred

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For selected transactions, examine signed materials requisitions, approved
labor tickets, and allocation of overhead.
Classification: Production transactions have been recorded in the proper
accounts

For a sample of entries, verify the accuracy of account coding.

Accuracy (Valuation): Production transactions are recorded at proper

amounts

Test cost records by tracing to underlying documents, such as bill of

materials, labor tickets, authorized labor rates, and standard overhead rates.
Review variances.
- end -

PROBLEM NO. 1

Pasay Company, a manufacturer of small tools, provided the following

information from its accounting records for the year ended December 31,
2017:

Inventory at December 31, 2017 (based on physical count

on Dec. 31, 2017) P1,290,000
Accounts payable at December 31, 2017 876,000
Net sales (sales less sales returns) 8,087,000

Additional information follows:

a. Parts held on consignment from Anito to Pasay amounting to P9,000, were

included in the physical count of goods in Pasay’s warehouse on December
31, 2017, and in accounts payable at December 31, 2017.

b. Retailers were holding P50,000, at cost, of goods on consignment from

Pasay, at their stores on December 31, 2017.

c. Included in the physical count were tools billed to a customer FOB shipping
point on December 31, 2017. These tools had a cost of P31,000 and were
billed at P40,000. The shipment was on Pasay’s loading dock waiting to be
picked up by the common carrier.

d. P15,000 worth of parts which were purchased from Sogo and paid for in
December 2017 were sold in the last week of 2017 and appropriately
recorded as sales of P21,000. The parts were included in the physical
count on December 31, 2017, because the parts were on the loading dock
waiting to be picked up by the customer.

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e. Goods were in transit from a vendor to Pasay on December 31, 2017. The
invoice cost was P71,000, and the goods were shipped FOB shipping point
on December 29, 2017.

f. Work in process inventory costing P30,000 was sent to an outside

processor for plating on December 30, 2017.

g. Tools returned by customers and held pending inspection in the returned

goods area on December 31, 2017, were not included in the physical count.
On January 8, 2018, the tools costing P32,000 were inspected and returned
to inventory. Credit memos totaling P47,000 were issued to the customers
on the same date.

h. Tools shipped to a customer FOB destination on December 26, 2017, were

in transit at December 31, 2017, and had a cost of P21,000. Upon
notification of receipt by the customer on January 2, 2018, Pasay issued a
sales invoice for P42,000.

i. Goods, with an invoice cost of P27,000, received from a vendor at 5:00

p.m. on December 31, 2017, were recorded on a receiving report dated
January 2, 2018. The goods were not included in the physical count, but
the invoice was included in accounts payable at December 31, 2017.

j. Goods received from a vendor on December 26, 2017, were included in the
physical count. However, the related P56,000 vendor invoice was not
included in accounts payable at December 31, 2017, because the accounts
payable copy of the receiving report was lost.

k. On January 3, 2018, a monthly freight bill in the amount of P6,000 was

received. The bill specifically related to merchandise purchased in
December 2017, one-half of which was still in the inventory at December
31, 2017. The freight charges were not included in either the inventory or
accounts payable at December 31, 2017.

REQUIRED:

Determine the adjusted amounts of:

a. Inventory as of December 31, 2017
b. Accounts Payable as of December 31, 2017
c. Net sales for the year 2017

PROBLEM NO. 2

Makati Company is preparing its 2017 financial statements. Prior to any

adjustments, inventory is valued at P1,605,000. During your audit, you
found the following information relating to certain inventory transactions from
your cutoff test.

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a. Goods valued at P110,000 are on consignment with a customer. These
goods were not included in the ending inventory figure.

b. Goods costing P87,000 were received from a vendor on January 5, 2018.

The related invoice was received and recorded on January 12, 2018. The
goods were shipped on December 31, 2017, terms FOB shipping point.

c. Goods costing P85,000, sold for P102,000, were shipped on December 31,
2017, and were delivered to the customer on January 2, 2018. The terms
of the invoice were FOB shipping point. The goods were included in the
ending inventory for 2017 and the sale was recorded in 2018.

d. A P35,000 shipment of goods to a customer on December 31, terms FOB

destination was not included in the year-end inventory. The goods cost
P26,000 and were delivered to the customer on January 8, 2018. The sale
was properly recorded in 2018.

e. The invoice for goods costing P35,000 was received and recorded as a
purchase on December 31, 2017. The related goods, shipped FOB
destination were received on January 2, 2018, and thus were not included
in the physical inventory.

f. Goods valued at P154,000 are on consignment from a vendor. These

goods are not included in the physical inventory.

g. A P60,000 shipment of goods to a customer on December 30, 2017, terms

FOB destination, was recorded as a sale upon shipment. The goods,
costing P37,000 and delivered to the customer on January 6, 2018, were
not included in the 2017 ending inventory.

REQUIRED:

1. Compute the proper inventory amount to be reported on Makati’s balance

sheet for the year ended December 31, 2017.

2. By how much would the profit or loss have been misstated if no

adjustments were made for the above transactions? (Disregard tax
implications)

PROBLEM NO. 3

You were engaged to perform an audit of the accounts of the Manila

Company for the year ended December 31, 2017, and you observed the
taking of the physical inventory of the company on December 30, 2017. Only
merchandise shipped by the company to customers up to and including
December 30, 2017 have been eliminated from inventory. The inventory as
determined by physical inventory count has been recorded on the books by

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the company’s controller. No perpetual inventory records are maintained. All
sales are made on an FOB shipping point basis. You are to assume that all
purchase invoices have been correctly recorded. The inventory was recorded
through the cost of sales method.

The following lists of sales invoices are entered in the sales books for the
month of December 2017 and January 2018, respectively.

DECEMBER 2017
Sales Sales
invoice amount invoice date Cost Date shipped
a) P150,000 Dec. 21 P100,000 Dec. 31, 2017
b) 100,000 Dec. 31 40,000 Nov. 03, 2017
c) 50,000 Dec. 29 30,000 Dec. 30, 2017
d) 200,000 Dec. 31 120,000 Jan. 03, 2018
e) 500,000 Dec. 30 280,000 Dec. 29, 2017
(shipped to consignee)
JANUARY 2018
f) P300,000 Dec. 31 P200,000 Dec. 30, 2017
g) 200,000 Jan. 02 115,000 Jan. 02, 2018
h) 400,000 Jan. 03 275,000 Dec. 31, 2017

REQUIRED:

Prepare the necessary adjusting entries at December 31, 2017.

PROBLEM NO. 4

Your client, Mandaluyong Company, is an importer and wholesaler. Its

merchandise is purchased from several suppliers and is warehoused until sold
to customers.

In conducting your audit for the year ended December 31, 2017, you were
satisfied that the system of internal control was good. Accordingly, you
observed the physical inventory at an interim date, November 30, 2017
instead of at year end. You obtained the following information from your
client’s general ledger:

Inventory, January 1, 2017 P 1,312,500

Physical inventory, November 30, 2017 1,425,000
Sales for 11 months ended Nov. 30, 2017 12,600,000
Sales for the year ended Dec. 31, 2017 14,400,000
Purchases for 11 months ended Nov. 30, 2017 (before audit
adjustments) 10,125,000
Purchases for the year ended Dec. 31, 2017 (before audit
adjustments) 12,000,000

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Your audit disclosed the following information:

a) Shipments received in November and included in the

physical inventory but recorded as December purchases. P 112,500
b) Shipments received in unsalable condition and excluded
from physical inventory. Credit memos had not been
received nor chargebacks to vendors been recorded:
Total at November 30, 2017 15,000
Total at December 31, 2017 (including the November
unrecorded chargebacks) 22,500
c) Deposit made with vendor and charged to purchases in
October, 2017. Product was shipped in January, 2018. 30,000
d) Deposit made with vendor and charged to purchases in
November, 2017. Product was shipped FOB destination,
on November 29, 2017 and was included in November
30, 2017 physical inventory as goods in transit. 82,500
e) Through the carelessness of the receiving department
shipment in early December 2017 was damaged by rain.
This shipment was later sold in the last week of
December at cost. 150,000

REQUIRED:

1. Gross profit rate for 11 months ended November 30, 2017.

2. Cost of goods sold during the month of December 2017 using the gross
profit method.
3. December 31, 2017 inventory using the gross profit method.

PROBLEM NO. 5

On April 21, 2017, a fire damaged the office and warehouse of Muntinlupa
Company. The only accounting record saved was the general ledger, from
which the trial balance below was prepared.

Muntinlupa Company
Trial Balance
March 31, 2017
DEBIT CREDIT
Cash P 180,000
Accounts receivable 400,000
Inventory, Dec. 31, 2016 750,000
Land 350,000
Building 1,100,000
Acc. depreciation P 413,000
Other assets 56,000
Accounts payable 237,000
Accrued expenses 180,000

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 DEBIT CREDIT
Share capital, P100 par 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 344,000 .
Totals P3,700,000 P3,700,000

The following data and information have been gathered:

a. The company’s year-end is December 31.

b. An examination of the April bank statement and cancelled checks revealed

that checks written during the period April 1 to 21 totaled P130,000:
P57,000 paid to accounts payable as of March 31, P34,000 for April
merchandise purchases, and P39,000 paid for other expenses. Deposits
during the same period amounted to P129,500, which consisted of receipts
on account from customers with the exception of a P9,500 refund from a
vendor for merchandise returned in April.

c. Correspondence with suppliers revealed unrecorded obligations at April 21

of P106,000 for April merchandise purchases, including P23,000 for
shipments in transit on that date.

d. Customers acknowledged indebtedness of P360,000 at April 21, 2017. It

was also estimated that customers owed another P80,000 that will never
be acknowledged or recovered. Of the acknowledged indebtedness, P6,000
will probably be uncollectible.

e. The insurance company agreed that the fire loss claim should be based on
the assumption that the overall gross profit ratio for the past two years was
in effect during the current year. The company’s audited financial
statements disclosed the following information:

2016 2015
Net sales P5,300,000 P3,900,000
Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 750,000 500,000

f. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The
balance of the inventory was a total loss.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

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1. How much is the adjusted balance of Accounts Receivable as of April 21,
2017?
a. P400,000 c. P360,000
b. P440,000 d. P354,000

2. How much is the sales for the period January 1 to April 21, 2017?
a. P1,430,000 c. P1,510,000
b. P1,519,500 d. P1,506,000

3. How much is the adjusted balance of Accounts Payable as of April 21,

2017?
a. P286,000 c. P237,000
b. P106,000 d. P343,000

4. How much is the net purchases for the period January 1 to April 21, 2017?
a. P650,500 c. P660,000
b. P673,500 d. P683,000

5. How much is the cost of sales for the period January 1 to April 21, 2017?
a. P786,500 c. P830,500
b. P835,725 d. P828,300

6. How much is the estimated inventory on April 21, 2017?

a. P570,000 c. P623,500
b. P587,775 d. P579,500

7. How much is the estimated inventory fire loss?

a. P579,500 c. P535,000
b. P477,000 d. P512,000

PROBLEM NO. 6
You are engaged in the regular annual examination of the accounts and
records of Valenzuela Manufacturing Co. for the year ended December 31,
2017. To reduce the workload at year end, the company, upon your
recommendation, took its annual physical inventory on November 30, 2017.
You observed the taking of the inventory and made tests of the inventory
count and the inventory records.
The company’s inventory account, which includes raw materials and work-in-
process is on perpetual basis. Inventories are valued at cost, first-in, first-out
method. There is no finished goods inventory.
The company’s physical inventory revealed that the book inventory of
P1,695,960 was understated by P84,000. To avoid delay in completing its
monthly financial statements, the company decided not to adjust the book
inventory until year-end except for obsolete inventory items.

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Your examination disclosed the following information regarding the November
30 inventory:
a. Pricing tests showed that the physical inventory was overstated by
P61,600.
b. An understatement of the physical inventory by P4,200 due to errors in
footings and extensions.
c. Direct labor included in the inventory amounted to P280,000. Overhead
was included at the rate of 200% of direct labor. You have ascertained
that the amount of direct labor was correct and that the overhead rate was
proper.
d. The physical inventory included obsolete materials with a total cost of
P7,000. During December, the obsolete materials were written off by a
charge to cost of sales.
Your audit also disclosed the following information about the December 31
inventory:
a. Total debits to the following accounts during December were:
Cost of sales P1,920,800
Direct labor 338,800
Purchases 691,600
b. The cost of sales of P1,920,800 included direct labor of P386,400.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Adjusted amount of physical inventory at November 30, 2017
a. P1,715,560 c. P1,845,760
b. P1,631,560 d. P1,722,560
2. Adjusted amount of inventory at December 31, 2017
a. P1,509,760 c. P1,502,760
b. P1,516,760 d. P1,425,760
3. Cost of materials on hand, and materials included in work in process as of
December 31, 2017
a. P819,560 c. P728,560
b. P812,560 d. P942,760
4. The amount of direct labor included in work in process as of December 31,
2017
a. P618,800 c. P338,800
b. P232,400 d. P386,400
5. The amount of factory overhead included in work in process as of
December 31, 2017
a. P 772,800 c. P464,800
b. P1,237,600 d. P777,600

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PROBLEM NO. 7

Select the best answer for each of the following:

1. Which of the following is not one of the independent auditor's objectives
regarding the audit of inventories?
a. Verifying that inventory counted is owned by the client.
b. Verifying that the client has used proper inventory pricing.
c. Ascertaining the physical quantities of inventory on hand.
d. Verifying that all inventory owned by the client is on hand at the time of
the count.
2. Which of the following audit procedures probably provides the most reliable
evidence concerning the entity’s assertion of rights and obligations related
to inventories?
a. Trace test counts noted during the entity’s physical count to the entity’s
summarization of quantities.
b. Inspect agreements to determine whether any inventory is pledged as
collateral or subject to any liens.
c. Select the last few shipping advices used before the physical count and
determine whether shipments were recorded as sales.
d. Inspect the open purchase order file for significant commitments that
should be considered for disclosure.
3. An auditor is most likely to inspect loan agreements under which an
entity’s inventories are pledged to support management’s financial
statement assertion of
a. Existence or occurrence.
b. Completeness.
c. Presentation and disclosure.
d. Valuation or allocation.
4. An auditor selected items for test counts while observing a client’s physical
inventory. The auditor then traced the test counts to the client’s inventory
listing. This procedure most likely obtained evidence concerning
a. Existence. c. Rights.
b. Completeness. d. Valuation.
5. Periodic cycle counts of selected inventory items are made at various times
during the year rather than a single inventory count at year-end. Which of
the following is necessary if the auditor plans to observe inventories at
interim dates?
a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are maintained.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.
6. A client maintains perpetual inventory records in both quantities and pesos.
If the assessed level of control risk is high an auditor will probably

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 a. Apply gross profit tests to ascertain the reasonableness of the physical
counts.
b. Increase the extent of tests of controls relevant to the inventory cycle.
c. Request the client to schedule the physical inventory count at the end of
the year.
d. Insist that the client perform physical counts of inventory items several
times during the year.

7. If the perpetual inventory records show lower quantities of inventory that

the physical count an explanation of the difference might be unrecorded
a. Sales. c. Purchases.
b. Purchase returns. d. Purchase discounts.

8. The physical count of inventory of a retailer was higher than shown by the
perpetual records. Which of the following could explain the difference?
a. Inventory item has been counted but the tags placed on the items had
not been taken off the items and added to the inventory accumulation
sheets.
b. Credit memos for several items returned by customers had not been
recorded.
c. No journal entry had been made on the retailer’s books for several items
returned to its suppliers.
d. An item purchased “FOB shipping point” had not arrived at the date of
the inventory count and had not been reflected in the perpetual records.

9. An auditor is most likely to learn of slow-moving inventory through

a. Inquiry of sales personnel
b. Inquiry of warehouse personnel
c. Physical observation of inventory
d. Review of perpetual inventory records.

10. Purchase cut-off procedures should be designed to test whether all

inventory
a. Purchased and received before year-end was paid for.
b. Ordered before year-end was received.
c. Purchased and received before year-end was recorded.
d. Owned by the company is in the possession of the company at year-end.

11. The audit of year-end inventories should include steps to verify that the
client’s purchases and sales cutoffs were adequate. These audit steps
should be designed to detect whether merchandise included in the physical
count at year-end was not recorded as a
a. Sale in the subsequent period
b. Purchase in the current period
c. Sale in the current period
d. Purchase in the subsequent period

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12. An auditor’s observation of physical inventories at the main plant at
year-end provides direct evidence to support which of the following
objectives?
a. Accuracy of the priced-out inventory.
b. Evaluation of lower of cost or market test.
c. Identification of obsolete or damaged merchandise to evaluate allowance
(reserve) for obsolescence.
d. Determination of goods on consignment at another location.

13. What form of analytical review might uncover the existence of obsolete
merchandise?
a. Inventory turnover rates.
b. Decrease in the ratio of gross profit to sales.
c. Ratio of inventory to accounts payable.
d. Comparison of inventory values to purchase invoices.

14. The auditor tests the quantity of materials charged to work in process by
tracing these quantities to
a. Cost ledgers.
b. Perpetual inventory records.
c. Receiving reports.
d. Material requisitions.

- now do your STD-

AUDITING PROBLEM APTITUDE TEST (APAT) 1

PROBLEM NO. 1

Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery
stores. The company operates a perpetual inventory system, with the first-in,
first-out method used to assign costs to inventory items. Transactions and
other related information regarding two of the items (baked beans and plain
flour) carried by Jay Roy Ltd are given below for June 2017 the last month of
the company's reporting period.

Baked beans Plain flour

Unit of packaging Case containing 25 x 410g Box containing 12 x 4kg
cans bags
Inventory @ 1 35,000 cases @ P19.60 62,500 boxes @ P38.40
June 2017
Purchases 1. 10 June: 20,000 cases @ 1. 3 June: 15,000 boxes @
P19.50 per case P38.45
2. 19 June: 47,000 cases @ 2. 15 June: 20,000 boxes @
P19.70 per case P38.45
3. 29 June: 24,000 boxes @
P39.00

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 Baked beans Plain flour
Purchase terms 2/10, n/30, FOB destination n/30, FOB destination
June sales 73,000 cases @ P28.50 95,000 boxes @ 40.00
Returns and A customer returned 5,000 As June 15 purchase was
allowances cases that had been shipped unloaded, 1,000 boxes were
in error. The customer's discovered damaged. A
account was credited for credit of P38,450 was
P142,500. received by Jay Roy
Retailing Ltd.
Physical count at
30 June 2017 32,600 cases on hand 1,500 boxes on hand
Explanation of No explanation found Boxes purchased on 29 June
variance assumed stolen still in transit on 30 June
Net realizable
value at 30 P29.00 per case P38.50 per box
June 2017

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The inventory of baked beans as of June 30, 2017 at cost, as adjusted is

a. P641,860 c. P642,360
b. P642,220 d. P641,360

2. The inventory of plain flour as of June 30, 2017 at cost, as adjusted is

a. P134,575 c. P57,675
b. P993,675 d. P57,725

3. The amount of inventory shortage is

a. P27,440 c. P168,560
b. P27,580 d. P 0

4. The total inventory to be recognized in the balance sheet as of June 30,

2017 is
a. P699,895 c. P 699,535
b. P700,035 d. P1,623,970

5. Which of the following is the best procedure for identifying shortages of

specific items in an inventory of raw materials?
a. Compare the results of a physical inventory of raw materials with
perpetual inventory records.
b. Compare inventory turnover rates with prevailing rates from previous
years.
c. Estimates inventory quantities by using the gross profit method.
d. Review internal controls for the physical protection of inventories.

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PROBLEM NO. 2

The Bolinao Company values its inventory at the lower of FIFO cost or net
realizable value (NRV). The inventory accounts at December 31, 2016, had
the following balances.

Raw materials P 650,000

Work in process 1,200,000
Finished goods 1,640,000

The following are some of the transactions that affected the inventory of the
Bolinao Company during 2017.

Jan. 8 Bolinao purchased raw materials with a list price of P200,000

and was given a trade discount of 20% and 10%; terms 2/15,
n/30. Bolinao values inventory at the net invoice price

Feb. 14 Bolinao repossessed an inventory item from a customer who

was overdue in making payment. The unpaid balance on the
sale is P15,200. The repossessed merchandise is to be
refinished and placed on sale. It is expected that the item can
be sold for P24,000 after estimated refinishing costs of P6,800.
The normal profit for this item is considered to be P3,200.

Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed

item.

Apr. 3 The repossessed item was resold for P24,000 on account, 20%
down.

Aug. 30 A sale on account was made of finished goods that have a list
price of P59,200 and a cost P38,400. A reduction of P8,000 off
the list price was granted as a trade-in allowance. The trade-
in item is to be priced to sell at P6,400 as is. The normal profit
on this type of inventory is 25% of the sales price.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Assume the client is using perpetual inventory system)
6. The entry on Jan. 8 will include a debit to Raw Materials Inventory of
a. P200,000 c. P141,120
b. P144,000 d. P196,000
7. The repossessed inventory on Feb. 14 is most likely to be valued at
a. P14,000 c. P17,200
b. P24,000 d. P14,400

Page 17 of 20 AP.0101
8. The journal entries on April 3 will include a
a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of P14,000.
c. Credit to Profit on Sale of Repossessed Inventory of P3,600.
d. Credit to Repossessed Inventory of P20,400.

9. The trade-in inventory on Aug. 30 is most likely to be valued at

a. P8,000 c. P6,000
b. P4,800 d. P6,400

10. How much will be recorded as Sales on Aug. 30?

a. P51,200 c. P57,200
b. P56,000 d. P57,600

PROBLEM NO. 3

Pateros Company engaged you to examine its books and records for the
fiscal year ended June 30, 2017. The company’s accountant has furnished
you not only the copy of trial balance as of June 30, 2017 but also the copy of
company’s 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, 2016 P 125,000

Purchases 900,000
Goods available for sale 1,025,000
Inventory, June 30, 2017 175,000
Cost of goods sold P850,000

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, 2016

a. June invoices totaling to P32,500 were entered in the voucher register in

June. The corresponding goods not received until July.
b. Invoices totaling P13,500 were entered in the voucher register in July but
the goods received during June.

June 30, 2017

Page 18 of 20 AP.0101
c. Invoices with an aggregate value of P46,500 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 P18,500 were entered in the voucher register in June
but the goods were not received until July.
e. Invoices totaling P27,000 ( the corresponding goods for which were
received in June) were entered the voucher register, July.
f. Sales on account in the total amount of P44,000 were made on June 30
and the goods delivered at that time. However, book entries relating to the
sales were made in July.

QUESTIONS:

Based on the above and the result of your cut-off tests, answer the following:

11. How much is the adjusted Purchases for the fiscal year ended June 30,
2017?
a. P973,500 c. P960,000
b. P900,000 d. P978,500

12. How much is the adjusted Inventory as of June 30, 2017?

a. P196,000 c. P223,000
b. P240,000 d. P125,000

13. How much is the adjusted Cost of goods sold for the fiscal year ended
June 30, 2017?
a. P877,500 c. P829,000
b. P992,500 d. P891,000

14. An auditor usually examines receiving reports to support entries in the

a. Voucher register and sales returns journal.
b. Sales journal and sales returns journal.
c. Voucher register and sales journal.
d. Check register and sales journal.

15. Which one of the following audit procedures would give the least
assurance regarding valuation of inventory?
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.

 - end of AP.0101 - 

Page 19 of 20 AP.0101
 AUDIT PROCEDURES APTITUDE TEST 1 (APAT) 1
ANSWER SHEET

NAME: _____________________________________SCORE: _____ ___%

CONTACT DETAILS:  _________________________________________

THEORETICAL DRILL

01. 11. 21. 31.

02. 12. 22. 32.
03. 13. 23. 33.
04. 14. 24. 34.
05. 15. 25. 35.
06. 16. 26. 36.
07. 17. 27. 37.
08. 18. 28. 38.
09. 19. 29. 39.
10. 20. 30. 40.

-------------------------------------------------------Tear or cut here------------

AUDITING PROBLEMS APTITUDE TEST (APAT) 1

ANSWER SHEET

NAME: _____________________________________SCORE: _____ ___%

CONTACT DETAILS:  _________________________________________

PROBLEM SOLVING DRILL

01. 11.
02. 12.
03. 13.
04. 14.
05. 15.
06. 16.
07. 17.
08. 18.
09. 19.
10. 20.

Page 20 of 20 AP.0101