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1. Before the client takes the physical inventory, review and approve the client’s written plan
for taking it.
1. Obtain a copy of pre-numbered inventory tags used by the client in taking inventory and
reconcile the tags to the listing.
3. Perform cutoff procedures. Obtain the receiving report number of 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.
1. 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
1. 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.
2. For selected items, determine net realizable value (NRV) of the inventory and apply the
lower cost or NRV.
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.
1. Determine whether accounts are classified and disclosed in the financial statements in
accordance with GAAP.
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.
Trace a sequence of receiving reports to entries in the voucher register. Test cutoff. Account for
a sequence of entries in the voucher register.
For a sample of entries in the purchases journal, verify the accuracy of account coding.
For selected transactions, examine signed material requisitions, approved labor tickets, and
allocation of overhead.
For a sample of entries in the purchases journal, verify the accuracy of account coding.
Test cost records by tracing to underlying documents such as bills of materials, labor tickets,
authorized labor rates, and standard overhead rates. Review variances.
Illustrative cases:
Case No.1
Ball Company’s inventory at December 31, 2019 was P1,500,000 based on a physical count of goods
priced at cost, and before any necessary year-end adjustment relating to the following:
1. Included in the physical count were goods billed to a customer F.O.B shipping point on
December 31, 2019. These goods had a cost of P30,000 and were picked up by the carrier on
January 10, 2020.
2. Goods shipped F.O.B shipping point on December 28, 2019, from a vendor to Ball were received
on January 4, 2020. The invoice cost was P50,000.
As auditor of Ball Company, compute the adjusted balance of Inventory on December 31, 2019 and
prepare the proposed adjusting entries.
Answer:
Case No. 2
Mindoro Auto Parts sells new parts for foreign automobiles to auto dealers. Company policy
requires that a prenumbered shipping document be issued for each sale. At the time of pick up or
shipment, the shipping clerk writes the date on the shipping document. The last shipment made in the
fiscal year ended August 31, 2020, was recorded on document 2167. Shipments are billed in the order
the billing clerk receives the shipping documents.
For late August and early September, shipping documents are billed on sales invoices as follows:
The August and September sales journal have the following information included:
30 4326 P 726.11
30 4329 P1,914.30
31 4327 P 419.83
31 4328 P 620.22
31 4330 P 47.74
1 4331 P 2,641.31
1 4332 P 106.39
1 4333 P 852.06
2 4335 P 1,250.50
2 4334 P 646.58
Required:
1. Which sales invoice, if any, are recorded in the wrong accounting period, assuming a periodic
inventory? Prepare an adjusting journal entry to correct the financial statement for the year
ended August 31, 2020.
2. How much is the sales and inventory for the year ended August 31, 2020 assuming the
unadjusted balance of Sales is P320,000 and unadjusted balance of inventory is P150,000,
assuming sales are recorded for 130% of cost.
Answer:
Sales Invoice No. Shipping Document No. Error in Sales Cutoff Overstatement or
Understatement of
August 31 Sales
4326 2164 None
4329 2169 P 1,914.30 Overstatement
4327 2165 None
Case No. 3
The management of Maligaya Company has engaged you to assist in the preparation of year-end
(December 31, 2019) financial statements. You are told that on November 30, the correct inventory
level was 150,000 units. During the month of December, sales totalled 50,000 units including the 25,000
units shipped on consignment to Tower Company. A letter received from Tower indicates that as of
December 31, it had sold 12,000 units and was still trying to sell the remainder. A review of the
December purchase orders, to various suppliers, shows the following:
Maligaya Company uses the “passing of legal title” for inventory recognition.
Required: Determine the number of units which should be included in the inventory as of December 31,
2019.
Solution:
Add: Purchases
Case No. 4
Detdet Company uses the retail inventory method to estimate its inventory for interim
statement purposes. Data relating to the computation of the inventory at July 31, 2020, are as follows:
Cost Retail
Inventory Beginning P70,000 P110,000
Purchases 350,000 500,000
Additional mark-ups 90,000
Sales 600,000
Estimated normal shoplifting losses 10,000
Under the approximately lower of average cost or market retail method, how much is the estimated
inventory of Detdet Company at July 31, 2020?
Solution:
Cost Retail
Inventory Beginning P70,000 P110,000
Purchases 350,000 500,000
Additional mark-ups 90,000
Total P420,000 P700,000
Cost Ratio = P420,000/P700,000 = 60%
Less: Sales 600,000
Estimated normal shoplifting losses 10,000
Inventory 7/31/2020, at retail P 90,000
Inventory 7/31/2020, at cost (P90,000 x 60%) P 54,000
Case No. 5
The gross margin is 40% of net sales. What is the cost of goods available for sale?
Solution:
Net Sales P 1,800,000
Cost Ratio 60%
Cost of Goods Sold P 1,080,000
Add: Ending inventory 120,000
Cost of Goods Available for Sales P 1,200,000
Case No. 6
You were assigned to audit the factory accounts of D. Silang Gear Manufacturing Corporation for
the year ended December 31, 2019. The following data were gathered: Manufacturing cost totalled
P900,000. Cost of goods manufactured was P800,000 of which factory overhead was 75% of direct labor.
Overhead was 25% of total manufacturing cost. Beginning work-in-process inventory January 1 was 60%
of ending work-in-process inventory, December 31, 2019.
Manufacturing costs for the year ended December 31, 2019 submitted to you by the factory
accountant were as follows:
Raw materials used P 400,000
Direct Labor 275,000
Factory Overhead 225,000
Total P1,850,000
Solution:
Per client Per audit (Over) Under
1. Raw materials used P 400,000 P 375,000 (P25,000)
Direct Labor 275,000 300,000 25,000
Factory Overhead 225,000 225,000 -
Total P 900,000 P 900,000 -
Computations: