AUDITING PROBLEMS Review Class

AUDIT OF INVENTORIES

CAIMAN, INC

CAIMAN, INC. uses a perpetual inventory system and reports inventory at the lower of FIFO cost
or net realizable value. Caiman’s inventory control account balance at June 30, 2021, was
P221,020. A physical count conducted on that day found inventory on hand worth P220,200.
Net realizable value for each inventory item held for sale exceeded cost. An investigation of the
discrepancy disclosed the following:

1. Goods worth P6,600 held on consignment for Bugok Co. had been included in the physical
count.

2. Goods costing P1,200 were purchased on credit from Amor Co. on June 27, 2021, on FOB
shipping point terms. The goods were shipped on June 28, 2021, but, as they had not arrived
by June 30, 2021, were not included in the physical count. The purchase invoice was received
and processed on June 30, 2021.

3. Goods costing P2,400 were sold on credit to Acero Co. for P3,900 on June 28, 2021, on FOB
destination terms. The goods were still in transit on June 30, 2021. The sales invoice was
processed and recorded on June 29, 2021.

4. Goods costing P2,730 were purchased on credit (FOB destination) from San Miguel Co. on
June 28, 2021. The goods were received on June 29, 2021, and included in the physical
count. The purchase invoice was received on July 2, 2021.

5. On June 30, 2021, Caiman sold goods costing P6,300 on credit (FOB shipping point) terms to
Pisaro Corp. for P9,600. The goods were dispatched from the warehouse on June 30, 2021,
but the sales invoice had not been processed at that date.

6. Damaged inventory items valued at P2,650 were discovered during the physical count. These
items were still recorded on June 30, 2021, but were omitted from the physical count records
pending their write-off.

Questions:

1. What is the adjusted inventory balance on June 30, 2021?

A. P212,400 C. P222,500
B. P210,600 D. P217,200

2. What adjustment should be made to Caiman’s sales revenue for the year ended June 30,
2021?
A. Net increase of P5,700
B. Net decrease of P5,700
C. Increase of P9,600
D. Decrease of P3,900

3. Caiman’s accounts payable at June 30, 2021, should be

A. Decreased by P2,730
B. Increased by P2,730
C. Decreased by P2,650
D. Increased by P80

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4. The “unlocated difference” between the perpetual balance and the physical count amounts to
A. P2,650 C. P820
B. P80 D. P 0

5. The entry to correct the error described in item no. 2 is

A. Purchases 1,200
Accounts payable 1,200
B. Inventory 1,200
Accounts payable 1,200
C. Inventory 1,200
Cost of sales 1,200
D. No adjusting entry is necessary.

MUNTINLUPA COMPANY

On April 21, 2021, 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, 2021
Debit Credit
Cash P 180,000
Accounts receivable 400,000
Inventory, December 31, 2020 750,000
Land 350,000
Building 1,100,000
Accumulated depreciation P 413,000
Other assets 56,000
Accounts payable 237,000
Accrued expenses 180,000
Ordinary 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, 2021. 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.

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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:
2020 2019
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:

1. How much is the sales for the period January 1 to April 21, 2021?
A. P1,430,000 B. P1,510,000 C. P1,519,500 D. P1,506,000

2. How much is the net purchases for the period January 1 to April 21, 2021?
A. P683,000 B. P660,000 C. P673,500 D. P650,500

3. How much is the cost of sales for the period January 1 to April 21, 2021?
A. P786,500 B. P835,725 C. P830,500 D. P828,300

4. How much is the estimated inventory on April 21, 2021?

A. P579,500 B. P623,500 C. P587,775 D. P570,000

5. How much is the estimated inventory fire loss?

A. P579,500 B. P535,000 C. P477,000 D. P512,000

MALAWI COMPANY

The MALAWI COMPANY is an importer and wholesaler. Its merchandise is purchased from a
number of suppliers and is warehoused until sold to consumers.

In conducting his audit for the year ended December 31, 2021, the company’s CPA determined
that the system of internal control was good. Accordingly, he observed the physical inventory at
an interim date, November 30, 2021, instead of at year end.

The following information was obtained from the general ledger:

Inventory, January 1, 2021 P 90,000

Inventory, November 30, 2021 225,000
Sales for eleven months ended November 30, 2021 800,000
Sales for year ended December 31, 2021 950,000
Purchases for eleven months ended November 30, 2021
(before audit adjustments) 720,000
Purchases for year ended December 31, 2021 (before
audit adjustments) 810,000

Additional information is as follows:

a. Goods received on November 28 but recorded as

purchases in December 10,000

b. Deposits made in October 2021 for purchases to be

made in 2022 but charged to Purchases 14,000

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c. Defective merchandise returned to suppliers:

Total at November 30, 2021 5,000
Total at December 31, 2021, excluding
November items 7,000
The returns have not been recorded pending
receipt of credit memos from the suppliers.
The defective goods were not included in the inventory.

d. Goods shipped in November under FOB destination

and received in December were recorded as purchases
in November 18,500

e. Through the carelessness of the client’s

warehouseman, certain goods were damaged
in December and sold in the same month at its cost. 20,000

f. Audit of the client’s November inventory summary

revealed the following:
Items duplicated P 3,000
Purchases in transit:
Under FOB shipping point 12,000
Under FOB destination 18,500
Items counted but not included in
the inventory summary 7,000
Errors in extension that overvalued the items 4,000

Questions:

1. The correct amount of net purchases up to November 30, 2021, is

A. P716,000 C. P692,500
B. P682,500 D. P706,500

2. The correct amount of net purchases up to December 31, 2021, is

A. P765,500 C. P784,000
B. P803,000 D. P789,000

3. The correct inventory on November 30, 2021, is

A. P206,500 C. P237,000
B. P214,500 D. P218,500

4. What is the gross profit for eleven months ended November 30, 2021?
A. P234,000 C. P224,000
B. P217,000 D. P237,500

5. What is the estimated inventory on December 31, 2021?

A. P183,100 C. P184,400
B. P175,900 D. P190,000

MULTIPLE CHOICE QUESTIONS

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.

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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. 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.

3. A client maintains perpetual inventory records in both quantities and pesos. If the assessed
level of control risk is high, an auditor will probably
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.

4. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the
physical inventory listing to obtain evidence that all items
A. Included in the listing have been counted.
B. Represented by inventory tags are included in the listing.
C. Included in the listing are represented by inventory tags.
D. Represented by inventory tags are bona fide.

5. If the perpetual inventory records show lower quantities of inventory than the physical
count, an explanation of the difference might be unrecorded
A. Sales
B. Purchase returns
C. Purchases
D. Purchase discounts

6. 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 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.

7. 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.

8. The audit of year-end inventories should include steps to verify that the client’s purchases
and sales cutoffs were adequate. This audit step 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.

9. An auditor’s observation of physical inventories at the main plant at year-end provides direct
evidence to support which of the following objectives?

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A. Accuracy of the priced-out inventory.

B. Evaluation of the 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.

10. Which of the following is the best audit test to evaluate the accuracy of the inventory records
for materials inventory in a production operation?
A. Trace selected inventory receipts to perpetual inventory records.
B. Vouch selected postings in the perpetual inventory records to source documents.
C. Perform turnover tests for materials inventory.
D. Reconcile quantities on hand per physical counts of selected items with perpetual
inventory records and verify pricing.

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