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AUDITING PROBLEMS
AUDIT OF INVENTORIES QUIZZERS
PROBLEM NO. 1
Malabon, Inc., owner of a trading company, engaged your services as auditor.. There is a
discrepancy between the companys income and the sales volume. The owner suspects
that the staff is committing theft. You are to determine whether or not this is true. Your
investigations revealed the following.
1.
Physical inventory, taken December 31, 2005 under your observation showed that
cost was P265,000 and net realizable value (NRV), P244,000. The inventory on
January 1, 2005 showed cost of P390,000 and net realizable value of P375,000. It is
the corporations practice to value inventory at lower of cost or NRV. Any loss
between cost and NRV is included in Other expenses.
2.
3.
4.
5.
6.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1.
2.
3.
c. P3,230,000
d. P2,770,000
c. P2,000,000
d. P1,950,000
c. P175,000
d. P0
SUGGESTED ANSWERS: B, B, B
PROBLEM NO. 2
Navotas 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
Purchases
Goods available for sale
Inventory, June 30, 2005
Cost of goods sold
P 125,000
900,000
1,025,000
175,000
P850,000
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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.
b.
June invoices totaling to P32,500 were entered in the voucher register in June. The
corresponding goods not received until July.
Invoices totaling P13,500 were entered in the voucher register in July but the goods
received during June.
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.
June invoices totaling P18,500 were entered in the voucher register in June but the
goods were not received until July.
Invoices totaling P27,000 ( the corresponding goods for which were received in June)
were entered the voucher register, July.
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:
1.
d. P92,500
2.
How much is the adjusted Purchases for the fiscal year ended June 30, 2005?
a. P973,500
b. P960,000
c. P900,000
d. P978,500
3.
d. P125,000
4.
How much is the adjusted Cost of goods sold for the fiscal year ended June 30,
2005?
a. P877,500
b. P829,000
c. P992,500
d. P891,000
5.
The necessary compound adjusting journal entry as of June 30, 2005 would include:
a. A debit to Inventory, 6/30/05 of P21,000.
b. A debit to Purchases of P73,500.
c. A credit to Retained Earnings of P32,500.
d. A credit to Vouchers Payable of P73,500.
SUGGESTED ANSWERS: B, B, C, A, D
PROBLEM NO. 3
You obtained the following information from the balance sheet of Caloocan Company in
connection with your audit of the Companys financial statements for the year 2005:
Cash
Notes receivable
Inventory
Accounts payable
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All operating expenses are paid by Caloocan with cash and all purchases of inventory are
made on account. Caloocan sells only one product. All sales are cash sales which are
made for P100 per unit. Caloocan purchases 1,500 units of inventory per month and
values its inventory using periodic FIFO. The unit cost of inventory during January 2005
was P65.20 and increased P0.20 per month during the year. During 2005, payments to
suppliers totaled P943,400 and operating expenses totaled P440,000. The ending
inventory for 2004 was valued at P65.00 per unit.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Number of units sold during 2005
a. 18,400
b. 18,900
c. 8,268
d. 8,768
d. P383,500
c. 15,882
d. 15,382
c. P1,055,183
d. P1,022,483
SUGGESTED ANSWERS: A, A, A, A
PROBLEM NO. 4
You are engaged in the regular annual examination of the accounts and records of
Valenzuela Manufacturing Co. for the year ended December 31, 2005. To reduce the
workload at year end, the company, upon your recommendation, took its annual physical
inventory on November 30, 2005. You observed the taking of the inventory and made
tests of the inventory count and the inventory records.
The companys 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 companys 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.
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 P200% 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.
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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
Direct labor
Purchases
P1,920,800
338,800
691,600
2.
d. P1,425,760
3.
4.
The amount of direct labor included in work in process as of December 31, 2005
a. P618,800
b. P338,800
c. P232,400
d. P386,400
5.
SUGGESTED ANSWERS: A, A, C, C, B
End of AP-5905Q
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