AUDIT OF INVENTORIES – 1st SET

PROBLEM 1

Listed below are some items of inventory from Anecito Company that are in question during the audit.
The company stores a substantial portion of the merchandise in a separate warehouse and transfer
damaged goods to a special inventory account.

1. Items in receiving department returned by customer, no

communication received from customer 20,000
2. Items ordered and in receiving department, invoice not yet
received from supplier 50,000
3. Items counted in warehouse by the inventory crew 70,000
4. Invoice received for goods ordered, goods shipped but not received
(Anecito Company pays freight) 5,000
5. Items, shipped today, fob destination, invoice mailed to customer 5,000
6. Items currently used for window displays 10,000
7. Items on counter for sale per inventory count [not in (3)] 90,000
8. Items in shipping department, invoice not mailed to customer 6,000
9. Items in receiving department, refused by Anecito because of
Damage [(not in (3)] 3,000
10. Items shipped today, fob shipping point, invoice mailed to customer 4,000
11. Items included in warehouse count, damaged, not returnable 8,000
12. Items included in warehouse count, specifically crafted and
segregated for shipment to customer in five days per sales
contract, with return privilege. 18,000

Question:
1. If the recorded inventory in the balance sheet is P289,000, the year-end inventory will be
overstated by:

2. The following should be included from the inventory, except:

a. Inventory shipped today, f.o.b. shipping point, invoice mailed to customer.
b. Inventory counted in warehouse by the inventory crew.
c. Inventory shipped today, f.o.b. destination, invoice mailed to customer.
d. Inventory in warehouse count, specifically crafted and segregated for shipment to
customer with return privilege.

3. The inventory per audit at year-end is:

PROBLEM 2

In the event of your audit, you found the following information related to the inventories on December
31, 2019.

a. An invoice for P90,000, FOB shipping point, was received on December 15, 2019. The receiving
report indicates that the goods were received on December 18, 2019, but across the face of the report is
the notation “Merchandise not of the same quality as ordered, returned for credit, December 19”. The
merchandise was included in the inventory.

b. Included in the physical count were inventories billed to customer FOB shipping point on
December 31, 2019. These inventories had a cost of P28,000 and were billed at P35,000. The shipment
was in loading dock waiting to be picked by the common carrier.

c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on December
31, 2019, were recorded on a receiving report dated January 2, 2020. The goods were not included in the
physical count, but invoice was included in accounts payable at December 31, 2019.

d. Merchandise costing P15,000 to the company FOB shipping point on December 26, 2019. The
purchase was recorded, but the merchandise was excluded from the ending inventory because it was not
received until January 4, 2020.

e. The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost was
P10.00 per unit.

The adjusting entries for:

1. Item letter “a” is;

Debit Credit
a. Cost of sales 90,000 Inventory 90,000
b. Inventory 90,000 Cost of Sales 90,000
c. Retained earnings 90,000 Inventory 90,000
d. No adjustment

2. Item letter “b” is:

Debit Credit
a. Cost of sales 28,000 Inventory 28,000
b. Inventory 28,000 Cost of sales 28,000
c. Cost of sales 35,000 Inventory 35,000
d. No adjustment

3. Item letter “c” is;

Debit Credit
a. Inventory 50,000 Cost of sales 50,000
b. Cost of sales 50,000 Inventory 50,000
c. Inventory 50,000 Retained earnings 50,000
d. No adjustment
4. Item letter “d” is:
Debit Credit
a. Cost of sales 15,000 Inventory 15,000
b. Inventory 15,000 Cost of sales 15,000
c. Inventory 15,000 Retained earnings 15,000
d. No adjustment

5. Item letter “d” is:

Debit Credit
a. Cost of sales 500 Inventory 500
b. Inventory 500 Cost of sales 500
c. Cost of sales 10,000 Inventory 10,000
d. Inventory 10,000 Cost of sales 10,000

PROBLEM 3

You have observed the physical count of DEMI CORPORATION’s inventory taken on December 31, 2019.
The following errors were discovered:

a. Goods that cost P7,000 was sold for P8,500 on December 29, 2019. The order was shipped
December 31, 2019 with terms fob destination. The merchandise was not included in the ending
inventory. The sale was not recorded until January 4, 2020, the date when the customer made payment
of the sold goods.

b. On December 29, 2019, DEMI CORPORATION purchased merchandise costing P15,000 from a
supplier. The order was shipped December 30, 2019 (terms FOB shipping point) and was still “in transit”
on December 31, 2019. Since the invoice was received on December 31, the purchase was recorded in
2019. The merchandise was included in the inventory count.

c. On January 4, 2020, goods that were included in the ending inventory at December 31, 2019, were
returned to DEMI CORPORATION because the consignee had not been able to sell it. The cost of this
merchandise was P9,500 with a selling price of P14,500.

d. DEMI CORPORATION failed to make an entry for a purchase on account of P6,500 at the end of
2018, although it included this merchandise in the inventory count. The purchase was recorded when
payment was made to the supplier in 2019.

e. On January 6, 2020, DEMI CORPORATION received merchandise which had been shipped to them
on December 31, 2019. The terms of the purchase were fob destination. Cost of the merchandise was
P6,400. The purchase was not recorded until payment was made in January 2020 but the goods were
included in the inventory as of December 31, 2019.

f. Goods with a selling price of P30,000 was shipped to Herald Company, a consignee, on December
29, 2018. Since this was shipped before the inventory count, the merchandise, which was billed 20%
above cost, was excluded from the inventory count. Sales was not recorded until the inventory was
received on January 5, 2019. Your further investigation revealed that 50% of these goods were sold in
2019 and the on-hand at December 31, 2019 were not yet reported in 2019 inventory.
Questions: Based on the above information, answer the following:
1. What is the entry to adjust audit finding “a” at December 31, 2019?
a. Accounts Receivable 8,500 c. Both A and B
Sales 8,500
b. Inventory 7,000 d. Accounts Receivable 8,500
Retained Earnings 7,000 Retained Earnings 8,500

2. What is the entry to adjust audit finding number “b” at December 31, 2019?
a. Inventory 15,000 c. Both A and B
Retained Earnings 15,000
b. Retained Earnings 15,000 d. Neither A nor B
Accounts Payable 15,000

3. DEMI CORPORATION should debit what account to adjust audit finding number “c” at December
31, 2019?
a. Sales c. Retained Earnings
b. Cost of Sales d. No adjustment is necessary

4. In audit finding number “d”, choose the correct statement?

a. The company is correct for not making an entry on the P6,500 purchase on account even though
it is already included in the inventory count since no term of shipment is given.
b. The company should reduced its purchases at December 31, 2019 since the purchases being paid
in 2019 was the purchase for 2018.
c. The company is correct in recording of purchases in year 2019 since this is the time when the
company made payment on such.
d. Inventory should be recorded at December 31, 2018 since the purchases were recorded on this
year.

5. The entry to adjust audit finding number “e” at December 31, 2019 is: (assume the book is not
close)
a. Retained Earnings 6,400 c. Purchases 6,400
Inventory 6,400 Accounts Payable 6,400
b. Retained Earnings 6,400 d. Cost of sales 6,400
Accounts payable 6,400 Inventory 6,400

6. The entry to adjust audit finding number “f” at December 31, 2019 is: (assume the book is close)
a. Inventory 25,000 c. Cost of sales 25,000
Accounts Receivable 25,000 Sales 25,000
Cost of sales 25,000 Retained Earnings 25,000
Sales 25,000 Accounts Receivable 25,000
b. Cost of sales 25,000 d. Retained Earnings 2,500
Sales 15,000 Inventory 12,500
Retained Earnings 25,000 Accounts Receivable 15,000
Accounts Receivable 15,000
PROBLEM 4

The PRINCE COMPANY’S year-end inventory based on physical count conducted on December 31, 2019,
amounted to P885,000. Your cut-off examination disclosed the following information”:

1. Included in the physical count were goods billed to customer FOB shipping point on December
31, 2019. These goods had a cost of P28,000 and were billed at P35,000. The shipment was on
PRINCE’S loading dock waiting to be picked up by the common carrier.

2. Goods were in transit from a vendor to PRINCE on December 31, 2019. The invoice cost was
P50,000 and the goods were shipped FOB Shipping on Dec. 29,2019.

3. Work in process inventory costing P20,000 was sent to an outside processor for plating on Dec.
30, 2019.

4. Goods returned by customers and held pending inspection in the returned goods area on Dec. 31,
2019, were not included in the physical count. On January 8, 2020, the goods costing P26,000
were inspected and returned to inventory. Credit memos totaling P40,000 were issued.
5. Goods shipped to customer FOB destination on Dec. 26, 2019, were in transit at Dec. 31, 2019
and had a cost of P25,000. Upon notification of receipt by the customer on January 2, 2020, the
company issued a sales invoice for P42,000.

6. Goods received from a vendor on Dec. 26, 2019, were included in the physical count. However
the related P60,000 vendor invoice was not included in Accounts Payable as December 31, 2019,
because the Accounts Payable copy of the receiving report was lost.

7. On January 3, 2020, a monthly freight bill in the amount of P4,000 was received. This was
specifically related to merchandise purchased in Dec. 31, 2019. The freight charges were not
included in either the inventory or in accounts payable at Dec. 31, 2019.

Question:
1. Sales at year-end is overstated by:

2. Purchases at year-end is understated by:

3. Cost of sales at year-end is overstated by:

4. The inventory per audit at year-end is:

PROBLEM 5

On January 1, 2020, Arcenith Corporation engaged an independent CPA to perform an audit for the year
ended December 31, 2019. The company uses a periodic inventory system. The CPA did not observe the
inventory count on December 31, 2019, as a result, a special examination was made of the inventory
records.

The financial statements prepared by the company (uncorrected) showed the following: ending inventory,
P72,000; accounts receivable, P60,000; accounts payable, P30,000; sales, P400,000; net purchases,
P160,000, and pretax income P51,000.

The following data were found during the audit:

1. Merchandise received on January 2, 2020, costing P800 was recorded on December 31, 2019. An
invoice on hand showed the shipment was made fob supplier’s warehouse on December 31, 2019.
Because the merchandise was not on hand at December 31, 2019, it was not included in the
inventory.

2. Merchandise that cost P18,000 was excluded from the inventory, and the related sale for P23,000
was recorded. The goods had been segregated in the warehouse for shipment; there was no
contract for sale but a “tentative order by phone”.

3. Merchandise that cost P10,000 was out on consignment for Valentin Distributing Company and
was excluded from the ending inventory. The merchandise was recorded as a sale P25,000 when
shipped to Valentin on December 29, 2019.

4. A sealed packing case containing a product costing P900 was in Arcenith’s shipping room when
the physical inventory was taken. It was included in the inventory because it was marked “Hold
for customer’s shipping instructions.” Investigation revealed that the customer signed a purchase
contract dated December 18, 2019, but that case was shipped and the customer billed on January
10, 2020. A sale for P1,500 was recorded on December 31, 2019.

5. A special item, fabricated to order for a customer, was finished and in the shipping room on
December 31, 2019. The customer has inspected it and was satisfied. The customer was billed in
full on that sale in the amount of P5,000. The item was included in inventory at cost, P1,000
because it was shipped on January 4, 2020.

6. Merchandise costing P15,600 was received on December 28, 2019. The goods were excluded
from inventory, and a purchase was not recorded. The auditor located the related papers in the
hands of the purchasing; they indicated, “On consignment from Roselyn Company”.

7. Merchandise costing P2,000 was received on January 8, 2020, and the related purchase invoice
recorded January 9. The invoice showed the shipment was made on December 29, 2019, fob
destination. The merchandise was excluded from the inventory.

8. Merchandise that cost P6,000 was excluded from the ending inventory and not recorded as a sale
for P7,500 on December 31, 2019. The goods had been specifically segregated. According to the
terms of the contract of sale, ownership will not pass until actual delivery.
9. Merchandise that cost P15,000 was included in the ending inventory. The related purchase has
not been recorded. The goods had been shipped by the vendor fob destination, and the invoice was
received on December 30, 2019. The goods was received on January 5, 2020.

10. Merchandise in transit that cost P7,000 was excluded from inventory because it was not on hand.
The shipment from the vendor was fob shipping point. The purchase was recorded on December
29, 2019, when the invoice was received.

11. Merchandise in transit that cost P13,000 was excluded from inventory because it had not arrived.
Although the invoice had arrived, the related purchase was not recorded by December 31, 2019.
The merchandise shipped fob shipping point by the vendor.
12. Merchandise that cost P8,000 was included in the ending inventory because it was on hand. The
merchandise had been rejected because of incorrect specifications and was being held for return
to the vendor. The merchandise was recorded as a purchase on December 26, 2019.

Question:
Based on your analysis and the information above, answer the following:

1. The adjusted balance of inventory at year-end is:

2. The adjusted balance of accounts receivable at year-end is:

3. The adjusted balance of accounts payable at year-end is:

4. The adjusted balance of Sales at year-end is:

5. The adjusted balance of Net Purchases at year-end is:

6. The adjusted balance of Pre-tax income at year-end is:

PROBLEM 6

Marlisa Company’s December 31, 2018 and December 31, 2019 inventory is P35,000 and P27,000,
respectively. The beginning and ending inventories were determined by physical count of the goods on
hand on those dates, and no reconciling items were considered. All purchases are f.o.b. shipping point.
In the course of your examination of the inventory cut-off, both the beginning and ending of each year,
you discover the following facts:

Beginning of the year

a. Invoices totaling P3,260 were entered in the voucher register on January, but the goods were
received during December.
b. December invoices totaling P4,100 were entered in the voucher register in December, but the
goods were not received until January.

End of the Year

c. Invoices totaling P7,260 were entered in the voucher register in January but the goods were
received in December.
d. December invoices totaling P3,600 were entered in the voucher register in December, but the
goods were not received until January.
e. Invoices totaling P1,500 were entered in the voucher register in January, and the goods were
received in January, but the invoices were dated December.

Question:
Based on your analysis and the information above, answer the following:

1. The adjusted balance of the Jan. 1, 2019 inventory is:

a. P 35,000 b. P 35,840 c. P 39,100 d. P 59,100

2. How much is the adjusted balance of the Purchases account at December 31, 2019 assuming the
amount of Purchases in the trial balance is P5,176,000?
a. P 5,170,566 b. P 5,180,000 c. P 5,181,500 d. P 5,185,200

3. The corrected December 31, 2019 inventory is

a. P 52,100 b. P 50,600 c. P 32,100 d. P 28,500

4. When auditing inventories, an auditor would least likely verify that

a. All inventory owned by the client is on hand at the time of the count.
b. The client has used properly inventory pricing.
c. Damaged goods and obsolete items have been properly accounted for.
d. The financial statement presentation of inventories is appropriate.