BS Accountancy - 3

AA 3102
Group 5
Capote, Shan P.
Lagudas, Roselene D.
Macasaet, Kent Paul Walter N.
Manliguez, Rhea Joy D.
Pingoy, Vilda Jeanette R.
Vasquez, Kristina Loren M.
Zosa, Andria B.
Problem
Henry Martin is responsible for preparing checks, recording cash disbursements, and preparing bank reco
Corporation. While reconciling the October bank statement, Martin noticed that several checks totaling P9
outstanding for more than one year. Concluding that these checks would never be presented for payment
check for P9,370 payable to himself, forged the treasurer’s signature, and cashed the check. Martin made
accounts for this disbursement and attempted to conceal the theft by destroying the forged check and omi
standing outstanding checks from subsequent bank reconciliations.

Requirements
1. Identify the weaknesses in Star Corporation’s internal control.
No segregation of duties - Bank reconciliations as well as preparation of checks and recording of c
are done by the same employee. Should there be proper segregation of duties, Henry Martin would
conceal the theft because the existence of the forged check and unrecorded disbursement will be de
knowledge that as an internal control, bank reconciliations should be done by an employee with no o
cash transactions to make sure that any discrepancies will be found and no records are manipulated
No periodic examination of outstanding checks - Star Corporation’s checks have been outstandi
year. Usually, checks are good for 6 months (180 days) and are then considered stale checks. Othe
explicitly indicate in their checks “void after 90 days"). Should there be a periodic review of outstandi
separate employee, Star Corporation would know whether payments should be stopped and to reco
cash in bank.

2. Explain several audit procedures that might disclose the fraudulent disbursement.
Since it is known that there is no segregation of duties for the aforementioned tasks, the auditor shal
Test of controls of the client’s periodic bank reconciliations - To check whether controls are in e
bank reconciliations. Usually, an employee who prepares the reconciliation does not handle cash dis
case of Henry Martin, the auditor must inspect the reconciliation made by the former and should take
or high-risk transactions.
Inquire and observe about the check signer’s procedures - The auditor must inquire and observ
signer’s procedures for reviewing the documents in support of cash disbursements to make sure tha
authorized and transactions are not fictitious.
Accounting for serial numbers of all checks issued - This is done to examine that all checks issu
and are recorded properly. The auditor must be aware that checks issued are in numerical/chronolog
the date issued and then matched with the recorded checks in the bank statement.
Vouching all checks paid by the bank - To make sure that all checks issued by Star Corporation w
the bank to creditors, the auditor must vouch such checks. Should there be any discrepancies, missi
recorded checks but paid to a fictitious creditor, then the possibility of fraud arises.
List outstanding checks - The auditor must ask or prepare a list of outstanding checks to determin
checks were paid during the period or were listed as outstanding at the end of the period. Should the
discrepancies, then necessary adjustments must be made.
ts, and preparing bank reconciliations for Star
t several checks totaling P9,370 had been
r be presented for payments, Martin prepared a
hed the check. Martin made no entry in the
g the forged check and omitting the long-

of checks and recording of cash disbursements

duties, Henry Martin would not have been able to
ded disbursement will be detected. It is common
e by an employee with no other responsibility for
no records are manipulated.
checks have been outstanding for more than one
nsidered stale checks. Other businesses also
periodic review of outstanding checks by a
ould be stopped and to record such check back as

sbursement.
oned tasks, the auditor shall do the following:
eck whether controls are in effect when preparing
on does not handle cash disbursements. In the
y the former and should take note of any unusual

tor must inquire and observe about the check

ursements to make sure that checks are properly

examine that all checks issued are prenumbered

d are in numerical/chronological order based on
statement.
ssued by Star Corporation were actually paid by
be any discrepancies, missing, unrecorded or
ud arises.
tanding checks to determine whether such
nd of the period. Should there be any
You are the auditor in charge of the audit
CIRCLE of Circle Corporation. In the audit of investments, you have just
CORPORATION
following list of securities held by Circle Corporation at December 31, 20X3.
Schedule of Marketable Securities
December 31,20X3
Market Value December 31
10,000 shares of Diamond
P599,100
Corp.
6,000 shares of Square
216,500
Corp.
8,000 shares of Rectangle
(not publicly traded)
Corporation
400 Line Corporation 7.5%
555,000
Convertible Bonds

1. Identify the potential audit problems that may be indicated by the schedule.
Rectangle Corporation's stock is not publicly traded and it is not a listed business. Consequently, it
challenging scenario when attempting to calculate the stock's fair value, and a valuation model mus
do so.
As convertible bonds of Line Corporation are securities with implanted derivatives, therefore the ma
account for each option individually. This calls for a valuation model that takes the value of the optio
into account independently.

2. To value the shares of Rectangle Corporation, management has employed a securities valuation firm. E
considerations involved in auditing the value developed by the valuation firm.
When there is no active market for a security, management may hire an appraiser to determine the
As a result, the auditor should consult SAS 73, which places a strong emphasis on the need to get t
the securities from a third-party, qualified assessor. Auditor should analyze the reasonableness and
relevant model. Auditors should also ensure that the model considers all areas of risk such as risk o
market conditions, risk of legal and political nature. (PSA 620) USING THEIR GUIDELINES.
 investments, you have just been given the

d business. Consequently, it creates a

, and a valuation model must be utilized to

derivatives, therefore the management must

at takes the value of the option and the bond

a securities valuation firm. Explain the audit

n appraiser to determine the fair value of the assets.

mphasis on the need to get the fair value of
yze the reasonableness and accuracy of the
ll areas of risk such as risk of changes in
THEIR GUIDELINES.
 Possible
The auditor Misstatements
suspects that aDue kitingto scheme
Errors and Fraud
exists
because
An auditoransuspect
accounting department
that the controlleremployeewrote several who
a The entity borrowed funds from a financial
can
checks issue and record
and discovered
recorded the checkscash seem to
disbursementsbe leadingjust
b The auditor
institution. Although the an unusually
transaction waslarge properly
and unusually
before year-end luxurious
but did lifestyle.
not mail the checks until
c receivable
recorded, from
the one ofsuspects
auditor the entity's thatnewtheyear.customers.
loan created
after
The the first week of the subsequent
d a lien on the entity's real estate that is notmay
The auditor
auditor suspects
suspects that
that the receivable
fictitious employees be
have
disclosed
fictitious
been because
placedsuspects
on thethe auditor's
payroll initial attempt to
e in itsauditor
The financial
entity's statements.
cash receipts ofbythe
that selected thefirst
entity's
employees
few days payrollof the
of the
confirm
supervisor, the
entity received receivables
who has has
access
unauthorized been
to ignored
payroll
raises by
records
from the the
and
f subsequent year were properly deposited in entity's
its
customer.
to the paychecks.
payroll supervisor, who has access to payroll
general operating account after
The auditor suspects that vouchers were prepared the year-end.
g records.
The detailsthe of auditor
invoices for equipment
However,
and processed by an suspects
accounting that therepairs
department entity were
h not
The clearly
recorded
auditor theidentified
cash
suspects orthat
explained
receipts ain itswas
lapping to scheme
books the accounting
during the
exists
employee for merchandise that either ordered
i The auditor
department
last received
weekan
because suspects
employees.
of accounting
the that
yearentity.
underThethe entity
auditor is
suspects
audit. employee who
department that
nor by the
j inappropriately
the
has bookkeeper
access to cash increasing
incorrectly
receipts the cash
recorded
also reported
the repairs
maintains on its
the as
balance
fixedauditor
The
accounts sheet
assets. by drawing
suspectsledger
receivable a
that the check
andentity'son
refuses one account
controller
to take hasany
k
and not
overstated recording
sales
vacation or sick days. it
and as an outstanding
accounts receivable check by on that
l account and simultaneously recording it as a in the
recording fictitious sales to regular customers
deposit in a second account.
entity's books.
 Procedures
E. Send
K. Prepare bank transfer
a second requestschedule.
for confirmation of the
D. Obtain the
receivable cutoff
to the bank statement
customer and makeand compare
inquiries of athe
cleared checks
H. Confirmcredit
reputable to
the terms the
agency year-end
of borrowing bank reconciliation.
concerningarrangements
the customer’s with
the lender.
creditworthiness.
L.
P. Examine the entity’s
Observe payroll checkshipping documents
distribution to verify
on a surprise
Q. Vouch
that the
basis. data
merchandisein the payroll
that register
produced to
the documented
receivable
authorized
was
A. actually
Compare pay sent
the rates in the
to the
details human
customer.
of the cash resource
receipts journal
department’s
entries with the files.
details of the corresponding daily
U. Examine
deposit slips. the supporting purchase orders and
B.
A. Scan
Comparethe debits
receiving reports fortoselected
the details theoffixed asset
the paid
cash accounts
receipts
vouchers. and
journal
vouch selected amounts to vendors’
entries with the details of the corresponding daily invoices and
management’s
deposit authorization.
J. Send slips.
requests to confirm the entity’s accounts
J.
E. Send requests
Prepare
receivable bank
on to confirm
transfer
a surprise theatentity’s
schedule.
basis an interimaccounts
date.
receivable
L. Examine the entity’s shipping documents date.
on a surprise basis at an interim to verify
that the merchandise that produced the receivable
was actually sent to the customer.
The following questions related to payroll are included on the internal control questionnaire for Mama Com
1. Does payroll require written authorization to add an employee to the payroll?
2. Do employees use a time clock for recording time worked?
3. Does a supervisor approve time cards before they are sent to payroll?
4. Are payroll checks distributed by someone other than the people involved in supervising employees
payroll preparation, and check signing?
5. Are prenumbered checks used and accounted for?
6. Is the payroll bank account reconciled by a person independent of the payroll function?

Required:
For each of the six preceding questions, provide the following information about Mama Company’s interna
Identify the financial statement assertion related to the control addressed in each question.
Identify a potential misstatement that could arise from the absence of the control you identified in part
Identify the test of controls an auditor might perform for the controls you identified in part a.
Indicate the substantive tests of transactions an auditor might perform after the test of controls if the co
Financial
# Statement There Potential
Payroll Misstatement
ismight include of
a possibility Test of Controls
Existence or
Assertion fabricated Approval
Examine signatures on musttime
1 employees
There is a or evenpaid
being retired
possibility offor
Occurrence
Rights and employees. be inspected.
cards to ensure that
Examine signatures on time
2 more hours being
employees than they
paid for Examine
Obligations
Rights and work - overpayment of employees
cards to are paid
verify
to ensure for the
whether
that
3 more hours
Payroll than
might they
include hours they
paychecks rendered.
are pre-
Obligations
Existence or work
salaries. employees
Examine
Approval to are paid
verify
signatures for
whether
mustthe
4 There - is
overpayment
fabricated a or
possibilityof
even retired
that numbered, and examine if a
Occurrence salaries. hours they
paychecks
be inspected.rendered.
are pre-
5 Completeness There employees.
paychecks may be issued
is a possibility bank reconciliation
that numbered, is
and examine if a
but not recorded. executed
6 Completeness paychecks may be issued bank reconciliation is by a person
but not recorded. unaffiliated
executed bytoathe payroll
person
operations. to the payroll
unaffiliated
operations.
 ernal control questionnaire for Mama Company:
yee to the payroll?

nt to payroll?
people involved in supervising employees, personnel,

ndent of the payroll function?

formation about Mama Company’s internal control:

ol addressed in each question.
sence of the control you identified in part a.
ontrols you identified in part a.
ht perform after the test of controls if the control is ineffective.
Evaluate signed authorizations for
Substantive
employment Tests to
in relation of the
Transactions
provided
records and verify the signature on a paid
For specific records,
Compare verify the signed
check withthetheoverall number
signature on aof jobhours
employment,
worked
Compare with compensation,
thethe time number
overall chargedof and deduction
tohours
tasks.
application.
authorizations
worked with theand compare
time chargedthe to signatures
tasks.
on the paid check with the application, or
distribute funds in apreparation.
Bank reconciliation surprise payout
observing employees
Bank reconciliation picking up and
preparation.
signing for their checks.
 Audit Objectives Audit
D. Perform Procedures
cutoff tests to verify
The entity has legal rights to
Recorded inventory represents that inventory purchases are
items included in inventory. C. Reconcile inventory tags
assets that actually exist at the recorded in the proper period.
Inventory is properly gathered during inventory listing.
balance sheet date. valued at A. Foot the client’s inventory
the balance sheet date. listing.
 What control would have
been prevented or detected of
The production supervisor the errors or irregularities?
There should be a signed
believes he has good judgment Salary verification must be
production order which will
about what customers
Raw materials will buy. carried
were transferred The
serveaccounting
asout clerkAbe infor
anproperly.
authorization
He surprised the
to production but sales manager charge
were not comparison to account forproposed
the
Salaries of product
the sales the executionofof thethesalaries
with materials-usage
The a new
transferred in the that was is The
variance
accounting value
materials
expenses of transactions
requisitions which is
department were charged to work
The to berecorded,
procedures and
done.for assigning the
produced
unusually
records. on December
large because 24. determined
musthours by a
be prenumbered.bill of material,
The work-in-processs
manufacturing
materials issued account total
overhead.
to product costs
a validated
worked
to workticket,
by the and
in progress
labor rates,
is overstated because
development goodsto employee/s
were charged finished
and goodsmust
predetermined areberegularly
made
overhead
and
were independently
not transferred out when reviewed verified
and evaluated, andto the
production.
The rates.
payroll accounting
recorded department.
they labor
were cost on one job is
completed. The
their time
mathematical on labor is
accuracy
high because an employee tickets
verified.is reconciled to the time
completed a duplicate labor recorded on employee time
ticket. cards.
 To which financial statement
What tests should the auditor
assertion does each error or
perform to test each control?
irregularity relate?
The auditor should
mustthe examine
observe the
whether
In order to verify effectiveness of
signature
the of purchase order to and Rights and Obligations
this procedure
test control, is the
being followed
auditor needs to
determine
account
To
The verifyforits
the
auditor thevalidity.
materials
state
can of
verify the
the requisitions
goods in
transaction Completeness
follow a process of tracing the
while
through
amountskeeping
to thethe
work-in-process
carefully document
account,
examining
bill thethe
of materials, auditor
time Valuation and Allocation
sequencing
should
signed observe
payrollfor better
the
register. accuracy.
production
cards, and then trace the assigned Valuation and Allocation
process and evidence
costs to overhead rates.of Once
standard this is Valuation and Allocation
setting review and testing.
done, the costs can be further An auditor
traced
can
to gain reasonable
authorized price listsassurance
and the that
The
the auditor should
WIP account follow the
is fairly stated and
underlying schedules. Completeness
procedure.
free from material misstatement.
 Errors and irregularities
What control would have been
discovered while
prevented or detected of the
performing test of
Goods received errors
on June 3 Following orcounting
the irregularities?
of products
controls
were never placed in the moved to the storage area, an
Raw materials
storeroom
While issued on Pre-numbered
but instead
storeroom inventory storage reports
clerkand
shall sign a
July
were 15 were
taken never
to the requisitions should be received
personnel
Inventory
recorded as
are
issued by rain copy
at lunch,
damaged from and
of the
Officials
accounted
Operating
pre-numbered
should assess
for
personnel anand modify
byshould
receiving
production
remains inclerk's home.
employees
inventory at full receiving
the report.
provision for inventory
the storeroom.
Sometimes thestoreroom Only theapersonnel
accounting
storeroom prepare responsible
clerk. requisition
material tofor
come
cost. into the obsolescence as appropriate.
issues rawmaterials
materialsthey
to the custody of materials/inventory
release the raw materials, and the
to get the
production without access
warehousethe storeroom.
custodian should sign
need. They always
obtaining a signature
complete and sign the on a the same document after the
materials
requisitionrequisition.
forms. goods are counted and transferred
to production.
 To which financial
What tests should the auditor statement assertion does
The auditor
perform should
to testobserve this
each control? each error or irregularity
procedure being followed, specifically
The auditor should observe whether the relate?
the recording of receiving reports
procedure is being followed. The auditor and
requisitions.
should examine Thesignatures
auditor should
on thecheck Rights and Obligations
the
The documents
auditor
receiving in their
should
reports. numerical
inquire about and Completeness
sequence
observe to evidence
the ensure they andare all
review
The auditor should observe the the Valuation or Allocation
recorded.
recording The
of auditor
obsolete
procedures followed should
inventory.perform
by theonpersonnel Completeness
of this control whether
records-to-floor
department. and floor-to-records
there is a separation of duties. The Rights and Obligations
tests.
auditor should examine approval
signatures on materials requisitions.
a. What are the two principal problems facing the auditor in the audit of the inventory? Discuss briefly.
The two principal problems faced by the auditor in the audit of the inventory are:
1 A challenge in the incapability to take an actual count - the company does not take a
complete physical inventory at any time during the year since the conditions surrounding
the inventory make the auditor incapable of taking an actual count. It is near to impossible
with such conditions - cold temperatures and the sensitivity of the products.
2 No solid base - the company did not take a complete physical inventory at any time during
the year, the auditor will find it challenging to calculate the inventory. The auditor may
perform reverse calculations, by reducing purchases and adding sales.

b. Outline the audit steps that you would take to enable you to render an unqualified opinion with
respect to the inventory. (You may omit consideration of a verification of unit prices and clerical
Perform and account a detailed computation of the closing inventory on the date of audit by
accuracy.)
1 reducing purchases and adding back sales to arrive at the inventory value of a previous
date.
2 Compare and verify the inventory value of the previous date with the inventory value
maintained in the records, and make note of any discrepancies found.
3 To ensure and satisfy that the records and the physical inventory match, inquire concerning
the items whose counts were most recently performed and perform a reverse calculation of
the current inventory.
Monitor the company's inspection process and examine patterns in order to make sure that
4
at every inventory taking, a different item is chosen and no material item is overlooked for
the entire year.
nventory? Discuss briefly.

any does not take a

nditions surrounding
is near to impossible
oducts.
tory at any time during
The auditor may
es.

qualified opinion with

prices and clerical
on the date of audit by
value of a previous

inventory value
d.
tch, inquire concerning
reverse calculation of

rder to make sure that

em is overlooked for
 Existence or Occurence
Assertion -orrelates
Existence to whether
Occurence
Observe the client
1 the inventory
Assertion or actually
- relates to exists
whether and
counting inventory.stored Valuation
Confirm inventory Allocation
2 is
allowned
inventory
Assertion by- relates
the company
thatAssertion
should beas
to whether of
in public warehouses. Completeness -
the balance
recorded sheet date.
3 Foot the inventory listing. the relates
Existence to is
inventory actually
whetheramounts
Assertion allincluded
-recorded
inventory in
relates to
Trace test counts to the
in client's
the client'saccounting
accounting records.
records
4 items
whether
Valuationthattheshould be included
inventory
Assertion relatesinto
-actually
inventory
Account
Determine listing.
for inventory
whether are accurate.
5 the
existsclient's
whether and accounting
theisinventory
owned records
byisthe -
tags.
inventory has beenarea to Completeness
Tour the inventory are actually
company as of
Assertion
recorded.
the balance sheet
6 recorded
relates to at the appropriate
whether all inventory
valued at the
determine thatlower
all of cost Rights
date. and Obligations -
7 Obtain theitems
receiving amount
items in should
that the client's accounting
be recorded
or market.
inventory have been Completeness
relates to the Assertion
legal rights of -
8 Test
reportperpetual
for the records
last goods records.
for are actually included ininventory
the
tagged. relates
clients to
overwhether
theand the
ownership of -
inventory,
received. using records- Presentation
client's accounting records.
Disclosure
9 amounts recorded in the client's
to-floor
Review and floor-to-written goods.
the client’s relates to the understandability
10 accounting records are
records tests.
inventory procedures. on the client's written inventory
complete.
procedures
By observing the client counting inventory, the
auditor can confirm
By confirming inventorythat stored
the physical in public inventory
exists
By footingand the
warehouses, canthe compare itcan
auditor listing,
inventory to the
obtain recorded
the evidence
auditor can
inventory
By tracing
that there
ensure in
thatarethe
test client's
counts
thenoinventory to
unrecordedaccounting
the inventory
amounts inventory records
are listing,
items to
ensure
the that
auditor they
can
held in external accurate
mathematically match.
ensure This
that
locations and all helps
inventory
that consistent to
should be with provide
items
By
that accounting
evidence
were about
physicallyfor
theinventory
existence
counted tags, the auditor
assertion.
are included in
included.
the
By
can client'sThis
determining
ensure that
helps
accounting
whether
each
to provide
records.
inventory
inventory
evidence
This
item has helps
has been tothe
about
been
inventory
the
provide
valued listing
existence/occurence
evidence
at the and subsequently
about theassertion. recorded
orvaluation/allocation in
By touring
physically thelower
counted of cost
inventory
and area
tagged, market,
to which
determine the
providesthat
the client's
assertion.
auditor can accounting
ensure records.
that the inventoryThis helps
isthe to
all
By inventory
evidence
obtainingthat items have
thereceiving
the inventory been tagged,
actually for exists. lastThis
provide evidence
appropriately valued aboutin thereport
accordancecompleteness the
with
auditor
helps
goods tocan ensure
provide
received, that
evidence
the all
auditor inventory
about
can the
confirm items
existence
thathavethe
assertion.
generally
By testing accepted
perpetual accounting
records for principles
inventory, using
been physically
assertion.
inventory transactionscounted and tagged,
actually occurred, andthat
By reviewing
(GAAP).
records-to-floor the
Thisreceived,
helpsclient's
and to writtenevidence
provide
floor-to-records inventory
tests, about
the
subsequently
goods were recorded in the
and that client's
they
procedures,
the valuation
auditor can the auditor
assertion.
ensure that can
the gain
perpetual an were inventory
accounting records.
subsequently recorded Thisinhelpsthecontrol to provide
client's
understanding
records of the client's activities
evidenceare
accounting accurate
about
records. and helps
the completeness
This consistent to with the
assertion.
provide
over
physicalinventory
inventory and can
counts. evaluate
This the design and
evidence
implementationof ownership over the helps
goods. to provide
evidence about the completeness assertion. to
of those controls. This helps
provide evidence about the disclosure
assertion.
On December 31, 20X6, JC computed an ending inventory valuation of P250,000 based on a periodic inve
have been adjusted and closed. Subsequently, the independent auditor located several discrepancies in t
discussed with the company accountant, which then prepared the following schedule:

a Merchandise in store (at 50% above cost)

b Merchandise out on consignment at sales price
(including markup of 60% on selling price)
c Goods held on consignment from Davis Electronics
at sales price (Sales commission, 20% of sales price,
included)
d Goods purchased, in transit (shipped FOB shipping
point, estimated freight, not included, P800), invoice price
e Goods out on approval, sales price, P2,500, cost, P1,000
Total inventory as corrected
Average income tax rate

Item Solution Corrected Amount Explanat

a 250,000/1.5 166,667 Merchandise in store should be included in the
by the company. Since the given amount includ
given amount by 100% + 50% (Markup). It is to
recorded at cost.
b 10,000 * 40% 4,000 Merchandise out on consignment is still part of
still owned by them. Since the given amount is
by the difference between 100% and 60%, whic
should be recorded at cost.
c - 0 Goods held on consignment from Davis Electro
audited since a consignment agreement is unlik
still owned by the consignor.
d 5,000 + 800 5,800 Goods purchased FOB shipping point and are a
company since ownership has been passed as
Additionally, freight should form part of inventor
purchased. Hence, to compute for the corrected
freight charged.
e 1,000 1,000 Goods out on approval do not constitute sale as
unless otherwise. Thus, such goods are still pa
noted that inventory should be recorded at cost
177,467 Corrected Ending Inventory

List the items on the statement of comprehensive income and statement of financial position for 20X6 that
give the amount of error in the balance of each item affected.
List the items on the statement of comprehensive income and statement of financial position for 20X6 that
give the amount of error in the balance of each item affected.
Financial Amount of the
Item Solution
Statementof
Statement Errors
Inventory 72,533 250,000 - 177,467 = 72,533
Income Tax Financial Position
Statement of
29,013 72,533 * 40% = 29,013
Payable
Retained Financial Position
Statement of
Statement of 43,520 72,533 - 29,013 = 43,520
Earnings
Income Tax Financial Position
Comprehensive
Statement of 29,013 72,533 * 40% = 29,013
Expense
Net Income Income of
Comprehensive
Statement 43,520 72,533 - 29,013 = 43,520
Cost of Goods Income of
Comprehensive
Statement 72,533
Sold
Pretax Income Income
Comprehensive 72,533
Income
The accounts have been closed for 20X6. Therefore a correcting entry in January 20X7 is needed. Give th

Retained Earnings 43,520

Income Tax Payable 29,013
Inventory 72,533
 sed on a periodic inventory system. The accounts for 20X6
eral discrepancies in the 20X6 ending inventory. These were
e:

250,000

10,000

4,000

5,000
2,500
271,500
40%

Explanation
uld be included in the ending inventory as such are still owned
e given amount includes the markup, to find cost, divide the
50% (Markup). It is to be noted that inventory should be

gnment is still part of the inventory of the company as such are

the given amount is at sales price, to find cost, multiply such
100% and 60%, which is 40%. It is to be noted that inventory
t.
ent from Davis Electronics are not owned by the company
ent agreement is unlike a sales agreement. Thus, goods are
or.
ipping point and are already in transit are owned by the
has been passed as soon as the goods were shipped.
d form part of inventory as it is part of your cost of goods
mpute for the corrected amount, add the invoice price and the

not constitute sale as the seller retains the title and control
uch goods are still part of the company’s inventory. It is to be
d be recorded at cost.

position for 20X6 that should be corrected for the above errors;
position for 20X6 that should be corrected for the above errors;

Value
Overstated
Overstated
Overstated
Overstated
Overstated
Understated
Overstated

X7 is needed. Give the required correcting entry.

 Computation of adjustment that should be made to the client’s physical
inventory at December 31, 20X7.
Particulars:
Material in Car ≠ AR38162 - received in Amount:
warehouse on January
Materials stranded 2,20X8
en route ₱
(P19,270/125%)
Total ₱
Less inventory
Total adjustment ₱

WP1_a
Y COMPANY
Adjustments to Initial Amounts
December 31, 2017

Reference
SI#969, SI#970,
Goods sold in 2017
already but no
received shipments
and have
inventoried butmade
invoice was SI#971
received in 2018 RR#1060
Goods sold and paid but not shipped and inventoried SI#965
Goods
Goods received by 2017
sold, loaded but unloaded
and sealed in 2017inand
2018
switched off the RR#1063
company's siding in 2018
Goods sold and shipped FOB Destination but temporarily SI#968
stranded
Goods purchased and shipped FOB Destination and received SI#966
in 2018 RR#1064
Goods inventoried but deemed unsalable
TOTAL ADJUSTMENTS

PAJE 1
Sales (P5,841+P7,922+P2,010) 15,773
Accounts Receivable

PAJE 2
Purchases 2,183
Accounts Payable

PAJE 3
Accounts Receivable 12,700
Sales

PAJE 5
Sales 19,270
Accounts Receivable
PAJE 6
Claimed receivable 1,600
Merchandise Inventory
Freight in

PAJE 7
Inventory (P19,270/1.25) 22,286
Cost of Goods Sold

Prepared by:
GFIVE 3.23.23
he client’s physical

:
8,120
15,416
23,536
1,250
24,786

Accounts Accounts
Inventory Reference Sales Purchases Reference
Receivable Payable
(15,773.00) (15,773.00) PAJE 1
2,183.00 2,183.00 PAJE 2

8,120.00
12,700.00 12,700.00 PAJE 3
15,416.00 (19,270.00) (19,270.00) PAJE 4

(1,250.00) PAJE 5
22,286.00 PAJE 6 (6,570.00) 2,183.00 (6,570.00) 2,183.00

15,773

2,183

12,700

19,270
 1,250
350

22,286
a Prepare all adjustments for cutoff errors in accounts payable, assuming no acquisitions are made for c

WP2_a
ENGINE WAREHOUSE SUPPLY COMPANY
Inventory Cut-Off (Acquisition)
August 31, XXXX
Receiving Date Peso Amount
Date Received FOB
Report No. Shipped of Acquisition
682 8-27 09-01 4,674 Destination
684 8-30 09-02 -106 Shipping Point
TOTAL 4,568

PAJE 1
Accounts payable 4,568
Purchases 4,568

Prepared by:
GFIVE 3.23.23

WP2_b
ENGINE WAREHOUSE SUPPLY COMPANY
Inventory Cut-Off (Sales)
August 31, XXXX Should be Was actually
Shipping Date Peso Amount of recorded in recorded in
Document No. Shipped Sale August? August?
311 09-01 56 No Yes
312 09-01 3,194 No Yes
313 09-01 635 No Yes
314 09-02 193 No Yes
TOTAL 4,078

PAJE 2
Sales 4,078
Accounts Receivable 4,078

Prepared by:
GFIVE 3.23.23

WP2_c
ENGINE WAREHOUSE SUPPLY COMPANY
 Adjustments to Initial Amounts
As of August 31, XXXX

Adjustments Inventory Accounts Payable

Initial Amounts
(Increase/ 6,938 6,938
Decrease)
682 -4,674 -4,674
684
Total 106 106
Adjustments
Adjusted -4,568 -4,568
Amounts 2,370 2,370

Prepared by:
GFIVE 3.23.23 This transaction was
This transaction was
recorded
This in the books
transaction was
excluded as inventory
as a reduction
recorded
This in the to
books
from transaction
the books but was
inventory
b What is the amount of the client’sas
Thisa when
reduction
transaction
recorded in the itwas
to
books
was included in the
error in inventory assuming a periodic inventory method and no adju
should
inventory notasbeinventory
when since
recorded
as
affected inventory? For retail sales, aassume
reduction
physical thetoitgross margin is approximately 30%.
count.
goods
should were
when it not shipped
be since
should not
it be
Error (P2,405.5) inventory
Nevertheless,
Overstatement
after
goods August
were
when
31.
this
shippedSince
because
should
transaction goods
not be have
since
should not Overstated or
the
after
been
goodsgiven
Augustamount
received
were 31. is
Since
after
shipped
Receiving Date be recorded because Amount of Understated
the selling
August
after 31
August price,
Explanation
given amount
(FOB
31. tois
Since
Report No. goods have
Received compute for the cost, been Error with Regards
682 09-01 the selling
Destination).
the givenafter
received price,
amount tois
August -4,674 Overstated
multiply the given to Inventory
683 09-02 compute
the sellingfor the
price,
31 (FOB Destination). cost,
to -450 Overstated
amount
computeby
multiply forthe
the given
the cost, Overstated or
Shipping Date difference
amount by
multiply of
thethe 100%
given Amount of Understated
Explanation
Document No. Shipped and amount30%
difference bywhich
ofthe100%is Error with Regards
311 09-01 70%.
and (56 which
30%
difference *of70%)
100%is 39.2 Understated
to Inventory
312 09-01 70%.30%
and (3194 * 70%)
which is 2,235.80 Understated
313 09-01 70%. (635 * 70%) 444.5 Understated

TOTAL -2,404.50 Overstated

uisitions are made for cash and for errors in sales.

Should be Was actually

recorded in recorded in
August?
NO August?
YES
YES NO
ory method and no adjustment in part (a)
30%.
 Inventory Accounts Payable Sales
Initial Amounts ₱ 1,250,000.00 ₱ 1,000,000.00 ₱
Adjustments:
Increase (Decrease)
1 (155,000.00) (155,000.00)
2 (22,000.00) NONE
3 NONE NONE
4 210,000.00 NONE
5 25,000.00 25,000.00
6 2,000.00 2,000.00
7 (5,300.00) (5,300.00)
Total adjustments ₱ 54,700.00 ₱ (133,300.00) ₱

Adjusted amounts ₱ 1,304,700.00 ₱ 866,700.00 ₱

WP3_a
ISABELA COMPANY
Inventory Reconciliation
December 31, 20X7
Inventory
Unadjusted Balance GL 1,250,000
Add (Deduct) Adjustments:
Parts held on consignment (155,000)
Goods sold included in inventory (22,000)
Goods sold F.O.B. shipping point
Goods held by retailers 0.00 210,000
Goods in transit 25,000
Bill on freight 2,000
Purchase discount (5,300)
Adjusted Balance 1,304,700

PAJE 1
Accounts payable 155,000
Merchandise inventory 155,000

PAJE 2
Cost of sales 22,000
Merchandise inventory 22,000
 PAJE 3
Accounts receivable 40,000
Sales 40,000

PAJE 4
Merchandise inventory 210,000
Finished Goods 210,000

Prepared by:
GFIVE 3.23.23

WP3_b
ISABELA COMPANY
Accounts Receivable Reconciliation
December 31, 20X7

Accounts Receivable
Unadjusted balance 0.00
Goods sold from F Company 40,000.00 PAJE 4
Balance 40,000.00

Prepared by:
GFIVE 3.23.23

WP3_c
ISABELA COMPANY
Accounts Payable Reconciliation
December 31, 20X7

Accounts Payable
Unadjusted balance 1,000,000.00 GL
Consigned Goods 155,000.00 PAJE 1
Goods sold F.O.B. shipping point 25,000.00 PAJE 5
Quarterly freight bill 2,000.00 PAJE 6
Purchases from B Company 5,300.00 PAJE 7
Adjusted balance 1,187,300.00

Prepared by:
 GFIVE 3.23.23

WP3_d
ISABELA COMPANY
Sales Cut-off Testing
December 31, 20X7

Description Selling Price Cost

December 20X7 Sales PAJE 2 28,000.00
January 20X8 Sales PAJE 3 40,000.00

Prepared by:
GFIVE 3.23.23

WP3_e
ISABELA COMPANY
Purchases Cut-off Testing
December 31, 20X7

Description Purchase Price Terms

December 20X7 Purchases 25,000.00 Net 30, FOB Sh
259,700.00 2%, 10 days, ne
Freight bill PAJE 6 2,000.00

Prepared by:
GFIVE 3.23.23

WP3_f
ISABELA COMPANY
Inventories Lead
December 31, 20X7

20X7
Description W/P Unadjusted
Ref Balance PAJE
Merchandise inventory WP3_a 1,250,000 1
 WP3_a 2
WP3_a 4
WP3_a 5
WP3_a 6
WP3_a 7

Total Inventories 1,250,000

Prepared by:
GFIVE 3.23.23

WP3_g
ISABELA COMPANY
Proposed Audit Adjustments
December 31, 20X7

PAJE 1
Accounts payable 155,000
Merchandise inventory 155,000

PAJE 2
Cost of sales 22,000
Merchandise inventory 22,000

PAJE 3
Accounts receivable 40,000
Sales 40,000

PAJE 4
Merchandise inventory 210,000
Finished Goods 210,000

PAJE 5
Merchandise inventory 25,000
Accounts payable 25,000

PAJE 6
Merchandise inventory 2,000
Accounts payable 2,000
PAJE 7
Accounts payable 5,300
Merchandise inventory 5,300

Prepared by:
GFIVE 3.23.23
Sales
9,000,000.00

NONE
NONE
40,000.00
NONE
NONE
NONE
NONE
40,000.00

9,040,000.00

Sales Cost of sales

9,000,000 0

(22,000)
40,000

9,040,000 (22,000)

PAJE 5
Merchandise inventory 25,000
Accounts payable 25,000

PAJE 6
Merchandise inventory 2,000
Accounts payable 2,000
PAJE 7
Accounts payable 5,300
Merchandise inventory 5,300
 Record as sale?
Cost Terms Date of shipment Per books Per Audit
22,000.00 Net 30 - Yes Yes
34,000.00 F.O.B. Shipping Point December 28 , 20X7 No Yes

Record as purchases/Included in inventory?

Terms Date of shipment Per books Per Audit
Net 30, FOB ShippingDecember 29, 20X7 Yes Yes
2%, 10 days, net 30 - Yes Yes
- - No Yes

20X7 20X7
Adjusting Report
PAJE Entries Balance
1 (155,000) 1,304,700
2 (22,000)
4 210,000
5 25,000
6 2,000
7 (5,300)

54,700 1,304,700
ecord as sale? Included in Inventory?
Per Audit Per books Per Audit
Yes Yes No
Yes No No