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AUDITING REVIEWER

Week 4: Audit of Inventories including Biological Assets

Objec�ves:
1. To know the audit objec�ves, the asser�ons and procedures in audi�ng Inventories including Biological Assets

AUDIT OF INVENTORIES

Assertions
Usual Audit Procedure
Oc Cu Cl Co R E AVA P
1. Observing inventory count and performing test counts     
2. Reconciling inventory summary sheet with general ledger  
3. Confirming inventories held by others   
4. Performing purchases and inventory cut-off   
5. Checking appropriation valuation in accordance with accounting policies  
6. Performing lower of cost or net realizable value test 
7. Determining whether any inventories have been pledged and reviewing purchase

commitment
8. Performing test of details on cost of goods sold     
9. Performing analytical procedures   

As defined in PAS 2 paragraph 6, inventories are assets held for sale in the ordinary course of business, in the process of produc�on
for such sale or in the form of materials or supplies to be consumed in the produc�on process or in the rendering of services.

Initial Measurement Subsequent Measurement

The cost of inventories shall comprise all costs of purchase, costs Inventories are required to be stated at the lower of cost and
of conversion and other costs incurred in bringing the net realizable value.
inventories to their present location and condition.
Special Considerations
Repurchase agreement – a contract in which the entity sells an Cost Formula:
asset and also promises to buy or has the option to repurchase
the asset. Specific Identification of cost
FIFO
Consignment arrangement – consignor shall not recognize Weighted Average
revenue upon delivery of product, but only when: (i) the
consignee sold the product to a customer; or (ii) after an Change in Inventory Method
expiration of a specified period. It is considered as a change in accounting policy, hence should
be applied retrospectively.
Trade Discount vs. Cash Discount
Inventory Estimation
Methods of Accounting for Purchases
Gross Method – Purchases are recorded at the total invoice price Gross Profit Method
Net Method – purchases are recorded at the invoice price net of Retail Inventory Method
cash discount (whether taken or not)

PROBLEM 1: Synzer CO. has incurred the following costs in connec�on with its purchase of inventory:
Purchase price based on vendor’s invoices 1,250,000.00
Trade discounts on purchases before deduction from vendor’s invoices (125,000.00)
Salaries of accounting department 150,000.00
Brokerage commission paid to agents arranging imports 50,000.00
Sales commission to sales agents 75,000.00
After-sales warranty costs 62,500.00
Import duties 100,000.00
Freight and insurance on purchases 250,000.00
Other handling costs relating to imports 25,000.00

Required: How much is the total cost of purchases? P1,550,000.00

Reviewer: Rona Loreta Andrea G. Caneda, CPA, MBA

Week 4: Audit of Inventories including Biological Assets
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PROBLEM 2: The snake Inc. reported income before taxes of P1,000,000.00 for 2024 and P1,200,000.00 for 2025. The company takes
it annual physical count of inventory every December 31. Your audit revealed the following informa�on:

a) The price used for 4,000 units included in the 2024 ending inventory was P119. The correct cost was P129.
b) Goods cos�ng P70,000 was received from a vendor on January 5, 2025. The shipment was made on December 26, 2024 under
FOB Shipping Point term. The purchase was recorded in 2024 but the shipment was not included in the 2024 ending inventory.
c) Merchandise cos�ng P100,000 was sold to customer on December 29, 2024. Snake was asked by the customer to keep the
merchandise un�l January 3, 2025, when the customer would come and pick it up. Although the sale was properly recorded in
2024, the merchandise was included in the ending inventory.
d) A supplier sold merchandise valued at P140,000 to Snake Inc. The merchandise was shipped FOB Shipping point on December
29, 2025 and was received by Snake on December 31, 2025. The purchase was recorded in 2025 and the merchandise was not
included in the 2025 ending inventory.
e) On December 31, 2025, merchandise cos�ng P30,000 was in the hands of another en�ty and was sold for P60,000. However,
Snake is obliged to purchase these on February 28, 2026 at a set price of 80,000.

Required: Compute for the following (disregard tax implica�ons)

1. The December 31, 2024 Inventory is over or understated by
2. The December 31, 2025 Inventory is over or understated by
3. The corrected income for 2024 is
4. The corrected income for 2025 is
5. If no correc�ng entries are made for the 2 years combined, by what amount did the total income change?

PROBLEM 3: Penduks Co. completed his first year of trading as a toy wholesaler on December 31, 2024. He is worried about his end-
of-year physical and cut-off procedures.

The inventory count balance at December 31, 2024 under the perpetual inventory method was P314,800. His physical count,
however, revealed the cost of inventory on hand on December 31, 2024 to be only P293,600. While they expected a small inventory
shor�all due to breakage and pety the�, he considered this shor�all to be excessive.

Upon inves�ga�ng, you discovered the following:

- Goods cos�ng P3,200 were sold on credit to Maria for P5,200 on December 26, 2024 on FOB Des�na�on terms. The goods were
s�ll in transit at December 31, 2024. Penduks recorded the sale on December 26, 2024 but did not include these goods in the
physical count.
- Goods cos�ng P8,400 were sold on credit to Elmo Co. for P12,800 on December 24, 2024 on FOB Shipping terms. The goods
were shipped on December 28, 2024. The sale was unrecorded at December 31, 2024 and Penduks Co. did not include these
goods in the physical count.
- Goods cos�ng P6,000 had been returned to Camilo Co. on December 31, 2024. A credit note was received from the supplier on
January 5, 2025. No payment had been made for the goods prior to their return.
- Included in the physical count were P8,800 of goods held on consignment
- Goods cos�ng P3,640 were purchased on credit from Ambrosyo Co. on December 24, 2024 and received on December 28,
2024. The purchase was unrecorded at December 31, 2024 but the goods were included in the physical count.
Reviewer: Rona Loreta Andrea G. Caneda, CPA, MBA
Week 4: Audit of Inventories including Biological Assets
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- Goods cos�ng P1,600 were purchased on credit from Gregorio Supplies on December 23, 2024 on FOB Shipping terms. The
goods were delivered to the transport company on December 27, 2024. The purchase was recorded on December 27, 2024 but
since the goods had not yet arrived, Penduks Co. did not include these goods in the Physical Count.
- On December 31, 2024 Penduks Co. had unsold goods cos�ng P14,800 out on consignment. These goods were not included in
the physical count.

Required: Compute for the following:

1. The adjusted Inventory Balance per ledger is
2. The adjusted inventory per count is
3. The adjusted inventory shortage is

Reviewer: Rona Loreta Andrea G. Caneda, CPA, MBA

Week 4: Audit of Inventories including Biological Assets
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BIOLOGICAL ASSETS

A biological asset is a living animal or plant. PAS 41 prescribes the accoun�ng and disclosure requirement on biological assets.

Initial Measurement and Subsequent

Shall be measured at its fair value less cost to sell, except when the fair value cannot be measured reliably.

Agricultural produce – is the harvested product of the en�ty’s biological assets.

Initial Measurement Subsequent Measurement

Shall be measured at its fair value less cost to sell, except when the Treated as Inventory under PAS 2
fair value cannot be measured reliably.

PROBLEM 4 The following informa�on pertains to Quack Quack Bibe Co., a company opera�ng in a diverse agricultural ac�vity.

Sheep Biological P400,000

Felled Trees Agricultural Produce 2,680,000
Harvested cane Agricultural Produce 1,160,000
Coconut trees PPE 4,800,000
Dairy cattle Biological 4,000,000
Cigarette Marlborro Inventory 41,000
Sausages Inventory 20,000
Cured hams Inventory 36,000
Pig carcass Agricultural Produce 230,000
Fruit pickles Inventory 120,000
Trees in a plantation forest Biological 12,000,000
Harvested cabbage Agricultural Produce 40,000
Carpet Inventory 260,000
Grape vines PPE 1,500,000
Picked grapefruit Agricultural Produce 180,000
Wool Agricultural Produce 160,000
Tea Inventory 38,200
Cotton Agricultural Produce 1,360,000
Plants Biological 1,400,000
Thread Inventory 80,000
Carrots due to be harvested next week Biological 200,000
Low fat milk Inventory 520,000
Wine Inventory 6,000,000
Picked fruit Agricultural Produce 49,400
Frozen lechon (cebu) Inventory 120,000
Mango tree with ripe mango not yet harvested PPE 1,400,000
Guard dogs PPE 300,000
Animals in zoo (tigers, zebra, python etc) PPE 24,000,000
Dinasaur statue in zoo PPE 1,000,000
Tomato vines (with ripe fruit ready for harvest) Biological 500,000
Strawberry plants PPE 1,500,000
Required:
1. How much is classified as biological assets? P18,500,000.00
2. How much is classified as agricultural produce? P5,859,400.00
3. How much is classified as Inventory? 7,235,200.00
4. How much is classified as PPE? 34,500,000.00

PROBLEM 5: On December 31, 2024, Boy Macho Farming Co. has a herd of dairy catle whose fair value less costs to sell at the
repor�ng date was 400,000 bucks. The equivalent value of the herd at the beginning of the year was 350,000 bucks. The increase
was due partly to purchases of animals made during April 1, 2024 at a cost of 20,000 bucks.

Required:
1. Does PAS 41 apply in this situa�on?
2. At what amount is the herd carried on the statement of financial posi�on?
3. What is the overall gain from this ac�vity during the year?
4. Does the gain have to be disaggregated under PAS 41’s disclosure requirements?

Reviewer: Rona Loreta Andrea G. Caneda, CPA, MBA

Week 4: Audit of Inventories including Biological Assets
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-END-
Reference Book: Audi�ng and Assurances: Concepts and Applica�ons, Part I by Asuncion, Ngina and Escala (2023-2024 Edi�on)

Reviewer: Rona Loreta Andrea G. Caneda, CPA, MBA

Week 4: Audit of Inventories including Biological Assets