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AUDITING PROBLEMS OCAMPO/CABARLESAP-Audit of Inventories OCTOBER 2015The Use of Assertions in Obtaining Audit EvidenceAssertions about classes of transactions and events for the period under audit: (COCAC)Completeness - all transactions and events that should have been recorded have been recorded.Oc...

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Since 1977

AUDITING PROBLEMS AP.1901-Audit of Inventories

OCAMPO/CABARLES OCTOBER 2015

The Use of Assertions in Obtaining Audit Evidence Assertions about classes of transactions and events for the period under audit: (COCAC) Completeness - all transactions and events that should have been recorded have been recorded. Occurrence - transactions and events that have been recorded have occurred and pertain to the entity. Classification - transactions and recorded in the proper accounts.

events

have

been

Accuracy - amounts and other data relating to recorded transactions and events have been recorded appropriately. Cutoff - transactions and events have been recorded in the correct accounting period.

Assertions about account balances at the period end: (RECV) Rights and obligations - the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

Existence - assets, liabilities, and equity interests exist. Completeness - all assets, liabilities and equity interests that should have been recorded have been recorded. Valuation and allocation - assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

Assertions about presentation and disclosure: (COCA) Completeness - all disclosures that should have been included in the financial statements have been included. Occurrence and rights and obligations - disclosed events, transactions, and other matters have occurred and pertain to the entity. Classification and understandability - financial information is appropriately presented and described, and disclosures are clearly expressed. Accuracy and valuation - financial and other information are disclosed fairly and at appropriate amounts.

INTERNAL CONTROL MEASURES 1. Authority and responsibility for controlling the inventories should be centralized management and in one person.

6. Deliveries of materials, finished stock and merchandise should be made only upon specific authorizations emanating at authorized levels.

2. There should be careful selection of inventory personnel and intensive training of such personnel in policies, objectives and system of inventory control.

7. Slow-moving, obsolete and damaged stock should be identified and reported following periodic reviews of physical and book records by qualified employees. Valuation on the basis of approved cost-mark-down methods should be reviewed.

3. Adequate physical facilities for handling and storage of inventory should be provided. 4. Adequate system of procedures, forms and reports related to the management of inventories should be developed and implemented. 5. Quantitative controls through perpetual inventory records; book quantities verified with physical counts at least once a year and differences being investigated, promptly adjusted and reported to higher authority should be implemented.

8. Safeguards against that action of the element and inaccuracies in recording receipts and issues should be adopted. Example – Maintaining adequate insurance coverage.

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AP.1901

EXCEL PROFESSIONAL SERVICES, INC. SUBSTANTIVE AUDIT OF INVENTORIES Inventory Balances

Purchases

Existence: Recorded inventory exist

Completeness: Purchases that occurred are recorded

1. Before the client takes the physical inventory, review and approve the client’s written plan for taking it.

Trace a sequence of receiving reports to entries in the voucher register. Test cutoff. Account for a sequence of entries in the voucher register.

2. Observe the inventory.

client

personnel

physically

counting

3. Confirm inventories on consignment and held in public warehouses.

Completeness: All inventory of the entity recorded 4. Obtain a copy of prenumbered inventory tags used by the client in taking inventory and reconcile the tags to the listing. 5. For selected items, trace from tags to listing. 6. Perform cutoff procedures. Obtain the receiving report number for the last shipment received prior to yearend and determine that the item is included in inventory. Also, identify the last shipping document and determine, based on shipping terms, whether the item was properly recorded in sales or inventory. 7. Perform analytical procedures. Rights and obligations: Inventory is owned by the entity 8. Determine that consigned inventory has been excluded from inventory and that inventory pledged has been properly disclosed. Examine confirmations from financial institutions and read minutes of the board of directors’ meetings. Valuation and allocation: Recorded inventory is valued in accordance with GAAP

Occurrence: Recorded purchases are for items that were acquired Examine underlying documents for authenticity and reasonableness. Scan voucher register for large or unusual items. Trace inventory purchased to perpetual records. Scan voucher register for duplicate payments. Classification: Purchase transactions have been recorded in the proper accounts For a sample of entries in the purchases journal, verify the accuracy of account coding.

Accuracy (Valuation): amounts

Purchases are recorded at proper

Recompute invoices and compare invoice price to purchase order. Production Completeness: All production transactions that occurred are recorded Account for a sequence for production reports. Occurrence: Recorded production transactions occurred

9. Considering the method the client uses for inventory valuation, examine invoices for inventory on hand or trace prior year’s inventory listing to verify cost.

For selected transactions, examine signed materials requisitions, approved labor tickets, and allocation of overhead. Classification: Production transactions have been recorded in the proper accounts

10. For selected items, determine net realizable value (NRV) of the inventory and apply the lower of cost or NRV.

For a sample of entries, verify the accuracy of account coding.

11. Verify computations in the inventory listing. 12. Review the obsolescence of the inventory by: a. being alert while observing inventory being taken for damaged, slow-moving, or scrap inventory. b. Scanning perpetual records for slow-moving items and discussing their valuation with client. Presentation and disclosure: Inventory is classified and disclosed in accordance with GAAP 13. Determine whether accounts are classified and disclosed in the financial statements in accordance with GAAP.

Accuracy (Valuation): Production recorded at proper amounts

transactions

are

Test cost records by tracing to underlying documents, such as bill of materials, labor tickets, authorized labor rates, and standard overhead rates. Review variances.

- end -

EXCEL PROFESSIONAL SERVICES, INC. PROBLEM NO. 1 You were engaged by Quezon Corporation for the audit of the company’s financial statements for the year ended December 31, 2015. The company is engaged in the wholesale business and makes all sales at 25% over cost. The following were gathered from the client’s accounting records:

PU R C HAS E S

SALES Date Ref. Balance forwarded Dec. SI No. 27 965 Dec. SI No. 28 966 Dec. SI No. 28 967 SI No. Dec. 969 31 Dec. SI No. 31 970 Dec. SI No. 31 971 Dec. Closing 31 entry

Amount P5,200,000 40,000 150,000 10,000 46,000 68,000 16,000 (5,530,000) P -

Note: SI = Sales Invoice Inventory Accounts receivable Accounts payable

Date Ref. Balance forwarded Dec. RR No. 27 1057 Dec. RR No. 28 1058 Dec. RR No. 29 1059 RR No. Dec. 1061 30 Dec. RR No. 31 1062 Dec. RR No. 31 1063 Dec. Closing 31 entry

Amount P2,700,000 35,000 65,000 24,000 70,000 42,000 64,000 (3,000,000) P -

RR = Receiving Report P600,000 500,000 400,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was properly taken. When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report which had been used was No. 1063 and that no shipments had been made on any Sales Invoices whose number is larger than No. 968. You also obtained the following additional information: a) Included in the warehouse physical inventory at December 31 were goods which had been purchased and received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost was P18,000. b) On the evening of December 31, there were two trucks in the company siding:  Truck No. CPA 123 was unloaded on January 2 of the following year and received on Receiving Report No. 1063. The freight was paid by the vendor.  Truck No. ILU 143 was loaded and sealed on December 31 but leave the company premises on January 2. This order was sold for P100,000 per Sales Invoice No. 968. c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to Brooks Trading Corporation. Brooks received the goods, which were sold on Sales Invoice No. 966 terms FOB Destination, the next day. d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No. 1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by the client. However, the freight was deducted from the purchase price of P800,000. QUESTIONS:

Based on the above and the result of your audit, determine the following: 1. Sales for the year ended December 31, 2015 a. P5,250,000 c. P5,400,000 b. P5,150,000 d. P5,350,000 2. Purchases for the year ended December 31, 2015 a. P3,000,000 c. P3,018,000 b. P3,754,000 d. P3,818,000 3. Inventory as of December 31, 2015 a. P864,000 c. P968,000 b. P800,000 d. P814,000 4. Accounts receivable as of December 31, 2015 a. P350,000 c. P370,000 b. P220,000 d. P120,000 5. Accounts payable as of December 31, 2015 a. P418,000 c. P 400,000 b. P354,000 d. P1,218,000

PROBLEM NO. 2 During your audit of the Makati Corporation for the year ended December 31, 2015, you found the following information relating to certain inventory transactions from your observation of the client’s physical count and review of sales and purchases cutoff: a.

Goods costing P180,000 were received from a vendor on January 3, 2016. The goods were not included in the physical count. The related invoice was received and recorded on December 30, 2015. The goods were shipped on December 31, 2015, terms FOB shipping point.

b. Goods costing P200,000, sold for P300,000, were shipped on December 31, 2015, and were received by the customer on January 2, 2016. The terms of the invoice were FOB shipping point. The goods were included in the ending inventory for 2015 and the sale was recorded in 2016. c.

The invoice for goods costing P150,000 was received and recorded as a purchase on December 31, 2015. The related goods, shipped FOB destination were received on January 2, 2016, but were included in the physical inventory as goods in transit.

d. A P600,000 shipment of goods to a customer on December 30, 2015, terms FOB destination, was recorded as a sale upon shipment. The goods, costing P400,000 and delivered to the customer on January 6, 2016, were not included in the 2015 ending inventory. e.

Goods valued at P250,000 are on consignment from a vendor. These goods are included in the physical inventory.

f.

Goods valued at P160,000 are on consignment with a customer. These goods are not included in the physical inventory.

QUESTIONS: Based on the above and the result of your audit, answer the following: 1. The inventory as of December 31, 2015 is understated by c. P140,000 a. P230,000 b. P190,000 d. P290,000

EXCEL PROFESSIONAL SERVICES, INC. 2. The cost of sales for the year ended December 31, 2015 is overstated by a. P290,000 c. P440,000 b. P110,000 d. P380,000 3. The profit for the year ended December 31, 2015 is misstated by a. P190,000 over c. P140,000 under b. P 10,000 over d. P290,000 under 4. The working capital as of December 31, 2015 is misstated by a. P190,000 over c. P140,000 under b. P 10,000 over d. P290,000 under

receiving department shipment in early December 2015 was damaged by rain. This shipment was later sold in the last week of December at cost.

150,000

REQUIRED: 1. Gross profit rate for 11 months ended November 30, 2015. 2. Cost of goods sold during the month of December 2015 using the gross profit method. 3. December 31, 2015 inventory using the gross profit method.

SOLUTION GUIDE

a b c d e f

Inventory (180) 200 150 (400) 250 (160) (140)

Over (Under) COS Profit 180 (180) (200) (100) 400 200 (250) 250 160 (160) 290 10

SOLUTION GUIDE: WC (180) (100) 200 250 (160) 10

Your client, Mandaluyong Company, is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused until sold to customers. In conducting your audit for the year ended December 31, 2015, you were satisfied that the system of internal control was good. Accordingly, you observed the physical inventory at an interim date, November 30, 2015 instead of at year end. You obtained the following information from your client’s general ledger: P 1,312,500 1,425,000 12,600,000 14,400,000 10,125,000 12,000,000

Your audit disclosed the following information: a)

b)

c)

d)

e)

Shipments received in November and included in the physical inventory but recorded as December purchases. Shipments received in unsalable condition and excluded from physical inventory. Credit memos had not been received nor chargebacks to vendors been recorded: Total at November 30, 2015 Total at December 31, 2015 (including the November unrecorded chargebacks) Deposit made with vendor and charged to purchases in October, 2015. Product was shipped in January, 2016. Deposit made with vendor and charged to purchases in November, 2015. Product was shipped FOB destination, on November 29, 2015 and was included in November 30, 2015 physical inventory as goods in transit. Through the carelessness of the

Sales, up to 11/30 Less COS, up to 11/30: Inventory, 1/1 Net purchases, 11/30 TGAS Inventory, 11/30 Gross profit

P12,600,000 P 1,3,500 10,110,000 11,422,500 ( 1,342,500)

10,080,000 P 2,520,000

Computation of adjusted amounts:

PROBLEM NO. 3

Inventory, January 1, 2015 Physical inventory, November 30, 2015 Sales for 11 months ended Nov. 30, 2015 Sales for the year ended Dec. 31, 2015 Purchases for 11 months ended Nov. 30, 2015 (before audit adjustments) Purchases for the year ended Dec. 31, 2015 (before audit adjustments)

Requirement No. 1

P 112,500

Inventory, 11/30

N.P.,11/30 (11 mos.)

N.P.,12/31 (12 mos.)

1,425,000

10,125,000

12,000,000

a

-

112,500

-

b

-

(

15,000)

(

22,500)

c

-

(

30,000)

(

30,000)

d

( 82,500)

e

-

-

1,342,500

10,110,000

Unadjusted

Adjusted

(

82,500)

11,947,500

Requirement No. 2 Sales, up to 12/31 Less sales, up to 11/30 Sales - December Sales without profit Sales with profit x Cost ratio COS with profit COS without profit Total

P14,400,000 12,600,000 1,800,000 ( 150,000) 1,650,000 .8 1,320,000 150,000 P 1,470,000

Requirement No. 3 15,000

22,500

30,000

82,500

Inventory, 1/1 P 1,312,500 11,947,500 Net purchases, 12/31 TGAS 13,260,000 Less cost of sales: With profit [(14.4M -.15M)x.8] P11,400,000 Without profit 150,000 11,550,000 Estimated inventory, 12/31 P 1,710,000...