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 20,000

customer
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:
a. P 41,000 b. P 23,000 c. P 18,000 d. P 3,000

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:

a. P 286,000 b. P 271,000 c. P 266,000 d. P 248,000

Problem 2

In the event of your audit, you found the following information related to the inventories on December
31, 2006.

a. An invoice for P90,000, FOB shipping point, was received on December 15, 2006. The receiving report
indicates that the goods were received on December 18, 2006, 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, 2006. 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,
2006, were recorded on a receiving report dated January 2, 2007. The goods were not included in the
physical count, but invoice was included in accounts payable at December 31, 2006.

d. Merchandise costing P15,000 to the company FOB shipping point on December 26, 2006. The
purchase was recorded, but the merchandise was excluded from the ending inventory because it was
not received until January 4, 2007.

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 audit of APAS COMPANY for the year 2006 disclosed the following:
1. The December 31 inventory was determined by a physical count on December 28 and based on such
count, the inventory was recorded by:
Inventory 1,400,000
Cost of sales 1,400,000
2. The 2006 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on sales.
4. The company recognizes sales upon passage of title to the customers.
5. All customers are within a four-day delivery area.

The sales register for December, 2006 and January, 2007, showed the following details:

December Register
Invoice No. FOB Terms Date Shipped Amount
300 Destination 12/30 P 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
304 Shipping point 01/02 56,000
305 Shipping point 12/29 90,000

January Register
Invoice No. FOB Terms Date Shipped Amount
306 Destination 12/29 67,500
307 Shipping point 12/29 74,500
308 Destination 01/02 140,000
309 Shipping point 01/04 73,000
310 Shipping point 12/27 67,500

Questions

1. The Sales for December is over/(under) by:

a. P 36,000 under c. P 106,000 under
b. P 36,000 over d. P 106,000 over

2. The Inventory for December is over/(under) by:

a. P 235,600 over c. P 245,412 under
b. P 181,600 over d. P 245,412 over

3. The adjusted inventory at December 31, 2006 is:

a. P 1,645,412 b. P 1,218,400 c. P 1,164,400 d. P 1,154,588

4. The adjusted sales at December 31, 2006 is:

a. P 20,106,000 b. P 20,036,000 c. P 19,964,000 d. P 19,894,000

5. How much sales for the month of December 2006 were erroneously recorded in January 2007?
a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000

6. How much sales for the month of January 2007 were erroneously recorded in December 2006?
a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000

Problem 4
The following information was obtained from the balance sheet of LION INC.:
Dec. 31, 2006 Dec. 31, 2005
Cash P706,600 P 200,000
Notes receivable 0 50,000
Inventory ? 399,750
Accounts payable ? 150,000

All operating expenses are paid by Lion Inc. with cash and all purchases of inventory are made on
account. Lion, Inc. sells only one product. All sales are cash sales which are made for P100 per unit. Lion.
Inc., purchases 1,500 units of inventory per month and values its inventory using the periodic FIFO. The
unit cost of inventory during January 2006 was P65.20 and increased P0.20 per month during the year.
During 2006, payments to suppliers totaled P943,400 and operating expenses totaled P440,000. The
ending inventory for 2005 was valued at P65.00 per unit.

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

1. Recorded sale during 2006 is:

a. P 1,840,000 b. P 1,890,000 c. P 2,090,000 d. P 2,140,000

2. Number of units sold during 2006 is:

a. 21,400 b. P 20,900 c. 18,900 d. 18,400

3. The accounts payable balance at December 31, 2006 is:

a. P 400,000 b. P 250,000 c. P 156,000 d. P 150,000

4. The January 1, 2006 inventory balance is:

a. P 399,750 b. P 385,900 c. P 380,900 d. P 355,800

5. The amount of inventory at December 31, 2006 is:

a. P 399,750 b. P 385,900 c. P 380,900 d. P 355,800
PROBLEM 5

In conducting your audit of Ma. Angela Corporation, a company engaged in import and wholesale
business, for the fiscal year ended June 30, 2006, you determined that its internal control system was
good. Accordingly, you observed the physical inventory at an interim date, May 31, 2006 instead of at
June 30, 2006.

You obtained the following information from the company’s general ledger

Sales for eleven months ended May 31, 2006 P1,344,000

Sales for the fiscal year ended June 30, 2006 1,536,000
Purchases for eleven months ended May 31, 2006
(before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30, 2006 1,280,000
Inventory, July 1, 2005 140,000
Physical inventory, May 31, 2006 220,000

Your audit disclosed the following additional information.

(1) Shipments costing P12,000 were received in May and included in the physical inventory but
recorded as June purchases.

(2) Deposit of P4,000 made with vendor and charged to purchases in April 2006. Product was
shipped in July 2006.

(3) A shipment in June was damaged through the carelessness of the receiving department. This
shipment was later sold in June at its costs of P16,000.

Questions:
In audit engagements in which interim physical inventories are observed, a frequently used auditing
procedure is to test the reasonableness of the year-end inventory by the application of gross profit
ratios. Based on the above and the result of your audit, you are to provide the answers to the following:

1. The gross profit ratio for eleven months ended May 31, 2006 is
a. 20% b. 25% c. 30% d. 35%

2. The cost of goods sold during the month of June, 23003 using the gross profit ratio method is
a. P 132,000 b. P 148,000 c. P 144,000 d. P 160,000

3. The June 30, 2006 inventory using the gross profit method is
a. P 260,000 b. P 264,000 c. P 268,000 d. P 340,000

Theories

1. From the auditor's point of view, inventory counts are more acceptable prior to the year-end, when
a. Internal control is deficient.
b. Accurate perpetual inventory records are maintained.
c. Inventory is slow moving.
d. Significant amounts of inventory are held on consignment

2. For several years, a client's physical inventory count has been lower than what was shown on the
books at the time of the count so that downward adjustments to the inventory account were required.
Contributing to the inventory problem could be deficiencies in internal control that led to the failure to
record some
a. Purchases returned to vendors.
b. Sales returns received.
c. Sales discounts allowed.
d. Cash purchases.

3. When perpetual inventory records are maintained in quantities and in dollars, and internal control
procedures over inventory are deficient, the auditor would probably
a. Want the client to schedule the physical inventory count at the end of the year.
b. Insist that the client perform physical counts of inventory items several times during the year.
c. Increase the extent of tests for unrecorded liabilities at the end of the year.
d. Have to disclaim an opinion on the income statement that year.

4. Proper authorization of write-offs of uncollectible should be approved in which of the following

department?
A. Accounts Receivable
B. Credit
C. Accounts Payable
D. Treasurer

5. An inappropriate audit objective relative to accounts receivable is to determine that

A. The accounts exist and are properly valued
B. The client has rights in the receivable
C. The accounts represent the complete transaction process
D. The accounts are collected by the balance sheet date