APPLIED AUDITING

QUIZ NO._____
PREPARED BY: REGIE R. BAOY

1.

Presented below is a list of items that may or may not be reported as inventory in a companys December 31 statement of
financial position:
Goods out on consignment at another companys store
Goods sold on installment basis
Goods purchased f.o.b shipping point that are in transit at December 31
Goods purchased f.o.b destination that are transit at December 31
Goods sold to another company for which our company has signed an agreement to repurchase at a
set price that covers all costs related to the inventory
Goods sold where large returns are predictable
Goods sold f.o.b shipping point that are in transit December 31
Freight charges on goods purchased
Factory labor costs incurred on goods still unsold
Interest cost incurred for inventories that are routinely manufactured
Costs incurred to advertise goods still unsold
Materials on hand not yet placed into production
Office supplies
Raw materials on which the company has started production, but are not completely processed
Factory supplies
Goods held on consignment from another company
Costs identified with units completed but not yet sold
Goods sold f.o.b destination that are in transit at December 31
Temporary investment in stocks and bonds that will be resold in the near term
Goods held on consignment

P800,000
100,000
120,000
200,000
300,000
280,000
120,000
80,000
50,000
40,000
50,000
350,000
10,000
280,000
20,000
450,000
260,000
40,000
500,000
300,000

The amount of inventory to be reported in the December 31 statement of financial position is

2.

The BCA COMPANY is on calendar year basis. The following data were found during your examination:
a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000 had been excluded from the
inventory, and further testing revealed that the purchase had been recorded.
b.

Goods costing P50,000 had been received, included in inventory, and recorded as a purchase. However, upon your
inspection the goods were found to be defective and would be immediately returned.

c.

Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had been segregated in the
warehouse for shipment to a customer. The materials had been excluded from inventory as a signed purchase order had
been received from the customer. Terms, FOB destination.

d.

Goods costing P70,000 was out on consignment with HERMIE COMPANY. Since the monthly statement from HERMIE
COMPANY listed those materials as on hand, the items had been excluded from the final inventory and invoiced on
December 31 at P80,000.

e.

The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of shipment on December
31. However, this inventory was found to be included in the final inventory. The sale was properly recorded in 2012.

f.

Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped ay December 31, and were not
included in the inventory. A review of the customers purchase order set forth as FOB destination. The sale had not
been recorded.

g.

Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived yet. However, these
materials costing P170,000 had been included in the inventory count, but no entry had been made for their purchase.

h.

Merchandise costing P200,000 had been recorded as a purchase but not included as inventory. Terms of sale are FOB
shipping point according to the suppliers invoice which had arrived at December 31.

Further inspection of the clients records revealed the following December 31, 2012 balances: inventory P1,100,000;
accounts receivable, P580,000; accounts payable, P690,000; net sales, P5,050,000; net purchases, P2,300,000; net
income, P510,000.

Required:
Based on the above information, determine the adjusted balances of the following as of December 31, 2010:
1.
2.
3.
4.
5.

Inventory
Accounts payable
Net sales
Net purchases
Net income

Use the following information for items 3-5.

In January 2012, ABC began retailing product X. ABC uses the perpetual system. Data regarding purchases and sales of
product X during 2012 are as follows:

January 1
February 1
February 28
March 1
April 1
April 30
June 30
July 1
August 1
August 31
October 31
November 1
December 31

Units
5,000
2,000
3,000
2,500

6,000
2500

3,000

Purchases
Cost per Unit
10
11
11
12

12.5
13.5

14

Sales
Cost
P50,000
22,000

Units

Revenue

2,000

P24,000

5,000
4,000

70,000
52,000

3,000
1,000

39,000
16,000

5,000

100,000

33,000
30,000

75,000
33,750

42,000

A review of the companys cost records showed that the company used LIFO cost flow method in valuing its inventory.
3.

The cost of sales for the year 2012 as determine by the company is:
a. P239,500
b. P230,250
c. P233,724

d.

P241,836

4.

The correct cost of sales for the year 2012 under FIFO cost flow formula is:
a. P239,500
b. P230,250
c. P233,724

d.

P241,836

5.

The cost of ending inventory at December 31, 2012 using the weighted average cost formula is:
a. P52,026
b. P55,500
c. P46,250
d. P40,000

Use the following information for numbers 6-8

The records of ABC COMPANY report the following data for April.
Inventory 4/01/12
Purchases
Purchase returns
Purchase discounts
Sales
Sales returns
Employee discounts
Freight-in
Freight-out
Loss from breakage
Markups
Markup cancellations
Markdowns
Markdown cancellations

Cost
P36,000
346,500
9,000
7,000

Retail
P50,000
600,000
20,000
605,000
20,000
6,000

23,500
50,000
2,500
20,000
8,000
28,000
7,000

6.

Inventory to be reported using the conventional/conservative retail method is

a. P16,706
b. P17,271
c. P17,049

d.

P19,800

7.

Inventory to be reported using the average retail method is

a. P16,706
b. P17,271
c. P17,049

d.

P19,800

8.

Inventory to be reported using the FIFO retail method is

a.
9.

P16,706

b.

P17,271

c.

P17,049

d.

P19,800

When auditing inventories, an auditor would least likely verify that

A. The financial statement presentation of inventories is appropriate.
B. Damaged goods and obsolete items have been properly accounted for.
C. All inventory owned by the client are on hand at the time of the count.
D. The client has used proper inventory pricing.

10. The
A.
B.
C.
D.

primary objective of a CPAs observation of clients physical inventory count is to

Discover whether a client has counted particular inventory items or group of items.
Obtain direct knowledge that the inventory exist and has been properly counted.
Provide an appraisal of the quality of merchandise on hand on the day of the physical count.
Allow the auditor to supervise the conduct of the count so as to obtain assurance that inventory quantities are
reasonably accounted.

11. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high, an
auditor would probably
A. Increase the extent of test of controls of the inventory cycle.
B. Request the client to schedule the physical inventory count at the end of the year.
C. Insist that the client perform physical counts of inventory counts of inventory items several times during the year.
D. Apply gross profit tests to ascertain the reasonableness of the physical count.
12. The audit of year-end physical inventories should include steps to verify that the clients purchase and sales cutoffs are
adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was
not recorded as a
A. Sale in the subsequent period.
B. Purchase in the current period.
C. Sale in the current period.
D. Purchase return in the subsequent period.
13. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to
obtain evidence that all items
A. Included in the listing have been counted.
B. Represented by inventory tags are included in the listing.
C. Included in the listings are represented by inventory tags.
D. Represented by inventory tags are bona fide.
14. An auditor selected items for test counts while observing a clients physical inventory. The auditor then traced the tests
counts to the clients inventory listing. This procedure most likely obtained evidence concerning managements assertion of
A. Rights and obligations
C. Existence or occurrence
B. Completeness
D. Valuation
15. To gain assurance that all inventory items in a clients inventory listing schedule are valid, an auditor most likely would
trace
A. Inventory tags noted during the auditors observation to items listed in the inventory listing schedule.
B. Inventory tags noted during the auditors observation to items listed in receiving reports and vendors invoices.
C. Items listed in the inventory listing schedule to inventory tags and auditors recorded count sheets.
D. Items listed in receiving reports and vendors invoices to the inventory listing schedule.

16. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could
explain this difference?
A. Inventory items had been counted but tags placed on the items had not been taken off and added to the inventory
accumulation sheets.
B. Credit memos for several items returned by customers had not been recorded.
C. No journal entry had been made on retailer's books for several items returned to its suppliers.
D. An item purchased FOB shipping point had not arrived at the date of inventory count and had been reflected in he
perpetual records.
17. For several years a clients 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 inventory problem could be
weaknesses 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.
18. Which of the following is the best audit procedure for the discovery of damaged merchandise in clients ending inventory?
A. Compare physical quantities of slow-moving items with corresponding quantities of the prior year.
B. Observe merchandise and raw materials during the clients physical inventory taking.
C. Review managements inventory representation letter for accuracy.
D. Test overall fairness of inventory values by comparing the companys turnover ratio.

19. An
A.
B.
C.
D.

inventory turnover is useful to the auditor because it may detect

Inadequacies in inventory pricing.
Methods of avoiding cyclical holding costs.
The optimum automatic reorder points.
The existence of obsolete merchandise.

20. Which of the following auditing procedures most likely would provide assurance about a manufacturing entitys inventorys
valuation?
A. Testing the entitys computation of standard overhead rates.
B. Obtaining confirmation of inventories pledged under loan agreements.
C. Reviewing shipping and receiving cut-off procedures for inventories.
D. Tracing test counts to entitys inventory listing.
21. When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that:
A. All goods purchased before year-end are received before the physical inventory count.
B. No goods held on consignment for customers are included in the inventory balance.
C. No goods observed during the physical count are pledged or sold.
D. All goods owned at year-end are included in the inventory balance.
22. In a manufacturing company, which one of the following audit procedures would give the least assurance of the valuation of
inventory at the audit date?
A. Testing the computation of standard overhead rates.
B. Examining paid vendors invoices.
C. Reviewing direct labor rates.
D. Obtaining confirmation of inventories pledged under loan agreements.

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