MANUEL L.

QUEZON UNIVERSITY

INTEGRATED REVIEW 3 RROcampo

IR3.407 AUDIT OF INVENTORIES 1ST Semester AY 2018-2019

LECTURE NOTES
INTERNAL CONTROL MEASURES
1. Authority and responsibility for controlling the inventories should be centralized management and in one person.
2. There should be careful selection of inventory personnel and intensive training of such personnel in policies,
objectives and system of inventory control.
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.
6. Deliveries of materials, finished stock and merchandise should be made only upon specific authorizations
emanating at authorized levels.
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.
8. Safeguards against that action of the element and inaccuracies in recording receipts and issues should be adopted.
Example – Maintaining adequate insurance coverage.

SUBSTANTIVE AUDIT OF INVENTORIES

Inventory Balances
Existence: Recorded inventory exist
1. Before the client takes the physical inventory, review and approve the client’s written plan for taking it.
2. Observe the client personnel physically counting inventory.
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 year-end
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
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.
10. For selected items, determine net realizable value (NRV) of the inventory and apply the lower of cost or NRV.
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.

Purchases
Completeness: Purchases that occurred are recorded
Trace a sequence of receiving reports to entries in the voucher register. Test cutoff. Account for a sequence of
entries in the voucher register.
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): Purchases are recorded at proper amounts
Recompute invoices and compare invoice price to purchase order.

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Production
Completeness: All production transactions that occurred are recorded
Account for a sequence for production reports.
Occurrence: Recorded production transactions occurred
For selected transactions, examine signed materials requisitions, approved labor tickets, and allocation of overhead.
Classification: Production transactions have been recorded in the proper accounts
For a sample of entries, verify the accuracy of account coding.
Accuracy (Valuation): Production transactions are recorded at proper amounts
Test cost records by tracing to underlying documents, such as bill of materials, labor tickets, authorized labor rates,
and standard overhead rates. Review variances.
 DONE 

DISCUSSION PROBLEMS
PROBLEM NO.1
Presented below is a list of items that may or may not reported as inventory in a company’s December 31 statement of
financial position.
1. Goods out on consignment at another company’s store P800,000
2. Goods sold on installment basis 100,000
3. Goods purchased f.o.b. shipping point that are in transit at December 31 120,000
4. Goods purchased f.o.b. destination that are in transit at December 31 200,000
5. 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 300,000
6. Goods sold where large returns are predictable 280,000
7. Goods sold f.o.b. shipping point that are in transit December 31 120,000
8. Freight charges on goods purchased 80,000
9. Factory labor costs incurred on goods still unsold 50,000
10. Interest cost incurred for inventories that are routinely manufactured 40,000
11. Costs incurred to advertise goods held for resale 20,000
12. Materials on hand not yet placed into production 350,000
13. Office supplies 10,000
14. Raw materials on which a the company has started production,
but which are not completely processed 280,000
15. Factory supplies 20,000
16. Goods held on consignment from another company 450,000
17. Costs identified with units completed but not yet sold 260,000
18. Goods sold f.o.b. destination that are in transit at December 31 40,000
19. Temporary investment in stocks and bonds that will be resold in the near future 500,000
REQUIRED:
How much of these items would typically be reported as inventory in the financial statements?

PROBLEM NO.2
Salvador Company included the following items under inventories:
Materials P1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventories 60,000
Advertising catalogs and shipping boxes 150,000
Finished goods in factory 2,000,000
Finished goods in company-owned retail stores, including 50% profit on cost 750,000
Finished goods in hands of consignees including 40% profit on sales 400,000
Finished goods in transit to customers, shipped FOB destination, at cost 250,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit shipped FOB shipping point, excluding freight of P30,000 330,000
Goods held on consignment, at sales price, cost P150,000 200,000
REQUIRED:
Compute the amount to be presented as “Inventories” under current assets.

PROBLEM NO.3
Bobby Company asks you to review its December 31 inventory values and prepare the necessary adjustments to the
books. The following information is given to you.
a. Bobby uses the periodic method of recording inventory. A physical count reveals P2,348,900 inventory on hand at
December 31.
b. Not included in the physical count of inventory is P134,200 of merchandise purchased on December 15 from
Standing. This merchandise was shipped f.o.b. shipping point on December 29 and arrived in January. The invoice
arrived and was recorded on December 31.

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c. Included in inventory is merchandise sold to Oval on December 30, f.o.b. destination. This merchandise was
shipped after it was counted. The invoice was prepared and recorded as a sale on account for P128,000 on
December 31. The merchandise cost P73,500, and Oval received it on January 3.
d. Included in inventory was merchandise received from Owl on December 31 with an invoice price of P156,300. The
merchandise was shipped f.o.b destination. The invoice, which has not yet arrived, has not been recorded.
e. Not included in inventory is P85,400 of merchandise purchased from Oxygen Industries. The merchandise was
received on December 31 after the inventory had been counted. The invoice was received and recorded on
December 30.
f. Included in inventory was P104,380 of inventory held by Bobby on consignment from Ovoid Industries.
g. Included in inventory is merchandise sold to Kemp f.o.b. shipping point. This merchandise was shipped after it was
counted. The invoice was prepared and recorded as a sale for P189,000 on December 31. The cost of this
merchandise was P105,200, and Kemp received the merchandise on January 5.
h. Excluded from inventory was carton labeled “Please accept for credit.” This carton contains merchandise costing
P15,000 which had been sold to a customer for P25,000. No entry had been made to the books to reflect the
return, but none of the returned merchandise seemed damaged.
REQUIRED:
Determine the adjusted inventory cost of Bobby Company at December 31.

PROBLEM NO.4
During your audit of the Pogi Corporation for the year ended December 31, 2019, 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, 2020. The goods were not included in the
physical count. The related invoice was received and recorded on December 30, 2019. The goods were shipped on
December 31, 2019, terms FOB shipping point.
b. Goods costing P200,000, sold for P300,000, were shipped on December 31, 2019, and were received by the customer
on January 2, 2020. The terms of the invoice were FOB shipping point. The goods were included in the ending
inventory for 2019 and the sale was recorded in 2020.
c. The invoice for goods costing P150,000 was received and recorded as a purchase on December 31, 2019. The
related goods, shipped FOB destination were received on January 2, 2020, but were included in the physical
inventory as goods in transit.
d. A P600,000 shipment of goods to a customer on December 30, 2019, terms FOB destination, was recorded as a sale
upon shipment. The goods, costing P400,000 and delivered to the customer on January 6, 2020, were not included
in the 2019 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.
REQUIRED:
Based on the above and the result of your audit, answer the following:
1. The inventory as of December 31, 2019 is understated by
2. The cost of sales for the year ended December 31, 2019 is overstated by
3. The profit for the year ended December 31, 2019 is misstated by
4. The working capital as of December 31, 2019 is misstated by

PROBLEM NO.5
You were engaged by Tan Corporation for the audit of the company’s financial statements for the year ended
December 31, 2019. 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:
SALES PURCHASES
Date Ref. Amount Date Ref. Amount
Balance forwarded P5,200,000 Balance forwarded P2,700,000
Dec. 27 SI No. 965 40,000 Dec. 27 RR No. 1057 35,000
Dec. 28 SI No. 966 150,000 Dec. 28 RR No. 1058 65,000
Dec. 28 SI No. 967 10,000 Dec. 29 RR No. 1059 24,000
Dec. 31 SI No. 969 46,000 Dec. 30 RR No. 1061 70,000
Dec. 31 SI No. 970 68,000 Dec. 31 RR No. 1062 42,000
Dec. 31 SI No. 971 16,000 Dec. 31 RR No. 1063 64,000
Dec. 31 Closing entry (5,530,000) Dec. 31 Closing entry (3,000,000)
P - P -
Note: SI = Sales Invoice RR = Receiving Report
Inventory P600,000
Accounts receivable 500,000
Accounts payable 400,000
You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was
properly taken.

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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.
REQUIRED:
Based on the given information and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2019
2. Purchases for the year ended December 31, 2019
3. Inventory as of December 31, 2019
4. Accounts receivable as of December 31, 2019
5. Accounts payable as of December 31, 2019

PROBLEM NO.6
The Anda Company is on a calendar year basis. The following data were found during your audit:
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 2019.
f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at December 31, and were
not included in the inventory. A review of the customer’s purchase order set forth terms 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 as 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 supplier’s invoice which had arrived at December 31.
Further inspection of the client’s records revealed the following December 31, 2019 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 and the result of your audit, determine the adjusted balances of following as of December 31,
2019:
1. Inventory
2. Accounts payable
3. Net sales
4. Net purchases
5. Profit

PROBLEM NO.7
Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery stores. The company operates a perpetual
inventory system, with the first-in, first-out method used to assign costs to inventory items. Transactions and other
related information regarding two of the items (baked beans and plain flour) carried by Jay Roy Ltd are given below
for June 2018 the last month of the company's reporting period.

Baked beans Plain flour

Unit of packaging Case containing 25 x 410g cans Box containing 12 x 4kg bags
Inventory @ 1 June 2019 35,000 cases @ P19.60 62,500 boxes @ P38.40
Purchases 1. 10 June: 20,000 cases @ P19.50 per case 1. 3 June: 15,000 boxes @ P38.45

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Baked beans Plain flour

2. 19 June: 47,000 cases @ P19.70 per case 2. 15 June: 20,000 boxes @ P38.45
3. 29 June: 24,000 boxes @ P39.00
Purchase terms 2/10, n/30, FOB destination n/30, FOB destination
June sales 73,000 cases @ P28.50 95,000 boxes @ 40.00
Returns and allowances A customer returned 5,000 cases that had As June 15 purchase was unloaded, 1,000
been shipped in error. The customer's boxes were discovered damaged. A credit
account was credited for P142,500. of P38,450 was received by Jay Roy
Retailing Ltd.
Physical count at 30 June
2019 32,600 cases on hand 1,500 boxes on hand
Explanation of variance No explanation found assumed stolen Boxes purchased on 29 June still in transit
on 30 June
Net realizable value at 30
June 2019 P29.00 per case P38.50 per box
REQUIRED:
Based on the above and the result of your audit, answer the following:
1. The inventory of baked beans as of June 30, 2019 at cost, as adjusted is
2. The inventory of plain flour as of June 30, 2019 at cost, as adjusted is
3. The amount of inventory shortage is
4. The total inventory to be recognized in the balance sheet as of June 30, 2019 is

PROBLEM NO.8
Your client, Brian 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, 2019, you were satisfied that the system of internal control
was good. Accordingly, you observed the physical inventory at an interim date, November 30, 2019 instead of at year
end. You obtained the following information from your client’s general ledger:
Inventory, January 1, 2019 P 1,312,500
Physical inventory, November 30, 2019 1,425,000
Sales for 11 months ended Nov. 30, 2019 12,600,000
Sales for the year ended Dec. 31, 2019 14,400,000
Purchases for 11 months ended Nov. 30, 2019 (before audit adjustments) 10,125,000
Purchases for the year ended Dec. 31, 2019 (before audit adjustments) 12,000,000
Your audit disclosed the following information:
a) Shipments received in November and included in the physical inventory but recorded as
December purchases. P 112,500
b) 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, 2019 15,000
Total at December 31, 2019 (including the November unrecorded chargebacks) 22,500
c) Deposit made with vendor and charged to purchases in October 2019. Product was shipped in
January 2020. 30,000
d) Deposit made with vendor and charged to purchases in November 2019. Product was shipped
FOB destination, on November 29, 2019 and was included in November 30, 2019 physical
inventory as goods in transit. 82,500
e) Through the carelessness of the receiving department shipment in early December 2019 was
damaged by rain. This shipment was later sold in the last week of December at cost. 150,000
REQUIRED:
Based on the above and the result of your audit, answer the following:
1. Gross profit rate for 11 months ended November 30, 2019 is
2. December 31, 2019 inventory using the gross profit method is

PROBLEM NO.9
On April 21, 2019, a fire damaged the office and warehouse of Muntinlupa Company. The only accounting record
saved was the general ledger, from which the trial balance below was prepared.
Muntinlupa Company
Trial Balance
March 31, 2019
DEBIT CREDIT
Cash P 180,000
Accounts receivable 400,000
Inventory, Dec. 31, 2018 750,000
Land 350,000
Building 1,100,000
Acc. depreciation P 413,000
Other assets 56,000
Accounts payable 237,000
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DEBIT CREDIT
Accrued expenses 180,000
Share capital, P100 par 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 344,000 .
Totals P3,700,000 P3,700,000
The following data and information have been gathered:
a. The company’s year-end is December 31.
b. An examination of the April bank statement and cancelled checks revealed that checks written during the period
April 1 to 21 totaled P130,000: P57,000 paid to accounts payable as of March 31, P34,000 for April merchandise
purchases, and P39,000 paid for other expenses. Deposits during the same period amounted to P129,500, which
consisted of receipts on account from customers with the exception of a P9,500 refund from a vendor for
merchandise returned in April.
c. Correspondence with suppliers revealed unpaid obligations at April 21 of P106,000 for April merchandise purchases,
including P23,000 for shipments in transit on that date.
d. Customers acknowledged indebtedness of P360,000 at April 21. It was also estimated that customers owed another
P80,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, P6,000 will probably
be uncollectible.
e. The insurance company agreed that the fire loss claim should be based on the assumption that the overall gross
profit ratio for the past two years was in effect during the current year. The company’s audited financial
statements disclosed the following information:
2018 2017
Net sales P5,300,000 P3,900,000
Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 750,000 500,000
f. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the inventory was a total loss.
REQUIRED:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted balance of Accounts Payable as of April 21, 2019?
2. How much is the net purchases for the period January 1 to April 21, 2019?
3. How much is the adjusted balance of Accounts Receivable as of April 21, 2019?
4. How much is the sales for the period January 1 to April 21, 2019?
5. How much is the cost of sales for the period January 1 to April 21, 2019?
6. How much is the estimated inventory on April 21, 2019?
7. How much is the estimated inventory fire loss?

PROBLEM NO.10
You are engaged in the regular annual examination of the accounts and records of Valenzuela Manufacturing Co. for
the year ended December 31, 2019. To reduce the workload at year end, the company, upon your recommendation,
took its annual physical inventory on November 30, 2019. You observed the taking of the inventory and made tests of
the inventory count and the inventory records.
The company’s inventory account, which includes raw materials and work-in-process is on perpetual basis. Inventories
are valued at cost, first-in, first-out method. There is no finished goods inventory.
The company’s physical inventory revealed that the book inventory of P1,695,960 was understated by P84,000. To
avoid delay in completing its monthly financial statements, the company decided not to adjust the book inventory
until year-end except for obsolete inventory items.
Your examination disclosed the following information regarding the November 30 inventory:
a. Pricing tests showed that the physical inventory was overstated by P61,600.
b. An understatement of the physical inventory by P4,200 due to errors in footings and extensions.
c. Direct labor included in the inventory amounted to P280,000. Overhead was included at the rate of 200% of direct
labor. You have ascertained that the amount of direct labor was correct and that the overhead rate was proper.
d. The physical inventory included obsolete materials with a total cost of P7,000. During December, the obsolete
materials were written off by a charge to cost of sales.
Your audit also disclosed the following information about the December 31 inventory:
a. Total debits to the following accounts during December were:
Cost of sales P1,920,800
Direct labor 338,800
Purchases 691,600
b. The cost of sales of P1,920,800 included direct labor of P386,400.
REQUIRED:

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Based on the above and the result of your audit, answer the following:
1. Adjusted amount of physical inventory at November 30
2. Adjusted amount of inventory at December 31
3. Cost of materials on hand, and materials included in work in process as of December 31

PROBLEM NO.11
Shoplift Mart uses the average retail inventory method. The following information is available for the current year:

Cost Retail
Beginning inventory P 1,100,000 P 2,200,000
Purchases 15,800,000 26,300,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 800,000
Net mark ups 600,000
Net mark downs 900,000
Sales 24,700,000
Sales returns 350,000
Sales discounts 200,000
Employee discounts 600,000
Loss from breakage 50,000
REQUIRED:
Based on the above and the result of your audit, answer the following:
1. The cost ratio using the average retail inventory method is
2. The estimated retail inventory at retail is
3. The estimated ending inventory at cost is
4. The estimated cost of goods sold is
5. If the inventory at retail based on physical count at December 31, 2019 is P1,700,000, the estimated inventory
shortage is

PROBLEM NO.12
1. When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by:
a. Attendance at physical inventory counting, unless impracticable.
b. Performing audit procedures over the entity’s final inventory records to determine whether they accurately
reflect actual inventory count results.
c. Both a and b.
d. Neither a nor b.
2. Attendance at physical inventory counting involves:
a. Inspecting the inventory to ascertain its existence and evaluate its condition, and performing test counts.
b. Observing compliance with management’s instructions and the performance of procedures for recording and
controlling the results of the physical inventory count.
c. Obtaining audit evidence as to the reliability of management’s count procedures.
d. All of these.
3. The procedures involve in the attendance at physical inventory counting
a. Serve as risk assessment procedures.
b. Serve as test of controls.
c. Serve as substantive procedures.
d. May serve as test of controls or substantive procedures depending on the auditor’s risk assessment, planned
approach and the specific procedures carried out.
4. In which of the following cases is attendance at physical inventory counting impracticable?
a. Where inventory is held in a location that may pose threats to the safety of the auditor.
b. Where the auditor will be inconvenienced because of the difficulty, time and cost involved in doing the
procedures.
c. Both a and b.
d. Neither a nor b.
5. Which of the following may provide sufficient appropriate audit evidence about the existence and condition of
inventory if attendance at physical inventory counting is impracticable?
a. Inspection of documentation of the subsequent sale of specific inventory items purchased prior to the
physical inventory counting.
b. Inspection of documentation of the subsequent sale of specific inventory items purchased after the physical
inventory counting.
c. Both a and b.
d. Neither a nor b.
6. An auditor is most likely to inspect loan agreements under which an entity’s inventories are pledged to support
management’s financial statement assertion of
a. Existence or occurrence. c. Presentation and disclosure.
b. Completeness. d. Valuation or allocation.
7. Purchase cut-off procedures should be designed to test whether all inventory

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a. Owned by the company is in the possession of the company at year-end.

b. Ordered before year-end was received.
c. Purchased and received before year-end was paid for.
d. Purchased and received before year-end was recorded.
8. Which statement is correct regarding physical inventory counting conducted other than at the date of the
financial statements?
a. For practical reasons, the physical inventory counting may be conducted at a date, or dates, other than the
date of the financial statements.
b. This may be done irrespective of whether management determines inventory quantities by an annual physical
inventory counting or maintains a perpetual inventory system.
c. The effectiveness of the design, implementation and maintenance of controls over changes in inventory
determines whether the conduct of physical inventory counting at a date, or dates, other than the date of the
financial statements is appropriate for audit purposes.
d. All of these.
9. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is
high an auditor will probably
a. Request the client to schedule the physical inventory count at the end of the year.
b. Apply gross profit tests to ascertain the reasonableness of the physical counts.
c. Increase the extent of tests of controls relevant to the inventory cycle.
d. Insist that the client perform physical counts of inventory items several times during the year.
10. What form of analytical review might uncover the existence of obsolete merchandise?
a. Inventory turnover rates. c. Ratio of inventory to accounts payable.
b. Decrease in the ratio of gross profit to sales. d. Comparison of inventory values to purchase invoices.
11. An auditor is most likely to learn of slow-moving inventory through
a. Inquiry of sales personnel c. Physical observation of inventory
b. Inquiry of warehouse personnel d. Review of perpetual inventory records.
12. The auditor tests the quantity of materials charged to work in process by tracing these quantities to
a. Cost ledgers. c. Receiving reports.
b. Perpetual inventory records. d. Material requisitions.

 END of IR3.407 

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