AUDITING PROBLEMS

AUDIT OF INVENTORY
PROBLEM 1
The ALASKA Co. 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 P20, 000 had
been excluded from the inventory and further testing revealed that the purchased had
been recorded.
b) Goods costing P10, 000 had been received, included in the inventory and recorded as a
purchase. However, upon inspection, the goods were found to be defective and would
be immediately returned.
c) Material costing P50, 000 and billed on December 30 at a selling price of P64, 000 had
been segregated in the warehouse for shipment to a customer. The material had been
excluded from inventory as a signed purchased order had been received from a
customer. Terms, FOB destination.
d) Goods costing P14, 000 was out on consignment with Libra, Inc. Since the monthly
statement from Libra listed those materials as on hand, the items had been excluded
from the final inventory and invoiced on December 31 at P16, 000.
e) The sale of P30, 000 worth of materials and costing P24, 000 had been shipped FOB
point of shipment on December 31. However, this inventory was found to be included in
the final inventory.
f) Goods costing P20, 000 and selling for P28, 000 had been segregated but not shipped
at December 31, and were not included in the inventory. A review of the customer's
purchased order set forth term 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 not
arrived as yet. However, this materials costing P34, 000 had been included in the
inventory count, but no entry had been made for their purchased.
h) Merchandise costing P40, 000 had been recorded as a purchase but not included in
inventory. Terms of shipment are FOB shipping point according to the supplier's invoice
which was received on December 31. Further inspection of the client's records revealed
the following December 31 balances. Inventory, P220, 000; Accounts receivable, P116,
000; Accounts payable, P138, 000; Sales, P1, 010, 000; Purchases, P640, 000; Net
Income, P102, 000.
Required:

1. Inventory
a. P310,000 b. P300,000 c. P334,000 d. None of these
2. Accounts receivable
a. P100,000 b. P52,000 c. P36,000 d. None of these
3. Accounts payable
a. P152,000 b. P108,000 c. P142,000 d. None of these
4. Sales
a. P946,000 b. P930,000 c. P994,000 d. None of these
5. Purchases
a. P644,000 b. P654,000 c. P610,000 d. None of these

PROBLEM 2
GEORGIA Company is a retailer of dry goods. The accounts are currently kept on a cash basis,
however at the end of each year these are adjusted to the accrual basis to be able to prepare
financial statements. On January 1, 2011, an annual insurance premium totaling P30,000 was paid
to insure its inventory and fixtures for P380,000 and P700,000 respectively. Under the insurance
policy, the insurance company shall not be liable for more than the actual loss incurred base on
the carrying value of said property at the time such loss shall happen. A fire occurred in the early
morning hours of February 1, 2011. The fixtures were a total loss, but part of merchandise was
salvaged and was agreed with the adjusters to be worth P175,000. The following balances, among
others were drawn from the general ledger as of February 1, 2011 before any adjustment had
been made:
Debit Credit
Cash P200,500
Accounts receivable 141,200
Inventory 610,400
Store and office fixtures 1,800,000
Accumulated depreciation P 936,000
Accounts payable 79,200
Sales 235,200
Purchases 129,700

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 Insurance Expense 30,000
Salaries 41,000

a. Examination of the outstanding sales and purchase invoices revealed the following
balances as of February 1, 2011:
Accounts receivable P129,600
Accounts payable 51,800

b. The books showed that 25% of gross profit had been made consistently, and this
percentage was agreed upon with the adjusters as a bases for calculating the value of
the inventory.

c. There had been no capital expenditures in 2011, and depreciation had been provided
using straight line method to December 31, 2010. The store and office fixtures were
acquired on July 1, 2004.

Based on the above information, answer the following:

1. Estimated inventory balance on February 1, 2011.
a. P563,700 b. P518,300 c. P370,000 d. P545,000
2. The carrying value of the furniture and fixtures on February 1, 2011.
a. P720,000 b. P864,000 c. P852,000 d. P840,000
3. Inventory fire loss
a. P165,000 b. P370,000 c. P545,000 d. P0
4. Total amount recoverable from the insurance company.
a. P1,080,000 b. P1,222,000 c. P1,070,000 d. P1,232,000
5. Total loss incurred as a result of fire on February 1, 2011.
a. P179,500 b. P182,000 c. P162,000 d. P152,000

PROBLEM 3
Roel, owner of a trading company, engaged your services as auditor. There is a discrepancy
between the company's income and the sales volume. The owner suspects that the staff is
committing theft. You are to determine whether or not this is true. Your investigation revealed the
following:
a. The physical taken on December 31, 2011 under you observation showed that cost was
P26,500. The inventory on January 1, 2011 showed cost of P39,000.
b. The accounts receivable as of January 1, 2011 were P13,500. During 2011, accounts
receivable written off amounted to P1,000. Accounts receivable as of December 31,
2011were P37,500.
c. Outstanding purchase invoices amounted to P30,000 at the end of 2011. At the
beginning of 2011, they were P37,500.
d. Receipts from costumers during 2011 amounted to P300,000.
e. Disbursement to merchandise creditors amounted to P200,000.
f. The average gross profit rate was 40% of net sales.

REQUIRED:
1. Total Sales 325,000
2. Total Purchases 192,500
3. Inventory Shortage 10,000

PROBLEM 4
You were engaged to audit the inventory of Mexico Company on April 30, 2011 to determine
amount of raw materials destroyed by fire occurred that day.
a) Work in process and finished goods were placed in a different warehouse not affected by the
fire. A physical count of inventory was immediately conducted on April 30, 2011 and the
following balances were obtained:
Work in process P 10,000
Finished goods 85,000
b) A copy of 2010 financial statements indicated the following inventory balances at December
31, 2010:
Raw materials P 20,000
Work in process 60,000
Finished goods 70,000
c) Purchases for the period January 1 to April 30, 2011 amounted to P32,000 and goods are sold
at mark-up of 50% based on cost. Mexico was not able to provide you with other information
about 2011 transactions because the Company's records were also destroyed by fire.
d) Based on your inquiry from the client's personnel, you determined that raw materials used

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 was equivalent to 20% of the total manufacturing costs; and the total manufacturing costs
was 60% of the cost of goods manufactured.

Required:
1. Raw materials used from January 1 to April 30, 2011. 15,000
2. Raw materials destroyed by fire on April 30, 2011. 37,000
3. Cost of goods manufactured from January 1 to April 30, 2011. 110,000
4. Total sales from January 1 to April 30, 2011. 165,000

PROBLEM 5
You are the auditor of various manufacturing entities. Your risk assessment procedures for those
entities indicate high risk of material error related to classification and allocation of production
costs. Consequently, you perform recalculation procedures to test the valuation of inventory as
reported in the statement of financial position. The following information was available:
I. An entity incurred fixed production overheads of P900,000 during a month period in
which it manufactured 200,000 units of production. When operating at normal capacity
the entity manufactures 250,000 units of production per month.

1. The cost that should be allocated to each unit produced during the month is:
a.P3.60 b. P4.50 c. P4 d. P2
2. The entity shall recognize as expense in the profit or loss on amount equal to
a. P225,000 b. P720,000 c. P180,000 d. P0

II. Assuming the entity manufactured 300,000 units during the month. This level of
production is abnormally high.

3. How much should be allocated as fixed overhead cost to each unit produced during the
month?
a. P3.60 b. P3 c. P4.50 d. P4

III. An entity manufactures a chemical 'A' for use in the agriculture industry. The production
process require a mixture of base chemicals followed by a maturation process, and from
which, a product 'A' and a by-product 'C' are produced. The total cost of production run
is P100,000.

Each production run produces:

 5,000 liters of product A, sales value = P250,000
 1,000 liters of (by-product) C, sales value = P2,000
4. Assuming the costs to complete and sell the by-product are immaterial. What is the cost per
liter produced of product A?
a. P49.60 b. P19.60 c. P20 d. P19.84

IV. Assume that instead of the by-product there is another joint product 'B' resulting from
the maturation process. Furthermore, the total cost (including direct cost and the
allocation of overheads) of a production run are P390,000.

Each production run produces:

 5,000 liters of product A, sales value = P250,000
 4,000 liters of product B, sales value = P400,000

The entity allocates the joint process costs to the products produced on the basis of their
relative sales values.
5. The cost per liter produced of product A is:
a. P37.50 b. P35 c. P42 d. P30
6. The cost per liter produced of product B is
a. P52.50 b. P60 c. P48 d. P46.15

V. Assume that the maturation process produces 'A' and 'B' and by-product 'C'. The total
cost (including direct cost and the allocation of the overheads) of a production run is
P370,000.

Each production run produces:

 5,000 liters of product A, sales value = P250,000
 4,000 liters of product B, sales value = P400,000
 1.000 liters of (by-products) C, sales value = P6,000

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7. The cost per liter of product A is
a. P28 b. P35 c. P28.46 d. P35.58
8. The cost per liter of product B is
a. P44.80 b. P60 c. P52 d. P56

PROBLEM 6
A recent fire severely damaged MID-SEA COMPANY's administration and destroyed many of
its financial records. You have been contracted by Mid-Sea’s management to reconstruct as
much financial information as possible for the month of July. You learned that Mid-Sea
makes a physical inventory count at the end of each month to determine monthly ending
inventory values. You also find out that the company applies the average cost method.
You are able to gather the following information by examining various documents:
Inventory, July 31 150,000 units
Total cost of goods available for sale in July P 356,400
Cost of goods sold during July P 297,000
Gross profit on sales for July P 303,000
Cost of inventory, July 1 0.35 per unit
Date Quantity Unit Cost
July 6 180,000 P0.40
July 12 150,000 0.41
July16 120,000 0.42
July17 150,000 0.45
Mid-Sea’s management has asked you to provide the following information:
1. Number of units on hand, July 1
a. 450,000 b. 848,571 c.169,714 d. 300,000
2. Units sold during July
a. 600,000 b. 300,000 c. 750,000 d. 450,000
3. Unit cost of inventory at July
a. P0.35 b. P0.396 c. P0.419 d. P0.279
4. Value of inventory at July 31
a. P59,400 b. P52500 c. P62,850 d. P41,850

PROBLEM 7
The work-in-process inventory of RHODE ISLAND Constructions Co., was completely
destroyed by fire on April 1, 2011. You were able to establish the physical inventory figures
as follows:

January 1, 2011 April 1, 2011

Raw materials 30,000 60,000
Work in process 100,000 -
Finished goods 140,000 120,000

Sales from January 1 to March 31, were P 300,000. Purchases of raw materials were P
100,000 and freight on purchases, P 10,000. Direct labor during the period was P 80,000. It
was agreed with the insurance adjusters that an average gross profit rate of 32.5% be used
and that manufacturing overhead was 45% of direct labor cost.

1. The value of goods manufactured and completed as of April 1, 2011:

a. P 120,000 b. P 180,000 c. P 190,000 d. P 182,500
2. Raw materials used were:
a. P 50,000 b. P 70,000 c. P 80,000 d. P 90,000
3. The work-in-process inventory destroyed as computed by the adjuster would be:
a. P 113,500 b. P 131,500 c. P 173,500 d. P 121,500

PROBLEM 8
The following data were obtained from the books ALABAMA Corporation:
Accounts receivable, March 31, 2011 P 110,000
Accounts receivable, Sept. 30, 2011 130,000
Purchases March to Sept. 2011 450,000
Inventory March 31, 2011 180,000
Average gross profit rate 40%
Accounts receivable turnover 6 to 1

Required:
1. Credit sales in 2011.
a. P 720,000 b. P 660,000 c. P 780,000 d. None of these
2. The inventory at Sept. 30,2011 should be:
a. P 198,000 b. P 150,000 c. P 120,000 d. None of these

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PROBLEM 9
The UTAH Corporation manufactures a highly flammable product. On June 30, 2011 a fire
completely destroyed its factory and all the work in process inventory therein. However, some
records were saved which showed the following inventory balances as of June 30, 2011.
Raw materials P60,000
Finished goods 120,000
And as of January 1, 2011 the inventories were as follows:
Raw materials 30,000
Work in process 100,000
Finished goods 140,000

A review of the records showed that sales and gross profit for the past five years are as follows:

Sales Gross Profit

2006 P 300,000 P 80,000
2007 320,000 100,000
2008 330,000 100,000
2009 270,000 80,000
2010 280,000 90,000

Sales for the first six months of 2011 were P300,000. Raw material purchases were P100,000.
Freight on purchase was P20,000. Direct labor for the six months was P80,000. For the past five
years manufacturing overhead was 50 percent of direct labor cost.

Required:
1. Compute the average gross profit rate for the five year period.
a. 25% b. 28% c. 30% d. 32%
2. What was the value of the work in process inventory as of June 30, 2011?
a. P80,000 b. P140,000 c. P100,000 d. P120,000

You are engaged in an audit of the financial statements of the Oprah Company for the year
ended October 30,2010, and have observed the physical inventory count on that date.

All merchandise received up to and including October 30, 2010 has been included in the physical
count. The following list of invoices is for purchase of merchandise and are entered in the
purchases journal for the months of October and November 2010, respectively:

Amount FOB Date of Invoice Date Merchandise Received

OCTOBER 2010
P7,200 Destination October 19 October 21
4,400 Destination October 20 October 22
9,250 Shipping point October 20 October 30
3,900 Destination October 25 November 3
2,500 Destination November 4 October 29
10,250 Shipping point October 25 October 30
9,200 Shipping point October 25 October 30
13,600 Destination October 21 October 30
34,600 Destination October 29 October 30
NOVEMBER 2010
P2,000 Destination October 29 November 4
4,850 Destination October 30 October 31
6,420 Shipping point October 27 October 30
7,220 Shipping point November 2 October 30
12,820 Shipping point October 23 November 3
14,200 Shipping point October 23 November 3
15,000 Destination October 27 November 3

No perpetual inventory records are maintained, and the physical inventory count is to be used
as a basis for the financial statements.
1. What adjusting entry is necessary for the October 25 invoice?
a. Accounts payable 3,900
Purchase 3,900
b. Purchases 3,900
Accounts payable 3,900
c. Inventory, ending 3,900
Cost of sales 3,900
d. No adjusting entry is necessary.

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2. What adjusting entry is necessary for the November 4 invoice?
a. Purchases 2,500
Accounts payable 2,500
b. Accounts payable 2,500
Purchases 2,500
c. Cost of sales 2,500
Inventory, ending 2,500
d. No adjusting entry is necessary.

3. The journal entry to adjust the purchases account should be

a. Debit to purchases of P45,510
b. Credit to purchases of P3,900
c. Net debit to purchases of P41,610
d. Net credit to purchases of P41,600

4. The net adjustment to accounts payable is

a. P3,900 increase c. P41,610 increase
b. P3,900 increase d, P41,610 decrease

5. Oprah's October 31 physical inventory should be increased by

a. P31,870 b. P41,610 c. P45,510 d. P73,480

PROBLEM 10
You were assigned to audit the factory accounts of MICHIGAN Corporation for the year ended
December 31, 2011. The following data were gathered: Manufacturing cost totaled P900,000.
Cost of goods manufactured was P800,000 of which factory overhead was 75% of direct labor.
Overhead was 25% of total manufacturing cost.

Beginning work in process inventory January 1 was 60% of ending work in process inventory,
December 31, 2011.

Manufacturing cost for the year ended December 31, 2011 submitted to you by the factory
accountant was as follows:

Raw material used P 400,000

Direct labor 275,000
Factory overhead 225,000
Total P 900,000

1. Assuming cost percentage relationships as stated are correct. Adjustment on

manufacturing cost at December 31, 2011 was:
a. Raw Material Used P25,000
Direct Labor P25,000
b. Direct Labor P25,000
Raw Material Used P25,000
c. Raw Material Used P50,000
Direct Labor P50,000
d. Direct Labor P50,000
Raw Material Used P50,000

2. Work in process, December 31, 2011 was

a. P200,000 b. P225,000 c. P250,000 d. P275,000

/rac

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