PROBLEM NO.
1
You were engaged by Quezon Corporation for the audit of the company’s
financial statements for the year ended December 31, 2023. 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 InvoiceRR = 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.
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, 2023
a. P5,250,000 b. P5,150,000 c. P5,400,000 d. P5,350,000
2. Purchases for the year ended December 31, 2023
a. P3,000,000 b. P3,754,000 c. P3,018,000 d. P3,818,000
3. Inventory as of December 31, 2023
a. P864,000 b. P800,000 c. P968,000 d.
P814,000
4. Accounts receivable as of December 31, 2023
a. P350,000 b. P220,000 c. P370,000 d.
P120,000
5. Accounts payable as of December 31, 2023
a. P418,000 b. P354,000 c. P 400,000 d.
P1,218,000
PROBLEM NO. 2
During your audit of the Makati Corporation for the year ended December 31,
2023, 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,
2024. The goods were not included in the physical count. The related
invoice was received and recorded on December 30, 2023. The goods
were shipped on December 31, 2023, terms FOB shipping point.
b. Goods costing P200,000, sold for P300,000, were shipped on December
31, 2023, and were received by the customer on January 2, 2024. The
terms of the invoice were FOB shipping point. The goods were
included in the ending inventory for 2023 and the sale was recorded in
2024.
c. The invoice for goods costing P150,000 was received and recorded as a
purchase on December 31, 2023. The related goods, shipped FOB
destination were received on January 2, 2024, but were included in the
physical inventory as goods in transit.
d. A P600,000 shipment of goods to a customer on December 30, 2023,
terms FOB destination, was recorded as a sale upon shipment. The
goods, costing P400,000 and delivered to the customer on January 6,
2024, were not included in the 2023 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, 2023 is understated by
a. P230,000 b. P190,000 c. P140,000 d.
P290,000
2. The cost of sales for the year ended December 31, 2023 is overstated by
a. P290,000 b. P110,000 c. P440,000 d.
P380,000
3. The profit for the year ended December 31, 2023 is misstated by
a. P190,000 over b. P 10,000 over c. P140,000 under d.
P290,000 under
4. The working capital as of December 31, 2023 is misstated by
a. P190,000 over b. P 10,000 over c. P140,000 under d.
P290,000 under
PROBLEM NO. 3
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, 2023, you were
satisfied that the system of internal control was good. Accordingly, you
observed the physical inventory at an interim date, November 30, 2023
instead of at year end. You obtained the following information from your
client’s general ledger:
Inventory, January 1, 2023 P 1,312,500
Physical inventory, November 30, 2023 1,425,000
Sales for 11 months ended Nov. 30, 2023 12,600,000
Sales for the year ended Dec. 31, 2023 14,400,000
Purchases for 11 months ended Nov. 30,
2023 (before audit adjustments) 10,125,000
Purchases for the year ended Dec. 31, 2023
(before audit adjustments) 12,000,000
Your audit disclosed the following information:
a Shipments received in November and included in P 112,500
) the physical inventory but recorded as December
purchases.
b Shipments received in unsalable condition and
) excluded from physical inventory. Credit memos
had not been received nor chargebacks to
vendors been recorded: 15,000
Total at November 30, 2023
Total at December 31, 2023 (including the 22,500
November unrecorded chargebacks)
c Deposit made with vendor and charged to 30,000
) purchases in October, 2023. Product was shipped
in January, 2024.
d Deposit made with vendor and charged to 82,500
) purchases in November, 2023. Product was
shipped FOB destination, on November 29, 2023
and was included in November 30, 2023 physical
inventory as goods in transit.
e Through the carelessness of the receiving
) department shipment in early December 2023 150,000
was damaged by rain. This shipment was later
sold in the last week of December at cost.
REQUIRED:
1. Gross profit rate for 11 months ended November 30, 2023.
2. Cost of goods sold during the month of December 2023 using the gross
profit method.
3. December 31, 2023 inventory using the gross profit method.
PROBLEM NO. 4
On April 21, 2023, 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, 2023
DEBIT CREDIT
Cash P 180,000
Accounts receivable 400,000
Inventory, Dec. 31, 2022 750,000
Land 350,000
Building 1,100,000
Acc. depreciation P 413,000
Other assets 56,000
Accounts payable 237,000
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:
2022 2021
Net sales P5,300,0 P3,900,0
00 00
Net purchases 2,800,00 2,350,00
0 0
Beginning 500,000 660,000
inventory
Ending 750,000 500,000
inventory
f. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The
balance of the inventory was a total loss.
QUESTIONS:
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,
2023?
a. P286,000 b. P106,000 c. P237,000 d.
P343,000
2. How much is the net purchases for the period January 1 to April 21, 2023?
a. P650,500 b. P673,500 c. P660,000 d. P683,000
3. How much is the adjusted balance of Accounts Receivable as of April 21,
2023?
a. P400,000 b. P440,000 c. P360,000 d. P354,000
4. How much is the sales for the period January 1 to April 21, 2023?
a. P1,430,000 b. P1,519,500 c. P1,510,000 d.
P1,506,000
5. How much is the cost of sales for the period January 1 to April 21, 2023?
a. P786,500 b. P835,725 c. P830,500 d.
P828,300
6. How much is the estimated inventory on April 21, 2023?
a. P570,000 b. P587,775 c. P623,500 d. P579,500
7. How much is the estimated inventory fire loss?
a. P579,500 b. P477,000 c. P535,000 d. P512,000
PROBLEM NO. 5
You are engaged in the regular annual examination of the accounts and
records of Valenzuela Manufacturing Co. for the year ended December
31, 2023. To reduce the workload at year end, the company, upon your
recommendation, took its annual physical inventory on November 30, 2023.
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 P1,920,8
00
Direct labor 338,800
Purchases 691,600
b. The cost of sales of P1,920,800 included direct labor of P386,400.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Adjusted amount of physical inventory at November 30
a. P1,715,560 b. P1,631,560 c. P1,845,760 d.
P1,722,560
2. Adjusted amount of inventory at December 31
a. P1,509,760 b. P1,516,760 c. P1,502,760 d. P1,425,760
3. Cost of materials on hand, and materials included in work in process as of
December 31
a. P819,560 b. P812,560 c. P728,560 d. P942,760
4. The amount of direct labor included in work in process as of December 31
a. P618,800 b. P232,400 c. P338,800 d.
P386,400
5. The amount of factory overhead included in work in process as of
December 31
a. P 772,800 b. P1,237,600 c. P464,800d. P777,600
PROBLEM NO. 6
Select the best answer for each of the following:
1. Which of the following is not one of the independent auditor's objectives
regarding the audit of inventories?
a. Verifying that inventory counted is owned by the client.
b. Verifying that the client has used proper inventory pricing.
c. Ascertaining the physical quantities of inventory on hand.
d. Verifying that all inventory owned by the client is on hand at the time
of the count.
2. 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.
b. Completeness.
c. Presentation and disclosure.
d. Valuation or allocation.
3. An auditor selected items for test counts while observing a client’s
physical inventory. The auditor then traced the test counts to the client’s
inventory listing. This procedure most likely obtained evidence
concerning
a. Existence. b. Completeness. c. Rights. d. Valuation.
4. 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. Apply gross profit tests to ascertain the reasonableness of the physical
counts.
b. Increase the extent of tests of controls relevant to the inventory cycle.
c. Request the client to schedule the physical inventory count at the end
of the year.
d. Insist that the client perform physical counts of inventory items several
times during the year.
5. The physical count of inventory of a retailer was higher than shown by the
perpetual records. Which of the following could explain the difference?
a. Inventory item has been counted but the tags placed on the items had
not been taken off the items 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 the retailer’s books for several
items returned to its suppliers.
d. An item purchased “FOB shipping point” had not arrived at the date of
the inventory count and had not been reflected in the perpetual
records.
6. Purchase cut-off procedures should be designed to test whether all
inventory
a. Purchased and received before year-end was paid for.
b. Ordered before year-end was received.
c. Purchased and received before year-end was recorded.
d. Owned by the company is in the possession of the company at year-
end.
7. The audit of year-end inventories should include steps to verify that the
client’s purchases and sales cutoffs were adequate. These 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 in the subsequent period
8. What form of analytical review might uncover the existence of obsolete
merchandise?
a. Inventory turnover rates.
b. Decrease in the ratio of gross profit to sales.
c. Ratio of inventory to accounts payable.
d. Comparison of inventory values to purchase invoices.
9. An auditor is most likely to learn of slow-moving inventory through
a. Inquiry of sales personnel
b. Inquiry of warehouse personnel
c. Physical observation of inventory
d. Review of perpetual inventory records.
10. The auditor tests the quantity of materials charged to work in process
by tracing these quantities to
a. Cost ledgers.
b. Perpetual inventory records.
c. Receiving reports.
d. Material requisitions.
PROBLEM NO. 1
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 2023 the last
month of the company's reporting period.
Baked beans Plain flour
Unit of packaging Case containing 25 x 410g Box containing 12 x 4kg
Baked beans Plain flour
cans bags
Inventory @ 1 June 35,000 cases @ P19.60 62,500 boxes @ P38.40
2023
Purchases 1. 10 June: 20,000 cases @ 1. 3 June: 15,000 boxes
P19.50 per case @ P38.45
2. 19 June: 47,000 cases @ 2. 15 June: 20,000 boxes
P19.70 per case @ 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 A customer returned 5,000 As June 15 purchase was
allowances cases that had been unloaded, 1,000 boxes
shipped in error. The were discovered
customer's account was damaged. A credit of
credited for P142,500. P38,450 was received by
Jay Roy Retailing Ltd.
Physical count at 30
June 2023 32,600 cases on hand 1,500 boxes on hand
Explanation of No explanation found Boxes purchased on 29
variance assumed stolen June still in transit on 30
June
Net realizable value
at 30 June 2023 P29.00 per case P38.50 per box
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The inventory of baked beans as of June 30, 2023 at cost, as adjusted is
a. P641,860 b. P642,220 c. P642,36d. P641,360
2. The inventory of plain flour as of June 30, 2023 at cost, as adjusted is
a. P134,575 b. P993,675 c. P57,675d. P57,725
3. The amount of inventory shortage is
a. P27,440 b. P27,580 c. P168,560 d. P 0
4. The total inventory to be recognized in the balance sheet as of June 30,
2023 is
a. P699,895 b. P700,035 c. P 699,535 d.
P1,623,970
5. Which of the following is the best procedure for identifying shortages of
specific items in an inventory of raw materials?
a. Compare the results of a physical inventory of raw materials with
perpetual inventory records.
b. Compare inventory turnover rates with prevailing rates from
previous years.
c. Estimates inventory quantities by using the gross profit method.
d. Review internal controls for the physical protection of
inventories.
PROBLEM NO. 2
The Bolinao Company values its inventory at the lower of FIFO cost or net
realizable value (NRV). The inventory accounts at December 31, 2022, had
the following balances.
Raw materials P 650,000
Work in process 1,200,000
Finished goods 1,640,000
The following are some of the transactions that affected the inventory of the
Bolinao Company during 2023.
Jan. 8 Bolinao purchased raw materials with a list price of P200,000
and was given a trade discount of 20% and 10%; terms 2/15,
n/30. Bolinao values inventory at the net invoice price
Feb. Bolinao repossessed an inventory item from a customer who
14 was overdue in making payment. The unpaid balance on the
sale is P15,200. The repossessed merchandise is to be
refinished and placed on sale. It is expected that the item can
be sold for P24,000 after estimated refinishing costs of
P6,800. The normal profit for this item is considered to be
P3,200.
Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed
item.
Apr. 3 The repossessed item was resold for P24,000 on account, 20%
down.
Aug. A sale on account was made of finished goods that have a list
30 price of P59,200 and a cost P38,400. A reduction of P8,000 off
the list price was granted as a trade-in allowance. The trade-
in item is to be priced to sell at P6,400 as is. The normal profit
on this type of inventory is 25% of the sales price.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Assume the client is using perpetual inventory system)
6. The entry on Jan. 8 will include a debit to Raw Materials Inventory of
a. P200,000 b. P144,000 c. P141,120 d.
P196,000
7. The repossessed inventory on Feb. 14 is most likely to be valued at
a. P14,000 b. P24,000 c. P17,200d. P14,400
8. The journal entries on April 3 will include a
a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of P14,000.
c. Credit to Profit on Sale of Repossessed Inventory of P3,600.
d. Credit to Repossessed Inventory of P20,400.
9. The trade-in inventory on Aug. 30 is most likely to be valued at
a. P8,000 b. P4,800 c. P6,000 d. P6,400
10. How much will be recorded as Sales on Aug. 30?
a. P51,200 b. P56,000 c. P57,200d. P57,600
PROBLEM NO. 3
The cost goods sold section of the income statement prepared by your client
for the year ended December 31 appears as follows:
Inventory, January 1 P
Purchases 80,000
1,600,00
0
Cost of goods available 1,680,00
for sale 0
Inventory, December
31 100,000
Cost of goods sold P1,580,0
00
Although the books have been closed, your working paper trial balance is
prepared showing all accounts with activity during the year. This is the first
time your firm has made an examination. The January 1 and December 31
inventories appearing above were determined by physical count of the goods
on hand on those dates and no reconciling items were considered. All
purchases are FOB shipping point.
In the course of your examination of the inventory cutoff, both at the
beginning and end of the year, you discovered the following facts:
Beginning of the Year
1. Invoices totaling P25,000 were entered in the voucher register in
January, but the goods were received during December.
2. December invoices totaling P13,200 were entered in the voucher
register in December, but goods were not received until January.
End of the Year
3. Sales of P43,000 (cost of P12,900) were made on account on
December 31 and goods delivered at that time, but all entries
relating to the sales were made on January 2.
4. Invoices totaling P15,000 were entered in the voucher register in
January, but the goods were received in December.
5. December invoices totaling P18,000 were entered in the voucher
register in December, but the goods were not received until January.
6. Invoices totaling P12,000 were entered in the voucher register in
January, and the goods were received in January, but the invoices
were dated December.
Based on the preceding information, determine the net working paper
adjustment that should be made for each of the following accounts:
11. Retained earnings
a. P13,200 credit c. P25,000 debit
b. P11,800 debit d. P38,200 debit
12. Purchases
a. P27,000 debit c. P25,000 credit
b. P28,000 debit d. P2,000 debit
13. Beginning inventory
a. P25,000 credit c. P13,200 debit
b. P38,200 debit d. P11,800 debit
14. Accounts receivable
a. P43,000 debit c. P30,000 debit
b. P43,000 credit d. No adjustment
15. Sales
a. P43,000 debit c. P30,000credit
b. P43,000 credit d. No adjustment
