Name: _________________________________________ Date: ______________

AUDITING PROBLEMS
AUDIT OF INVENTORY QUIZ 2

PROBLEM 1
During the 2006 audit of JONES Manufacturing Companys year-end inventory, you found the following
items.
A packing case containing product costing P8,160 was standing in the shipping room when the physical
inventory was taken. It was not included in the inventory because it was marked Hold for shipping
instructions. The customers order was dated December 18, but the case was shipped and the
customer billed on January 10, 2007.

Merchandise costing P6,250 was received on December 28, 2006, and the invoice was recorded. The
invoice was marked On Consignment.

Merchandise received on January 6, 2007 costing P7,200 was entered in the purchase register on
January 7. The invoice showed shipment made FOB shipping point on December 31, 2006.

A special machine, fabricated to order for a particular customer, was finished and in the shipping room
on December 30. The customer was billed on that date and the machine was excluded from inventory
although it was shipped January 2, 2007. The machine costs P25,000 and was sold for P45,000.

Merchandise costing P23,500 was received on January 3, 2007, and the related purchase invoice was
recorded January 5. The invoice showed the shipment was made on December 29, 2006, FOB
destination.

Merchandise costing P11,000 was sold on an installment basis on December 15 at P25,000. The
customer took possession of the goods on that date. The merchandise was included in inventory
because JONES still holds legal title. Historical experience suggests that full payment on the installment
sales is received approximately 99% of the time.

Goods costing P15,000 were billed for P20,000 and delivered on December 20. The goods were included
in inventory because the sale was accompanied by a repurchase agreement requiring JONES to buy back
the inventory in February 2007.

Selected account balances before considering the effects of the above items are as follows:
Accounts receivable P 185,000
Inventory 114,500
Accounts payable 67,200
Sales 942,400
Gross profit 287,990
Net income 84,680
Questions:
1. What is the adjusted accounts receivable balance at the end of the year?
a. P 166,000 b. P 165,000 c. P 150,000 d. P 125,000

2. What is the adjusted inventory balance at the end of 2006?

a. P 118,860 b. P 116,700 c. P 112,610 d. P 104,450

3. What is the adjusted balance of accounts payable at the end of the year?
a. P 68,150 b. P 68,000 c. P 67,200 d. P 65,000

4. The adjusted total sales in 2006 is

a. P 962,400 b. P 925,600 c. P 925,000 d. P 922,400

5. The adjusted Cost of goods sold in 2006 is

a. P 640,040 b. P 650,200 c. P 651,040 d. P 657,250

PROBLEM 2
You audit of APAS COMPANY for the year 2006 disclosed the following:
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

The 2006 ledger shows a sales balance of P20,000,000.

The company sells a mark-up of 20% based on sales.
The company recognizes sales upon passage of title to the customers.
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 3
The following information was obtained from the balance sheet of LION INC.:
Dec. 31, 2006 Dec. 31, 2005
Cash P 706,600 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 4
Kitkat Company operates a wholesale oil products company. Kitkat believes that an employee and a
customer are conspiring to steal gasoline. The employee records sales to the customer not less than the
amount actually placed in the customers tank truck. In order to confirm or refuse these suspicions, Kitkat
has collected the following data for the past 10 working days.

Quantity Cost per

(gallons) unit (gal) Total Cost
Inventory, September 1 220,000 P1.45 P 319,000
Purchases 1,560,000 1.45 2,262,000
Goods available for sale 1,780,000 2,581,000

Kitkat had sales of P2,512,000 during this 10-day period. All sales were made at P1.60 per gallon. A physical
inventory indicates that there are 192,000 gallons of gasoline in inventory at the close of business on
September 10.

Questions:
1. How much inventory should be present at the end of the 10-day period (in gallons)?
a. 220,000 b. 210,000 c. 200,000 d. 192,000

2. What is the cost of missing inventory?

a. P 304,500 b. P 40,600 c. P 26,100 d. P 0

PROBLEM 5
You were assigned to audit the factory accounts of Modfood Manufacturing Corporation for the year ended
December 31, 2006. The following data were gathered:
Total manufacturing Cost P 900,000
Cost of Goods Manufactured 800,000
Factory Overhead 75% of direct labor and 25% of total
manufacturing cost

Beginning work-in-process inventory, January 1, was 60% of ending work-in-process inventory, December
31, 2006.
Manufacturing costs for the year ended December 31, 2006 submitted to you by the factory accountant
was as follows:
Raw Materials Used P400,000
Direct Labor 275,000
Factory Overhead 225,000
Total P900,000
Questions:
1. Assuming cost percentage relationships are stated are correct, what will be the adjustment on
manufacturing cost at December 31, 2006?
a. Debit: Raw materials used 25,000
Credit Direct labor 25,000
b. Debit: Direct labor 25,000
Credit Raw materials used 25,000
c. Debit: Raw materials used 50,000
Credit Direct labor 50,000
d. Debit: Direct labor 50,000
Credit Raw materials used 50,000

2. How much is the Work-in-process Inventory on December 31, 2006?

a. P 200,000 c. P 250,000
b. P 225,000 d. P 275,000