AUDIT OF INVENTORY

Inventory shortage:
Should be inventory (accountability) --------------------------xxx
Less: Actual physical count (accounted for) -----------------xxx
Inventory on hand (observe physical count)
Inventory out on consignment (confirmation)
Inventory shortage xxx

Exercise 1: - Using of Inventory count tags

ACE Company conducted a physical inventory count on December 31, 2018. You observed the count on this date and
were satisfied that it was fairly conducted. On January 10, 2019, the controller furnished you with a copy of the inventory
summary which you reviewed. Following are your observations:

ACE Company
Inventory Summary
December 31, 2018

Items which require possible adjustment:

Tag No. Description Quantity Unit Price Amount
43 Wood clamps 43 pieces P274 each P11,782
561 Electric pumps 6 pieces P4,000 each P24,000 Consignment
1764 Rubber facing 312 pieces P15 each 4,860 Void
1765 Rubber facing 300 pieces P12 each 3,600
2264 Air Hose, 1” 96 dozen P240/gross 23,040 1,920
3126 Metal struts 126 pieces P120 each 15,120
3447 Metal chips 150 pieces P25 each 3,750 3,000
3682 Braces, #107 50 boxes P90/box 4,500
4822 Pipe, 3” 356 meters P25/meter 8,900
5118 Metal ribs 564 pieces P50/piece 28,200 +35,000
Subtotal P127,752
Other inventory items 476,364
Total inventory P604,116

During the inventory observation, you noted the following inventory tag control information:
Count Team Assigned Tags Last Tag Used Voided Tags
A 1-750 609 75,532
B 751-2000 1824 854,1265,1764
C 2001-4000 3776 2020,2723
D 4001-5500 5200 -------
E 5501-6000 5784 5901

At the inventory observation, you test-counted several items and documenting the following counts in your working
papers:
Tag No. Description Measuring Unit Quantity
561 Electric pumps Each 6
2264 Air Hose, 1” Gross 8
3126 Metal struts, 6” Each 126
3447 Metal chips Each 120
3682 Braces, #107 Box 50

You traced items from the inventory summary to the stock cards and noted the following differences:
Tag No. Inventory Summary Stock Cards Explanation
5118 564 1,264 700 pieces stored in Manila Brokerage warehouse
4822 356 322 Unlocated difference
561 6 -0- Goods received on consignment

Required: Correct the client’s inventory list and determine the adjusted balance of inventory.
Exercise 2:
P. So, 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, 2018 under your observation showed that cost was P26,500. The inventory on
January 1, 2018 showed cost of P39,000.
b. The accounts receivable as of January 1, 2018 were P13,500. During 2018, accounts receivable written off amounted to
P1,000. Accounts receivable as of December 31, 2018 were P37,500.
c. Outstanding purchase invoices amounted to P30,000 at the end of 2018. At the beginning of 2018, they were P37,500.
d. Receipts from customers during 2018 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
2. Total Purchases
3. Inventory Shortage

Exercise 3:
You were engaged to audit the inventory of Emerald Company on April 30, 2018 to determine the amount of raw
materials destroyed by fire that occurred that day.
a. Work in process and finished goods are placed in a different warehouse not affected by the fire. A physical count of
inventory was immediately conducted on April 30, 2018 and the following balances were obtained:
Work in process P5,000
Finished goods 85,000
b. A copy of the 2017 financial statements indicates the following inventory balances at December 31, 2017:
Raw materials P20,000
Work in process 60,000
Finished goods 70,000
c. Purchases for the period January 1 to April 30, 2018 amounted to P24,000 and gross profit rate is 25% of cost. Emerald
was not able to provide you with other information about 2018 transactions because the Company’s records were also
destroyed by fire.
d. Based on your inquiry with the client’s personnel, you determined that raw materials used was equivalent to 20% of
the total manufacturing costs; and that total manufacturing cost was 60% of the cost of goods manufactured.

Required:
1. Raw materials used from January 1 to April 30, 2018.
2. Raw materials destroyed by fire on April 30, 2018.
3. Cost of goods manufactured from January 1 to April 30, 2018.
4. Total sales from January 1 to April 30, 2018.