Solution with answer applied auditing by cabrera chapter09

CHAPTER SUBSTANTIVE TESTS OF INVENTORIES AND COST OF GOODS SOLD 9-1 Substantiation of the figure for inventories is an especially challenging task because of the variety of acceptable methods of valuation In addition, the variety of materials found in inventories calls for considerable experience and skill to an efficient job of identifying and test-counting goods on hand The possibilities of obsolescence and of excessive stocks also create problems Finally, the relatively large size of inventories and their significance in the determination of net income make purposeful misstatement by the client a possibility which the auditors must guard against 9-2 During an audit of a manufacturing company, the auditors review the cost system for the following purposes: (1) To determine that costs are properly allocated to current and future periods and hence that cost figures used in arriving at balance sheet and income statement amounts are supported by internal records (2) To obtain assurance that the cost system, as an integral part of the system of internal control, provides proper accounting control over costs incurred and related inventories (3) To ascertain, as a service to management, that the cost system is economical and effectively provides information for reducing or controlling costs and for determining the cost and profitability of products, and other related data necessary for informed managerial decisions 9-3 The auditors make test counts of inventory quantities during their observation of the taking of the physical inventory to ascertain that an accurate count is being made by the individuals taking the inventory The extent of test counting will be determined by the inventory-taking procedures; for example, the number of the auditors’ test counts would be reduced if there were two teams, one verifying the other, taking the inventory On the other hand, the auditors’ test counts would be expended if they found errors in the inventory counts 9-4 The statement is not true The auditors’ responsibilities with respect to inventories include not only quantities and pricing, but also the quality or condition of the goods, the accuracy of extensions, footing, and summaries, and the evaluation of internal control Weakness in internal control may cause large losses from excessive stockpiling, obsolescence, inaccurate cost data, and many other sources, even though the ending inventory is properly counted and priced 9-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition 9-5 The independent auditors utilize the client’s backlog of unfilled sales orders in the determination of net realizable value of finished goods and goods-in-process, and in the determination of losses, if any, on firm sales commitments for which no production has yet been undertaken 9-6 Beed Company Since Beed Company obtained all of its merchandise inventory from the president of the company in a related-party transaction, the auditors must determine the cost of the merchandise to the president in his operation of a similar business as a single proprietor In this related-party transaction, the auditors must look beyond form a total cost of P100,000 for the original stock of merchandise to substance Substantively, the merchandise of Beed Company should be priced, on a specific identification basis if feasible, at its cost from the suppliers of the sole proprietorship Any difference between cost as thus determined and amounts charged by the president to Beed Company represents unamortized discount on the notes payable The entire transaction should be fully disclosed in a note to the financial statements of Beed Company 9-7 Jay Company The following procedures should be undertaken: (a) The oral evidence that the motors are on consignment should be substantiated by a review of the client’s records of consigned inventory, examination of contracts and correspondence with consignors, and confirmation of consigned stocks by direct communication with consignors (b) The location of the machine in the receiving department, together with the presence of the “REWORK” tag, suggests that the machine had been shipped to a customer but rejected and returned by the customer The auditors should examine the receiving report for the machine, the accounts receivable confirmation from the customer, and records of the client’s quality control department, to ascertain who has title to the machine If the customer has title, the machine should not be included in inventory, and a liability for rework costs should be established If the client has title, the customer’s account should be credited for the sales return and the machine should be included in the client’s inventory at estimated realizable value (c) The “Material Inspection and Receiving Report” signed by the Navy Source Inspector, is evidence that title to the machine passed to the Phil Naval Base on November 30, 2006 Accordingly, the auditors should ascertain that the sales value of the machine is included in accounts receivable, and that the cost of the machine is not in the perpetual inventory or the physical inventory Substantive Tests of Inventories and Cost of Goods Sold (d) 9-8 9-3 The location of the storeroom and the dusty condition of the goods suggest that the items may be obsolete, or at least slow moving The auditors should inspect perpetual inventory records for usage of the materials, and should inquire of production personnel whether the materials are currently useful in production The materials may have to be valued at scrap value Pancho Manufacturing Corporation (a) Consignment out Obtain from the client a complete list of all consignees together with copies of the consignment contracts Evaluate the consignment contract provisions relative to the following areas: (a) Payment of freight and other handling charges (b) Extension of credit (c) Rates and computation of commissions to consignees (d) Frequency and contents of reports and remittances received from consignees Discuss with the client any variations found in the contracts which not seem justified by the circumstances Following review of the consignment contracts, communicate directly with the consignees to obtain complete information in writing on merchandise remaining unsold, receivables resulting from sales, unremitted proceeds, and accrued expenses and commissions, which should be reconciled with the client’s records for the period covered by the engagement Determine that merchandise on consignment with consignees is valued on the same basis as merchandise on hand, and included as part of the inventory Ascertain that any arbitrary mark-ons are deducted and that shipping and related charges for the transfer of merchandise to the consignees are reflected as part of the inventory Ascertain that quantities of goods in hands of consignees at the close of the period under audit appear in the balance sheet and are separately designated as “Merchandise on Consignment.” (b) Finished merchandise in public warehouse pledged as collateral for outstanding debt Determine that goods pledged to obtain funds are covered by warehouse receipts (The examination of warehouse receipts alone is not a sufficient verification of goods stored in public warehouses.) Request direct confirmation from the warehouses in which the merchandise is held If available, obtain independent accountants’ reports on a warehouses’ internal controls over custody of stored goods Review the client’s procedures for acceptance and evaluation of the performance of warehouses, and review supporting documents 9-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition 9-9 9-10 Review the loan agreements collateralized by warehouse receipts These agreements usually provide for certain payments to be made by the borrower as pledged goods are sold Consider observing a physical inventory of goods stored at the public warehouses a (2) b (3) e (4) f (2) a Principal problems the auditor will face are related by: b c (2) d (2) Verification of existence of the inventory owned by the company as against inventory belonging to the customers Proper valuation since the perpetual inventory records reflect quantities only Steps that should be undertaken to enable the auditor to render an unqualified opinion: Verify postings to the perpetual ledger at the plant office for both stock owned and stock being held for customers against original cost sheet to determine amounts debited and credited to the account Require that an annual physical inventory taking be done by the client and arrangements for the presence and observation of the auditor be done Confirm with customers unclaimed merchandise still in the possession of the client as of the balance sheet date 9-11 10 Existence or occurrence Existence or occurrence Valuation or allocation Completeness Completeness Valuation or allocation Completeness Completeness Existence or occurrence and completeness Completeness 9-12 a When the inventory is a material item in the financial statements that the auditor is examining, observation of the taking of the physical inventory is in compliance with the auditing standard pertaining to field work that requires obtaining sufficient competent evidential matter to afford a reasonable basis for an opinion regarding the financial statements Observation is a generally Substantive Tests of Inventories and Cost of Goods Sold 9-5 accepting auditing procedure applied in the examination of the physical inventory By observing the taking of the physical inventory, the CPA is seeking to satisfy himself or herself as to the effectiveness of the methods of inventory taking and the measure of reliance that can be placed on the client inventory records and their representations as to inventory quantities The CPA must ascertain that the physical inventory actually exists, that the inventory quantities are being determined by reasonably accurate methods, and that the inventory is in a salable or usable condition b The CPA makes test counts of inventory quantities during observation of the taking of the physical inventory to become satisfied that an accurate count is being made by the individuals taking the inventory The extent of test counting will be determined by the inventory-taking procedures For example, the number of test counts would be reduced if there were two teams taking the inventory, one checking the other On the other hand, the CPA’s test count would be expanded if errors were found in the inventory counts Some test counts are recorded by the CPA for the purpose of subsequent comparison with the client’s compilation of the inventory The comparison procedure goes beyond the mere determination that quantities have been accurately transcribed In addition, the CPA seeks assurance that the description and condition of the inventory items are accurate for pricing purposes and that the quantity information, such as dozen, gross, and cartons, is proper c The CPA does not regard the inventory certificate of an outside service company as a satisfactory substitute for his or her own audit of the inventory The service company has merely assumed the client’s function of taking the physical inventory, pricing it, and making the necessary extensions To the extent that the service company is competent, internal control with regard to the inventory has been strengthened Nevertheless, as under other strong systems of internal control, the CPA would investigate the system to become satisfied that it is operating in a satisfactory manner The CPA’s investigation would necessarily entail an observation of the taking of the inventory and testing the pricing and calculation of the inventory The inventory certificate of the outside specialists would have no effect on the CPA’s report The CPA must be satisfied that the inventory is fairly stated by observing the taking of the inventory and by testing the pricing and calculation of the inventory 9-6 Solutions Manual to Accompany Applied Auditing, 2006 Edition However, if the taking of the inventory was not observed and no audit tests were applied to the computation of the inventory, the CPA would be compelled to disclaim an opinion on the financial statements as a whole if the amount of the inventory is material If it has been impracticable or impossible for the CPA to observe the taking of the physical inventory but he or she has been satisfied by the application of other auditing procedures, the CPA would make no reference to the matter in the report 9-13 9-14 The CPA would make no reference to the certificate of the outside specialists in the report The outside specialists are serving as adjuncts of the company’s staff of permanent employees and, as such, are in somewhat the same position as temporary employees The outside specialists are not independent in that they are not imbued with thirdparty interests The CPA is compelled, under certain circumstances, to mention in the report the reports of other independent auditors, but this compulsion does not extend to the certificate of outside specialists who are not independent auditors a For a client to dispose of the chemical compound in a manner that meets legal requirements is admirable However, ethical behavior frequently calls for individual persons and companies to exhibit behavior that exceeds the minimum standards set by law Due to the harm to cattle and the pollution that has resulted Remote is involved in a matter that entails ethical issues b Most auditors are hesitant to serve as judge and jury for clients on ethical matters For example, declining to serve this client probably would not cause any alteration of its behavior Further, serving the client does not facilitate any unethical behavior Further, serving the client does not facilitate any unethical behavior Hence, an auditor might choose to discuss the matter with the board and encourage them to act as responsible citizens JC Requirement (1) Inventory, as given P271,500 Substantive Tests of Inventories and Cost of Goods Sold Deduct (adjustments to cost): 50% markup in (a) [P250,000 – (P250,000  1.5)] 60% markup in (b) (P10,000 x 0.60) Exclusion of (c) Incorrect amount used in (e) (P2,500 – P1,000) P83,333 6,000 4,000 1,500 Add: Freight on goods in transit in (d) Corrected ending inventory 9-7 94,833 P176,667 800 P177,467 Requirement (2) Income Statement a Ending inventory overstated (P250,000 – P177,467) b Cost of goods sold understated c Gross margin overstated d Pretax income overstated e Income taxes overstated (P72,533 x 0.40) f Net income overstated (P72,533 – P29,013) P72,533 72,533 72,533 72,533 29,013 43,520 Balance Sheet: Current assets, inventory overstated Current liabilities, income taxes payable overstated Retained earnings overstated 72,533 29,013 43,520 Requirement (3) Retained earnings (prior period adjustment) Income taxes payable Inventory 9-15 Beginning inventory Purchases Cost of goods available for sale Cost of goods sold (net sales of P51,000  1.50) Ending inventory before theft Ending inventory after theft Inventory lost 9-16 LRT Company 43,520 29,013 LRT COMPANY Computation of Value of Inventory Lost February 16, 2006 72,533 P 38,000 19,000 P 57,000 34,000 P 23,000 15,000 P 8,000 9-8 Solutions Manual to Accompany Applied Auditing, 2006 Edition Sales Less: Gross profit (40%) Cost of goods sold Finished goods, February 16 Cost of goods available for sale Less: Finished goods, December 31, 2005 Cost of goods manufactured and completed P 40,000 16,000 P 24,000 75,000 P 99,000 72,000 P 27,000 Raw materials, December 31, 2005 Raw materials purchases Raw materials available for production Raw materials before flood Raw materials used Direct labor Manufacturing overhead cost Goods in process, December 31, 2005 Cost of production Less: Cost of goods completed (from above) Goods in process inventory lost in flood P 65,000 20,000 P 85,000 70,000 P 15,000 30,000 15,000 80,000 P 140,000 27,000 P 113,000 Total value of inventory destroyed by flood 9-17 (P35,000  1/2) = Raw materials lost + Goods in process lost = (P70,000 - P35,000) + P113,000 = P148,000 Y Company a Necessary adjustments to client’s physical inventory: Material in Car #AR38162 received in warehouse on January 2, 2007 Materials stranded en route (Sales price P19,270/125%) Total Less unsalable inventory Total adjustment b P 8,120 15,416 23,536 1,250* P22,286 * If freight charges have been included in the client’s inventory, the amount would be P1,600 and the amount of the total adjustment would be P21,936 Journal entry probably would have a credit to purchases of P1,600 in this case Auditor’s worksheet adjusting entries: Purchases Accounts Payable To record goods in warehouse but not P 2,183 P 2,183 Substantive Tests of Inventories and Cost of Goods Sold 9-9 invoiced-received on RR 1060 No entry required Title to goods had passed Accounts receivable Sales To record goods as sold which were loaded on December 31 and not inventories-SI 968 No adjustment required Claims receivable Purchases Freight In To record claim against carrier for merchandise damaged in transit 9-18 12,700 Sales 19,270 Accounts receivable To reverse out of sales material included in both sales (SI 966) and in physical inventory (after adjustment) 12,700 19,270 1,600 1,250 350 Inventory 22,286 Cost of goods sold To adjust accounts for changes in physical inventory quantities Sales 15,773 Accounts receivable To reverse out of sales invoices #969, #970, #971 The sales book was held open too long This merchandise was in warehouse at time of physical count and so included therein 22,286 15,773 Engine Warehouse Supply Company a Cutoff errors will exist for accounts payable whenever the liability for a purchase is recorded in the wrong period The following rules should be followed for recording purchases: Record as of date received when shipped FOB destination Record as of date shipped when shipped FOB origin On this basis, the receiving reports would be evaluated as follows: Receivin g Report No Amoun Date Shipped Date Received FOB Point Should be Recorded in August Was Recorded in August 9-10 Solutions Manual to Accompany Applied Auditing, 2006 Edition t 679 680 681 682 683 684 685 686 P 860 1,211 193 4,674 450 106 2,800 686 8-29 8-27 8-20 8-27 8-30 8-30 9-06 8-30 8-31 9-01 9-01 9-01 9-02 9-02 9-02 9-02 Destination Origin Origin Destination Destination Origin Origin Destination Yes Yes Yes No No Yes No No Yes Yes Yes Yes No No No No The entry to adjust the records as of August 31 for cutoff errors in accounts payable is as follows: Dr Accounts payable Cr Purchases P4,568 P4,568 To adjust accounts payable for cutoff errors in recording inventory purchases: RR No 682 RR No 684 b P4,674 ( 106) P4,568 Sales should be recorded as of the date shipped The following shipping documents were dated on September and recorded in August: 311 312 313 314 P 56 3,194 635 193 P4,078 The adjusting entry will be: Dr Sales Cr Accounts receivable P4,078 P4,078 To adjust sales for cutoff errors at August 31 c Inventory received near the balance sheet date should be included in inventory if it is recorded as a purchase and excluded if it is not recorded as a purchase Substantive Tests of Inventories and Cost of Goods Sold 9-11 Inventory shipped near the balance sheet date should be excluded from inventory if it is recorded as a sale and included if it has not been recorded as a sale These principles lead to the following analysis Receipt of Goods Inventory for all receiving reports up to 684 are included in inventory Using the analysis in part a, column 6, inventory for all receiving reports up to 684, except 682 and 683, should be included in accounts payable and inventory Report No 679 680 681 682* 683* 684 685 686 Amount Should be Included in Purchases and Inventory Was Included in Inventory 860 1,211 193 4,674 450 106 2,800 686 Yes Yes Yes No No Yes No No Yes Yes Yes Yes Yes Yes No No * Requires removal from inventory Inventory for receiving reports 682 and 683 should therefore be removed from the physical count: Amount 682 4,674 683 450 5,124 Shipment of Goods Inventory for shipping documents 314 to 317 were included in inventory All inventory for documents 313 and earlier were excluded Sales, after adjustments, were included only for shipments 310 and those preceding, as shown in the analysis in part b Inventory for shipping documents 311 to 313 should therefore be added to inventory The amount of the cost of the inventory cannot be determined without reference to inventory costs Presumably, cost will be less than the sales value shown in part b 9-12 Solutions Manual to Accompany Applied Auditing, 2006 Edition Shipping Document No 310 311* 312* 313* 314 315 316 317 318 Included in Physical No No No No Yes Yes Yes Yes Yes Recorded as Sale After Adjustments in Part b Yes No No No No No No No No * Requires addition to inventory at cost Shipping Document No 311 312 313 Inventory cost (70% of selling price) Selling Price P 56 3,194 635 3,885 2,719 Summary Reduction of inventory due to physical count error resulting from receipt of goods Increase of inventory due to physical count error resulting from shipment of goods Net reduction of inventory required d 9-19 P5,124.00 2,719.50 P2,404.50 The accuracy about September receipts and shipments of goods could be verified by reference to bills of lading Green Company Requirement (a) Substantive Tests of Inventories and Cost of Goods Sold 9-13 Green Company Inventory 12.31.06 Item A – 510 A – 520 A – 530 A – 540 A – 550 A – 560 A – 570 Quantity 720 units 48 units 146 units 86 units 80 units 140 units 910 gross Total Add: AJE (1) Per Audit Unit Price * Amount P 2.64 / doz P 218.40 4.70 each 225.60 16.50 each 2,409.00 5.15 each 442.90 8.50 each 680.00 2.00 each 3,360.00 132 gross 120,120.00 Per Client P 2,592.00 252.60 2,706.00 353.60 7,280.00 280.00 27,360.00 P127,455.90 P 40,824.20 86,631.70 P127,455.90 P127,455.90 * Lower of cost or market Requirement (b) Inventory Cost of sales 86,631.70 86,631.70 9-20 9-21 Requirement (a) Requirement (b) Exclude Title to the goods passed to the client on January 3, 2007 or upon receipt because the term of shipment was FOB Destination Exclude Goods held on consignment are not owned by the client Include Regular stock item even if segregated but not actually delivered as of the end of the year is still part of the client’s inventory Include Title to the goods passed to the client on December 31, 2006 or upon shipment because the invoice showed FOB supplier’s warehouse Exclude Goods fabricated to order for a customer are considered sold as soon as completed even if not yet delivered Isabela Company ISABELA COMPANY 9-14 Solutions Manual to Accompany Applied Auditing, 2006 Edition Worksheet to Correct Selected Accounts 12-31-06 9-22 Inventory Accounts Payable Sales Initial amounts Adjustments Increase (Decrease) P1,250,000 P1,000,000 P9,000,000 P (155,000) (22,000) None 210,000 25,000 2,000 (5,300) P (155,000) None None None 25,000 2,000 (5,300) None None P 40,000 None None None None Total adjustments P Adjustment amounts P1,304,700 54,700 P (133,300) P P P9,040,000 866,700 40,000 Stockroom W Stockroom W Reconciliation of Inventory 9-23 Opening Inventor y Receipt s Withdrawal s Balance per Accounting Department Add (Deduct) Reconciling Items 1) Receipt of materials erroneously posted by the Accounting Department to Stockroom W 2) Correction of error in the Accounting Department 3) Shortage not recorded in the Accounting Department P 22,600 P28,000 P 26,000 _ 90 Balance per Factory Records P 22,000 P28,480 P 25,490 Pinas Company 480 ( 600) Ending Inventory P 24,600 480 ( 600) (90) P 24,990 Substantive Tests of Inventories and Cost of Goods Sold 9-15 Requirement (1) Audit Adjustments, 12.31.06 a b Retained earnings Purchases 300 Inventory, January 1, 2006 Retained earnings 700 Accounts receivable Sales 500 Purchases Accounts payable 500 Inventory, Dec 31, 2006 B/S Inventory, Dec 31, 2006 I/S 400 300 700 500 500 400 Purchases Accounts payable 1,200 Inventory, Dec 31, 2006 B/S Inventory, Dec 31, 2006 I/S 1,200 1,200 1,200 Accounts payable Purchases 800 800 Requirement (2) Pinas Company Cost of Sales 2006 Inventory, Jan Purchases Total available Less: Inventory, Dec 31 Cost of sales Per Client P 3,200 21,100 _ 24,300 4,300 _ P 20,000 Adjustments Dr Cr P 700 (2) 500 (4) P 300 (1) 1,200 (6a) 800 (7) P 2,400 Per Audit P 3,900 21,700 25,600 400 (5) 1,200 (6b) 5,900 P 2,700 P19,700 9-16 Solutions Manual to Accompany Applied Auditing, 2006 Edition 9-24 Bers Company Uncorrected Amounts Income statement: Sales revenue Cost of goods sold Gross margin Expenses Income Balance sheet: Accounts receivable Inventory Remaining assets Accounts payable Remaining liabilities Share capital, ordinary Retained earnings † Totals * † P90,000 50,000 40,000 30,000 P10,000 P42,000 20,000 30,000 11,000 * 6,000 * 60,000 * 15,000 * P Credits Retained Earnings is negative after correction (a) (b) Items for Correction (c) (d) – 12,000 + 7,000 – 7,000 – 12,000 (e) + 6,000 + 15,000 – 15,000 – 8,000 – 6,000 – 15,000 – 7,000 – 15,000 – 15,000 + 8,000 – 15,000 – 7,000 – 12,000 + 6,000 + 7,000 – 7,000 – 12,000 – 6,000 Corrected Amounts P 63,000 63,000 37,000 P(37,000) P15,000 13,000 30,000 17,000 * 13,000 * 60,000 * (32,000) P Substantive Tests of Inventories and Cost of Goods Sold 9-17 9-25 Jap Co P150,000 – (P150,000 X 20) = P120,000; P120,000 – (P120,000 X 10) = P108,000, cost of goods purchased Fred Company P1,100,000 + P69,000 = P1,169,000 The P69,000 of goods in transit on which title had passed on December 24 (f.o.b shipping point) should be added to 12/31/06 inventory The P29,000 of goods shipped (f.o.b shipping point) on January 3, 2007, should remain part of the 12/31/06 inventory B May Corp Because no date was associated with the units issued or sold, the periodic (rather than perpetual) inventory method must be assumed FIFO inventory cost: 1,000 units at P24 1,100 units at 23 Total P 24,000 25,300 P 49,300 Average cost: 1,500 at P21 2,000 at 22 3,500 at 23 1,000 at 24 8,000 P 31,500 44,000 80,500 24,000 P180,000 Totals P180,000  8,000 = P22.50 Ending inventory (2,100 X P22.50) is P47,250 Emmett Lopez Inc The inventoriable costs for 2007 are: Merchandise purchased Add: Freight-in Deduct: Purchase returns Purchase discounts Inventoriable cost P909,400 22,000 931,400 P16,500 6,800 23,300 P908,100 Substantive Tests of Inventories and Cost of Goods Sold 9-18 9-26 (a) (1) 8/10 Purchases Accounts Payable 9,000 9,000 8/13 Accounts Payable Purchase Returns and Allowances 1,200 1,200 8/15 Purchases Accounts Payable 12,000 12,000 8/25 Purchases Accounts Payable 15,000 15,000 8/28 Accounts Payable Cash (2) 12,000 12,000 Purchases—addition in cost of goods sold section of income statement Purchase returns and allowances—deduction from purchases in cost of goods sold section of the income statement Accounts payable—current liability in the current liabilities section of the balance sheet (b) (1) 8/10 Purchases Accounts Payable (P9,000 X 98) 8,820 8,820 8/13 Accounts Payable Purchase Returns and Allowances (P1,200 X 98) 1,176 1,176 8/15 Purchases Accounts Payable (P12,000 X 99) 11,880 11,880 Substantive Tests of Inventories and Cost of Goods Sold 8/25 Purchases Accounts Payable (P15,000 X 98) 8/28 Accounts Payable Purchase Discounts Lost Cash (2) 14,700 14,700 11,880 120 12,000 8/31 Purchase Discounts Lost Accounts Payable (.02 X [P9,000 – P1,200]) (3) 9-19 156 156 Same as part (a) (2) except: Purchase Discounts Lost—treat as financial expense in income statement (c) 9-27 The second method is better theoretically because it results in the inventory being carried net of purchase discounts, and purchase discounts not taken are shown as an expense The first method is normally used, however, for practical reasons MAR Company (a) Purchases Total Units April (balance on hand) April April 11 April 18 April 26 April 30 Total units Total units sold Total units (ending inventory) Sales Total Units 100 400 300 200 500 200 1,700 1,400 300 April April 12 April 27 April 28 Total units 300 200 800 100 1,400 Assuming costs are not computed for each withdrawal: (1) First-in, first-out Date of Invoice No Units Unit Cost Total Cost April 30 April 26 200 100 P5.80 5.60 P1,160 560 9-20 Solutions Manual to Accompany Applied Auditing, 2006 Edition P1,720 (2) Average cost Cost of Part X available Date of Invoice No Units Unit Cost Total Cost April April April 11 April 18 April 26 April 30 Total Available 100 400 300 200 500 200 1,700 P5.00 5.10 5.30 5.35 5.60 5.80 P 500 2,040 1,590 1,070 2,800 1,160 P9,160 Average cost per unit = P9,160  1,700 = P5.39 Inventory, April 30 = 300 X P5.39 = P1,617 (b) Assuming costs are computed for each withdrawal: (1) First-in, first out The inventory would be the same in amount as in part (a), P1,720 (2) Average cost Date April April April April 11 April 12 April 18 April 26 April 27 April 28 April 30 Purchased No of Unit units cost 100 400 P5.00 5.10 300 5.30 200 500 5.35 5.60 200 5.80 No of units Sold Unit cost 300 P5.0800 200 5.2120 800 100 5.4336 5.4336 No of units 100 500 200 500 300 500 1,000 200 100 300 Balance Unit cost* P5.0000 5.0800 5.0800 5.2120 5.2120 5.2672 5.4336 5.4336 5.4336 5.6779 Amount P 500.00 2,540.00 1,016.00 2,606.00 1,563.60 2,633.60 5,433.60 1,086.72 543.36 1,703.36 Substantive Tests of Inventories and Cost of Goods Sold 9-21 Inventory April 30 is P1,703 *Four decimal places are used to minimize rounding errors 9-28 Timmy Turner Requirement (a) Merchandise on hand, January Purchases Less purchase returns and allowances Net purchases Freight-in Total merchandise available for sale Cost of goods sold* Ending inventory Less undamaged goods Estimated fire loss *Gross profit = 33 1/3% 100% + 33 1/3% P38,000 P72,000 2,400 69,600 3,400 73,000 111,000 75,000 36,000 10,900 P 25,100 = 25% of sales Cost of goods sold = 75% of sales of P100,000 = P75,000 Requirement (b) Cost of goods sold = 66 2/3% of sales of P100,000 = P66,667 Ending inventory [P111,000 (as computed above) – P66,667] Less undamaged goods Estimated fire loss 9-29 P44,333 10,900 P33,433 Cosmo and Wanda Company Beginning inventory Purchases Purchase returns Total goods available Sales Sales returns Net sales Less gross profit (40% X P626,000) Estimated ending inventory (unadjusted for P170,000 390,000 560,000 (30,000) 530,000 P650,000 (24,000) 626,000 (250,400) 375,600 9-22 Solutions Manual to Accompany Applied Auditing, 2006 Edition damage) Less goods on hand—undamaged (at cost) P21,000 X (1 – 40%) Less goods on hand—damaged (at net realizable value) Fire loss on inventory 154,400 (12,600) (5,300) P136,500 ... inventory is fairly stated by observing the taking of the inventory and by testing the pricing and calculation of the inventory 9-6 Solutions Manual to Accompany Applied Auditing, 2006 Edition However,... warehouses, and review supporting documents 9-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition 9-9 9-10 Review the loan agreements collateralized by warehouse receipts These agreements usually... substantiated by a review of the client’s records of consigned inventory, examination of contracts and correspondence with consignors, and confirmation of consigned stocks by direct communication with