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 do
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 sie of inventories and their significance in the determination of
net income make purposeful misstatement by the client a possibility !hich the
auditors must guard against.
9-2. "uring an audit of a manufacturing company, the auditors revie! the cost system
for the follo!ing purposes#
$%& 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.
$'& 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.
$(& 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 )uantities 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 !ill be
determined by the inventory-taking procedures* for example, the number of the
auditors+ test counts !ould be reduced if there !ere t!o teams, one verifying the
other, taking the inventory. ,n the other hand, the auditors+ test counts !ould be
expended if they found errors in the inventory counts.
9-4. The statement is not true. The auditors+ responsibilities !ith respect to inventories
include not only )uantities and pricing, but also the )uality or condition of the
goods, the accuracy of extensions, footing, and summaries, and the evaluation of
internal control. -eakness 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.
CHAPTER
9
SUBSTANTIVE TESTS
OF INVENTORIES AND
COST OF GOODS SOLD
9-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
9-5. The independent auditors utilie the client+s backlog of unfilled sales orders in the
determination of net realiable value of finished goods and goods-in-process, and
in the determination of losses, if any, on firm sales commitments for !hich no
production has yet been undertaken.
9-6. Beed Company
Since .eed /ompany 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 0%11,111 for the original stock of merchandise--to substance.
Substantively, the merchandise of .eed /ompany should be priced, on a specific
identification basis if feasible, at its cost from the suppliers of the sole
proprietorship. 2ny difference bet!een cost as thus determined and amounts
charged by the president to .eed /ompany represents unamortied discount on
the notes payable. The entire transaction should be fully disclosed in a note to the
financial statements of .eed /ompany.
9-7. Jay Company
The follo!ing procedures should be undertaken#
$a& The oral evidence that the motors are on consignment should be
substantiated by a revie! of the client+s records of consigned inventory,
examination of contracts and correspondence !ith consignors, and
confirmation of consigned stocks by direct communication !ith consignors.
$b& The location of the machine in the receiving department, together !ith the
presence of the 345-,467 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
)uality control department, to ascertain !ho has title to the machine. If the
customer has title, the machine should not be included in inventory, and a
liability for re!ork 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 realiable value.
$c& The 38aterial Inspection and 4eceiving 4eport7 signed by the 9avy Source
Inspector, is evidence that title to the machine passed to the 0hil. 9aval .ase
on 9ovember (1, '11:. 2ccordingly, 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 oods Sold 9-3
$d& The location of the storeroom and the dusty condition of the goods suggest
that the items may be obsolete, or at least slo! moving. The auditors should
inspect perpetual inventory records for usage of the materials, and should
in)uire of production personnel !hether the materials are currently useful in
production. The materials may have to be valued at scrap value.
9-8. Pancho Manufacturing Corporation
$a& Consignment out!
%. ,btain from the client a complete list of all consignees together !ith
copies of the consignment contracts.
'. 5valuate the consignment contract provisions relative to the follo!ing
areas#
$a& 0ayment of freight and other handling charges.
$b& 5xtension of credit.
$c& 4ates and computation of commissions to consignees.
$d& Fre)uency and contents of reports and remittances received from
consignees.
(. "iscuss !ith the client any variations found in the contracts !hich do not
seem justified by the circumstances.
;. Follo!ing revie! of the consignment contracts, communicate directly
!ith the consignees to obtain complete information in !riting on
merchandise remaining unsold, receivables resulting from sales,
unremitted proceeds, and accrued expenses and commissions, !hich
should be reconciled !ith the client+s records for the period covered by
the engagement.
<. "etermine that merchandise on consignment !ith consignees is valued
on the same basis as merchandise on hand, and included as part of the
inventory. 2scertain 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.
:. 2scertain that )uantities of goods in hands of consignees at the close of
the period under audit appear in the balance sheet and are separately
designated as 38erchandise on /onsignment.7
$b& "inis#ed merc#andise in public $are#ouse pledged as collateral for
outstanding debt!
%. "etermine that goods pledged to obtain funds are covered by !arehouse
receipts. $The examination of !arehouse receipts alone is not a sufficient
verification of goods stored in public !arehouses.&
'. 4e)uest direct confirmation from the !arehouses in !hich the
merchandise is held.
(. If available, obtain independent accountants+ reports on a !arehouses+
internal controls over custody of stored goods.
;. 4evie! the client+s procedures for acceptance and evaluation of the
performance of !arehouses, and revie! supporting documents.
9-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition
<. 4evie! the loan agreements collateralied by !arehouse receipts. These
agreements usually provide for certain payments to be made by the
borro!er as pledged goods are sold.
:. /onsider observing a physical inventory of goods stored at the public
!arehouses.
9-9. a. %2& b. %'& c. %2& d. %2&
e. %(& f. %2&
9-10. a. 0rincipal problems the auditor !ill face are related by#
%. =erification of existence of the inventory o!ned by the company as
against inventory belonging to the customers.
'. 0roper valuation since the perpetual inventory records reflect )uantities
only.
b. Steps that should be undertaken to enable the auditor to render an un)ualified
opinion#
%. =erify postings to the perpetual ledger at the plant office for both stock
o!ned and stock being held for customers against original cost sheet to
determine amounts debited and credited to the account.
'. 4e)uire that an annual physical inventory taking be done by the client
and arrangements for the presence and observation of the auditor be
done.
(. /onfirm !ith customers unclaimed merchandise still in the possession of
the client as of the balance sheet date.
9-11. %. 5xistence or occurrence
'. 5xistence or occurrence
(. =aluation or allocation
;. /ompleteness
<. /ompleteness
:. =aluation or allocation
>. /ompleteness
?. /ompleteness
@. 5xistence or occurrence and completeness
%1. /ompleteness
9-12. a. -hen 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 !ith the auditing standard pertaining to field !ork that re)uires
obtaining sufficient competent evidential matter to afford a reasonable basis
for an opinion regarding the financial statements. ,bservation is a generally
Substantive Tests of Inventories and Cost of oods Sold 9-5
accepting auditing procedure applied in the examination of the physical
inventory.
.y observing the taking of the physical inventory, the /02 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 )uantities. The /02 must
ascertain that the physical inventory actually exists, that the inventory
)uantities are being determined by reasonably accurate methods, and that the
inventory is in a salable or usable condition.
b. The /02 makes test counts of inventory )uantities 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 !ill be determined by the inventory-taking procedures. For
example, the number of test counts !ould be reduced if there !ere t!o teams
taking the inventory, one checking the other. ,n the other hand, the /02+s
test count !ould be expanded if errors !ere found in the inventory counts.
Some test counts are recorded by the /02 for the purpose of subse)uent
comparison !ith the client+s compilation of the inventory. The comparison
procedure goes beyond the mere determination that )uantities have been
accurately transcribed. In addition, the /02 seeks assurance that the
description and condition of the inventory items are accurate for pricing
purposes and that the )uantity information, such as doen, gross, and cartons,
is proper.
c. %. The /02 does not regard the inventory certificate of an outside service
company as a satisfactory substitute for his or her o!n 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 !ith regard to the inventory has been
strengthened. 9evertheless, as under other strong systems of internal
control, the /02 !ould investigate the system to become satisfied that it
is operating in a satisfactory manner. The /02+s investigation !ould
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 !ould have no effect
on the /02+s report. The /02 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
Ao!ever, if the taking of the inventory !as not observed and no audit
tests !ere applied to the computation of the inventory, the /02 !ould be
compelled to disclaim an opinion on the financial statements as a !hole
if the amount of the inventory is material.
If it has been impracticable or impossible for the /02 to observe the
taking of the physical inventory but he or she has been satisfied by the
application of other auditing procedures, the /02 !ould make no
reference to the matter in the report.
(. The /02 !ould 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
some!hat the same position as temporary employees. The outside
specialists are not independent in that they are not imbued !ith third-
party interests. The /02 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 !ho
are not independent auditors.
9-13. a. For a client to dispose of the chemical compound in a manner that meets legal
re)uirements is admirable. Ao!ever, ethical behavior fre)uently calls for
individual persons and companies to exhibit behavior that exceeds the
minimum standards set by la!. "ue to the harm to cattle and the pollution
that has resulted. 4emote is involved in a matter that entails ethical issues.
b. 8ost auditors are hesitant to serve as judge and jury for clients on ethical
matters. For example, declining to serve this client probably !ould 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. Aence, an auditor might choose to discuss the matter !ith
the board and encourage them to act as responsible citiens.
9-14. JC
)e*uirement %+&
Inventory, as given.......................................................... 0'>%,<11
Substantive Tests of Inventories and Cost of oods Sold 9-7
"educt $adjustments to cost&#
<1B markup in $a& C0'<1,111 D $0'<1,111 %.<&E. 0?(,(((
:1B markup in $b& $0%1,111 x 1.:1&....................... :,111
5xclusion of $c&........................................................ ;,111
Incorrect amount used in $e& $0',<11 D 0%,111&...... %,<11 @;,?((
0%>:,::>
2dd#
Freight on goods in transit in $d&.............................. ?11
/orrected ending inventory...................................... 0%>>,;:>
)e*uirement %2&
Income Statement
a. 5nding inventory overstated $0'<1,111 D 0%>>,;:>&............. 0>',<((
b. /ost of goods sold understated............................................... >',<((
c. Fross margin overstated......................................................... >',<((
d. 0retax income overstated........................................................ >',<((
e. Income taxes overstated $0>',<(( x 1.;1&............................. '@,1%(
f. 9et income overstated $0>',<(( D 0'@,1%(&.......................... ;(,<'1
.alance Sheet#
/urrent assets, inventory overstated............................................ >',<((
/urrent liabilities, income taxes payable overstated.................... '@,1%(
4etained earnings overstated........................................................ ;(,<'1
)e*uirement %'&
4etained earnings $prior period adjustment&................... ;(,<'1
Income taxes payable...................................................... '@,1%(
Inventory.................................................................. >',<((
9-15. .eginning inventory 0 (?,111
0urchases %@,111
/ost of goods available for sale 0 <>,111
/ost of goods sold $net sales of 0<%,111 %.<1& (;,111
5nding inventory before theft 0 '(,111
5nding inventory after theft %<,111
Inventory lost 0 ?,111
9-16. LRT Company
G4T /,8029H
/omputation of =alue of Inventory Gost
February %:, '11:
9-8 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Sales 0 ;1,111
Gess# Fross profit $;1B& %:,111
/ost of goods sold 0 ';,111
Finished goods, February %: ><,111
/ost of goods available for sale 0 @@,111
Gess# Finished goods, "ecember (%, '11< >',111
/ost of goods manufactured and completed 0 '>,111
4a! materials, "ecember (%, '11< 0 :<,111
4a! materials purchases '1,111
4a! materials available for production 0 ?<,111
4a! materials before flood >1,111 $0(<,111 %I'&
4a! materials used 0 %<,111
"irect labor (1,111
8anufacturing overhead cost %<,111
Foods in process, "ecember (%, '11< ?1,111
/ost of production 0 %;1,111
Gess# /ost of goods completed $from above& '>,111
Foods in process inventory lost in flood 0 %%(,111
Total value of inventory J 4a! materials lost K Foods in process lost
destroyed by flood
J $0>1,111 - 0(<,111& K 0%%(,111
J 0%;?,111
9-17. Y Company
a. 9ecessary adjustments to client+s physical inventory#
8aterial in /ar L24(?%:'--received in
!arehouse on Manuary ', '11> 0 ?,%'1
8aterials stranded en route
$Sales price 0%@,'>1I%'<B& %<,;%:
Total '(,<(:
Gess unsalable inventory %,'<1N
Total adjustment 0'','?:
N If freight charges have been included in the client+s inventory, the
amount !ould be 0%,:11 and the amount of the total adjustment !ould
be 0'%,@(:. Mournal entry : probably !ould have a credit to purchases
of 0%,:11 in this case.
b. 2uditor+s !orksheet adjusting entries#
%. 0urchases 0 ',%?(
2ccounts 0ayable 0 ',%?(
To record goods in !arehouse but not
Substantive Tests of Inventories and Cost of oods Sold 9-9
invoiced-received on 44 %1:1.
'. 9o entry re)uired. Title to goods had passed.
(. 2ccounts receivable %',>11
Sales %',>11
To record goods as sold !hich !ere
loaded on "ecember (% and not
inventories-SI @:?.
;. Sales %@,'>1
2ccounts receivable %@,'>1
To reverse out of sales material included
in both sales $SI @::& and in physical
inventory $after adjustment&.
<. 9o adjustment re)uired.
:. /laims receivable %,:11
0urchases %,'<1
Freight In (<1
To record claim against carrier for
merchandise damaged in transit.
>. Inventory '','?:
/ost of goods sold '','?:
To adjust accounts for changes in physical
inventory )uantities.
?. Sales %<,>>(
2ccounts receivable %<,>>(
To reverse out of sales invoices L@:@, L@>1,
L@>%. The sales book !as held open too long.
This merchandise !as in !arehouse at time
of physical count and so included therein.
9-18. Engine Warehouse Supply Company
a. /utoff errors !ill exist for accounts payable !henever the liability for a
purchase is recorded in the !rong period. The follo!ing rules should be
follo!ed for recording purchases#
%. 4ecord as of date received !hen shipped F,. destination.
'. 4ecord as of date shipped !hen shipped F,. origin.
,n this basis, the receiving reports !ould be evaluated as follo!s#
)eceivin
g )eport
,o! Amoun
-ate
S#ipped
-ate
)eceived "./ 0oint
S#ould be
)ecorded
in August
1as
)ecorded
in August
9-10 Solutions Manual to Accompany Applied Auditing, 2006 Edition
t
:>@ 0 ?:1 ?-'@ ?-(% "estination Hes Hes
:?1 %,'%% ?-'> @-1% ,rigin Hes Hes
:?% %@( ?-'1 @-1% ,rigin Hes Hes
:?' ;,:>; ?-'> @-1% "estination 9o Hes
:?( ;<1 ?-(1 @-1' "estination 9o 9o
:?; %1: ?-(1 @-1' ,rigin Hes 9o
:?< ',?11 @-1: @-1' ,rigin 9o 9o
:?: :?: ?-(1 @-1' "estination 9o 9o
The entry to adjust the records as of 2ugust (% for cutoff errors in accounts
payable is as follo!s#
"r. 2ccounts payable 0;,<:?
/r. 0urchases 0;,<:?
To adjust accounts payable for cutoff errors in recording inventory purchases#
44 9o. :?' 0;,:>;
44 9o. :?; $ %1:&
0;,<:?
b. Sales should be recorded as of the date shipped. The follo!ing shipping
documents !ere dated on September % and recorded in 2ugust#
(%% 0 <:
(%' (,%@;
(%( :(<
(%; %@(
0;,1>?
The adjusting entry !ill be#
"r. Sales 0;,1>?
/r. 2ccounts receivable 0;,1>?
To adjust sales for cutoff errors at 2ugust (%.
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 oods 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 follo!ing analysis.
)eceipt of oods
%. Inventory for all receiving reports up to :?; are included in inventory.
'. Osing the analysis in part a, column :, inventory for all receiving reports
up to :?;, except :?' and :?(, should be included in accounts payable
and inventory.
)eport ,o! Amount
S#ould be Included in
0urc#ases and Inventory
1as Included
in Inventory
:>@ ?:1 Hes Hes
:?1 %,'%% Hes Hes
:?% %@( Hes Hes
:?'N ;,:>; 9o Hes
:?(N ;<1 9o Hes
:?; %1: Hes Hes
:?< ',?11 9o 9o
:?: :?: 9o 9o
N 4e)uires removal from inventory.
(. Inventory for receiving reports :?' and :?( should therefore be removed
from the physical count#
2mount
:?' ;,:>;
:?( ;<1
<,%';
S#ipment of oods
%. Inventory for shipping documents (%; to (%> !ere included in inventory.
2ll inventory for documents (%( and earlier !ere excluded.
'. Sales, after adjustments, !ere included only for shipments (%1 and those
preceding, as sho!n in the analysis in part b.
(. Inventory for shipping documents (%% to (%( should therefore be added
to inventory. The amount of the cost of the inventory cannot be
determined !ithout reference to inventory costs. 0resumably, cost !ill
be less than the sales value sho!n in part b.
9-12 Solutions Manual to Accompany Applied Auditing, 2006 Edition
S#ipping
-ocument ,o!
Included in
0#ysical
)ecorded as Sale After
Ad2ustments in 0art b
(%1 9o Hes
(%%N 9o 9o
(%'N 9o 9o
(%(N 9o 9o
(%; Hes 9o
(%< Hes 9o
(%: Hes 9o
(%> Hes 9o
(%? Hes 9o
N 4e)uires addition to inventory at cost.
Shipping
"ocument 9o.
Selling
0rice
(%% 0 <:
(%' (,%@;
(%( :(<
Inventory cost (,??<
$>1B of selling price& ',>%@
Summary
4eduction of inventory due to physical count error
resulting from receipt of goods. 0<,%';.11
Increase of inventory due to physical count error
resulting from shipment of goods. ',>%@.<1
9et reduction of inventory re)uired 0',;1;.<1
d. The accuracy about September % receipts and shipments of goods could be
verified by reference to bills of lading.
9-19. reen Company
)e*uirement %a&
Substantive Tests of Inventories and Cost of oods Sold 9-13
Freen /ompany
Inventory
%'.(%.1:
0er 2udit
Item Puantity Onit 0rice N 2mount 0er /lient
2 D <%1 >'1 units 0 '.:; I do. 0 '%?.;1 0 ',<@'.11
2 D <'1 ;? units ;.>1 each ''<.:1 '<'.:1
2 D <(1 %;: units %:.<1 each ',;1@.11 ',>1:.11
2 D <;1 ?: units <.%< each ;;'.@1 (<(.:1
2 D <<1 ?1 units ?.<1 each :?1.11 >,'?1.11
2 D <:1 %;1 units '.11 each (,(:1.11 '?1.11
2 D <>1 @%1 gross %(' gross %'1,%'1.11 '>,(:1.11
Total 0%'>,;<<.@1 0 ;1,?';.'1
2dd# 2M5 $%& QQQQQQQQQQ ?:,:(%.>1
0%'>,;<<.@1 0%'>,;<<.@1
N Go!er of cost or market
)e*uirement %b&
Inventory ?:,:(%.>1
/ost of sales ?:,:(%.>1
9-20.
)e*uirement %a& )e*uirement %b&
%. 5xclude Title to the goods passed to the client on Manuary (, '11>
or upon receipt because the term of shipment !as F,.
"estination.
'. 5xclude Foods held on consignment are not o!ned by the client.
(. Include 4egular 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 "ecember (%,
'11: or upon shipment because the invoice sho!ed F,.
supplier+s !arehouse.
<. 5xclude Foods fabricated to order for a customer are considered
sold as soon as completed even if not yet delivered.
9-21. !sa"ela Company
ISABELA COMPANY
9-14 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Worksheet to Correct Selected Accounts
12-31-0
Inventory Accounts Payable Sales
In!t!"l "#ounts P1$2%0$000 P1$000$000 P&$000$000
Ad'ust#ents
Incre"se ()ecre"se*
1 P (1%%$000* P (1%%$000* None
2 (22$000* None None
3 None None P +0$000
+ 210$000 None None
% 2%$000 2%$000 None
2$000 2$000 None
, (%$300* (%$300* None
-ot"l "d'ust#ents P %+$,00 P (133$300* P +0$000
Ad'ust#ent "#ounts P1$30+$,00 P .$,00 P&$0+0$000
9-22. Stoc#room W
Stockroo# W
/econc!l!"t!on o0 In1entor2
Opening
Inventor
y
Receipt
s
Withdrawal
s
Ending
Inventory
B"l"nce 3er Account!n4 )e3"rt#ent P 22$00 P2.$000 P 2$000 P 2+$00
Add ()educt* /econc!l!n4 Ite#s
1* /ece!3t o0 #"ter!"ls
erroneousl2 3osted 52 the
Account!n4 )e3"rt#ent to
Stockroo# W6 +.0 +.0
2* Correct!on o0 error !n the
Account!n4 )e3"rt#ent6 ( 00* ( 00*
3* Short"4e not recorded !n the
Account!n4 )e3"rt#ent6 7777777 777777 &0

(&0*
B"l"nce 3er 8"ctor2 /ecords P 22$000 P2.$+.0 P 2%$+&0 P 2+$&&0
9-23. Pinas Company
Substantive Tests of Inventories and Cost of oods Sold 9-15
)e*uirement %+&
2udit 2djustments, %'.(%.1:
%. 4etained earnings (11
0urchases (11
'. Inventory, Manuary %, '11: >11
4etained earnings >11
(. 2ccounts receivable <11
Sales <11
;. 0urchases <11
2ccounts payable <11
<. Inventory, "ec. (%, '11: .IS ;11
Inventory, "ec. (%, '11: IIS ;11
:. a. 0urchases %,'11
2ccounts payable %,'11
b. Inventory, "ec. (%, '11: .IS %,'11
Inventory, "ec. (%, '11: IIS %,'11
>. 2ccounts payable ?11
0urchases ?11
)e*uirement %2&
0inas /ompany
/ost of Sales
'11:
0er Ad2ustments 0er
Client -r Cr Audit
Inventory, Man. % 0 (,'11 0 >11 $'& 0 (,@11
0urchases '%,%11 <11 $;& 0 (11 $%&
QQQQQQQ %,'11 $:a& ?11 $>& '%,>11
Total available ';,(11 '<,:11
Gess# Inventory, "ec. (% ;,(11 ;11 $<&
QQQQQQQ QQQQQQ %,'11 $:b& <,@11
/ost of sales 0 '1,111 0 ',;11 0 ',>11 0%@,>11
9-16 Solutions Manual to Accompany Applied Auditing, 2006 Edition
9-24. Bers Company
3ncorrected Items for Correction Corrected
Amounts %a& %b& %c& %d& %e& Amounts
Income statement#
Sales revenue............................. 0@1,111 D %',111 D %<,111 0 :(,111
/ost of goods sold..................... <1,111 K :,111 K %<,111 D ?,111 :(,111
Fross margin.............................. ;1,111 1
5xpenses.................................... (1,111 K >,111 (>,111
Income....................................... 0%1,111 D >,111 D %',111 D :,111 D %<,111 D >,111 0$(>,111&
.alance sheet#
2ccounts receivable................... 0;',111 D %',111 D %<,111 0%<,111
Inventory.................................... '1,111 D %<,111 K ?,111 %(,111
4emaining assets....................... (1,111 (1,111
2ccounts payable....................... %%,111 N K :,111 %>,111 N
4emaining liabilities.................. :,111 N K >,111 %(,111 N
Share capital, ordinary............... :1,111 N :1,111 N
4etained earnings
R
.................... %<,111 N D >,111 D %',111 D :,111 D %<,111 D >,111 $(',111&
Totals...................................... 0 1 0 1
N /redits.
R
4etained 5arnings is negative after correction.
Substantive Tests of Inventories and Cost of oods Sold 9-17
@-'<.
%. 4ap Co!
0%<1,111 D $0%<1,111 S .'1& J 0%'1,111*
0%'1,111 D $0%'1,111 S .%1& J 0%1?,111, cost of goods purchased
'. "red Company
0%,%11,111 K 0:@,111 J 0%,%:@,111. The 0:@,111 of goods in transit on
!hich title had passed on "ecember '; $f.o.b. shipping point& should be
added to %'I(%I1: inventory. The 0'@,111 of goods shipped $f.o.b. shipping
point& on Manuary (, '11>, should remain part of the %'I(%I1: inventory.
(. .. 8ay /orp.
.ecause no date !as associated !ith the units issued or sold, the periodic
$rather than perpetual& inventory method must be assumed.
FIF, inventory cost# %,111 units at 0'; 0 ';,111
%,%11 units at '( '<,(11
Total 0 ;@,(11
2verage cost# %,<11 at 0'% 0 (%,<11
',111 at '' ;;,111
(,<11 at '( ?1,<11
%,111 at '; ';,111
Totals ?,111 0%?1,111
0%?1,111 ?,111 J 0''.<1
5nding inventory $',%11 S 0''.<1& is 0;>,'<1.
;. Emmett 5ope6 Inc!
The inventoriable costs for '11> are#
8erchandise purchased 0@1@,;11
2dd# Freight-in '',111
@(%,;11
"educt# 0urchase returns 0%:,<11
0urchase discounts :,?11 '(,(11
Inventoriable cost 0@1?,%11
Substantive Tests of Inventories and Cost of oods Sold 9-18
@-':.
$a& $%& ?I%1
0urchases @,111
2ccounts 0ayable @,111
?I%(
2ccounts 0ayable %,'11
0urchase 4eturns and 2llo!ances %,'11
?I%<
0urchases %',111
2ccounts 0ayable %',111
?I'<
0urchases %<,111
2ccounts 0ayable %<,111
?I'?
2ccounts 0ayable %',111
/ash %',111
$'& 0urchasesTaddition in cost of goods sold section of income
statement.
0urchase returns and allo!ancesTdeduction from purchases in cost
of goods sold section of the income statement.
2ccounts payableTcurrent liability in the current liabilities section of
the balance sheet.
$b& $%& ?I%1
0urchases ?,?'1
2ccounts 0ayable $0@,111 S .@?& ?,?'1
?I%(
2ccounts 0ayable %,%>:
0urchase 4eturns and 2llo!ances %,%>:
$0%,'11 S .@?&
?I%<
0urchases %%,??1
2ccounts 0ayable $0%',111 S .@@& %%,??1
Substantive Tests of Inventories and Cost of oods Sold 9-19
?I'<
0urchases %;,>11
2ccounts 0ayable $0%<,111 S .@?& %;,>11
?I'?
2ccounts 0ayable %%,??1
0urchase "iscounts Gost %'1
/ash %',111
$'& ?I(%
0urchase "iscounts Gost %<:
2ccounts 0ayable
$.1' S C0@,111 D 0%,'11E& %<:
$(& Same as part $a& $'& except#
0urchase "iscounts GostTtreat as financial expense in income
statement.
$c& The second method is better theoretically because it results in the inventory
being carried net of purchase discounts, and purchase discounts not taken
are sho!n as an expense. The first method is normally used, ho!ever, for
practical reasons.
9-27. M$R Company
$a& 0urchases
Total Onits
Sales
Total Onits
2pril % $balance on hand& %11 2pril < (11
2pril ; ;11 2pril %' '11
2pril %% (11 2pril '> ?11
2pril %? '11 2pril '? %11
2pril ': <11 Total units %,;11
2pril (1 '11
Total units %,>11
Total units sold %,;11
Total units $ending inventory& (11
2ssuming costs are not computed for each !ithdra!al#
$%& First-in, first-out.
"ate of Invoice 9o. Onits Onit /ost Total /ost
2pril (1 '11 0<.?1 0%,%:1
9-20 Solutions Manual to Accompany Applied Auditing, 2006 Edition
2pril ': %11 <.:1 <:1
0%,>'1
$'& 2verage cost.
/ost of 0art S available.
"ate of Invoice 9o. Onits Onit /ost Total /ost
2pril % %11 0<.11 0 <11
2pril ; ;11 <.%1 ',1;1
2pril %% (11 <.(1 %,<@1
2pril %? '11 <.(< %,1>1
2pril ': <11 <.:1 ',?11
2pril (1 '11 <.?1 %,%:1
Total 2vailable %,>11 0@,%:1
2verage cost per unit J 0@,%:1 %,>11 J 0<.(@.
Inventory, 2pril (1 J (11 S 0<.(@ J 0%,:%>.
$b& 2ssuming costs are computed for each !ithdra!al#
$%& First-in, first out.
The inventory !ould be the same in amount as in part $a&, 0%,>'1.
$'& 2verage cost.
0urchased Sold .alance
"ate
9o. of
units
Onit
cost
9o. of
units
Onit cost 9o. of
units
Onit
costN 2mount
2pril % %11 0<.11 %11 0<.1111 0 <11.11
2pril ; ;11 <.%1 <11 <.1?11 ',<;1.11
2pril < (11 0<.1?11 '11 <.1?11 %,1%:.11
2pril %% (11 <.(1 <11 <.'%'1 ',:1:.11
2pril %' '11 <.'%'1 (11 <.'%'1 %,<:(.:1
2pril %? '11 <.(< <11 <.':>' ',:((.:1
2pril ': <11 <.:1 %,111 <.;((: <,;((.:1
2pril '> ?11 <.;((: '11 <.;((: %,1?:.>'
2pril '? %11 <.;((: %11 <.;((: <;(.(:
2pril (1 '11 <.?1 (11 <.:>>@ %,>1(.(:
Substantive Tests of Inventories and Cost of oods Sold 9-21
Inventory 2pril (1 is 0%,>1(.
NFour decimal places are used to minimie rounding errors.
9-28. Timmy Turner
)e*uirement %a&
8erchandise on hand, Manuary % 0(?,111
0urchases 0>',111
Gess purchase returns and allo!ances ',;11
9et purchases :@,:11
Freight-in (,;11 >(,111
Total merchandise available for sale %%%,111
/ost of goods soldN ><,111
5nding inventory (:,111
Gess undamaged goods %1,@11
5stimated fire loss 0 '<,%11
NFross profit J
(( %I(B
J '<B of sales.
%11B K (( %I(B
/ost of goods sold J ><B of sales of 0%11,111 J 0><,111.
)e*uirement %b&
/ost of goods sold J :: 'I(B of sales of
0%11,111 J 0::,::>
5nding inventory C0%%%,111 $as computed above& D
0::,::>E 0;;,(((
Gess undamaged goods %1,@11
5stimated fire loss 0((,;((
9-29. Cosmo and Wanda Company
.eginning inventory 0%>1,111
0urchases (@1,111
<:1,111
0urchase returns $(1,111&
Total goods available <(1,111
Sales 0:<1,111
Sales returns $';,111&
9et sales :':,111
Gess gross profit $;1B S 0:':,111& $'<1,;11& (><,:11
5stimated ending inventory $unadjusted for
damage& %<;,;11
9-22 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Gess goods on handTundamaged $at cost&
0'%,111 S $% D ;1B& $%',:11&
Gess goods on handTdamaged $at net
realiable value& $<,(11&
Fire loss on inventory 0%(:,<11