Sea Gull Airframes

SEA GULL AIRFRAMES, INC.
WAREHOUSE DEPARTMENT
AUDIT OF INVENTORY
Cesar Almario
Louise Franchesca Bias
Johnrenzo Canoy
Snyrrah Jannel De Vera
Angela Liban
Paolo Munar

AUDIT OF INVENTORY
IA12404
GROUP 7
October 1, 2015
Page 2

AUDIT OF INVENTORY
TABLE OF CONTENTS
I.
CASE ASSIGNED................................................................................................... 3
II.
INTRODUCTION..................................................................................................... 5
III.
BACKGROUND................................................................................................... 5
IV.
DISCUSSIONS.................................................................................................... 6
V.
A.
FINDINGS........................................................................................................... 6
B.
AUDIT SCHEDULE SUMMARY............................................................................. 6

ASSOCIATED RISKS AND RECOMMENDATION........................................................7
Page 3

AUDIT OF INVENTORY
I.
CASE ASSIGNED
You are assigned to the December 31, 2013, audit of Sea Gull Airframes, Inc.
The company designs and manufactures aircraft superstructures and airframe
components. You observed the physical inventory at December 31 and are satisfied that
it was properly taken. The inventory at December 31, 2013, has been priced, extended,
and totaled by the client and is made up of about 5,000 inventory items with a total
valuation of $8,275,000. In performing inventory price tests, you have decided to stratify
your tests and conclude that you should have two strata: items with a value over $5,000
and those with a value of less than $5,000. The book values are as follows:
More than $5,000

Less than $5,000
No. of items
500
4,500
5,000
Total Value
$4,150,000
4,125,000
$8,275,000
In performing pricing and extension tests, you have decided to test about 50
inventory items in detail. You selected 40 of the over $5,000 items and 10 of those under
$5,000 at random from the population. You find all items to be correct except for items A
through G below, which you believe may be misstated. You have tested the following
items, to this point, exclusive of A through G:
More than $5,000

Less than $5,000
No. of items
36
7
Total Value
$360,000
2,600
Sea Gull Airframes uses a periodic inventory system and values its inventory at
the lower of FIFO cost or market. You were able to locate all invoices needed for your
examination. The seven inventory items in the sample you believe may be misstated,
along with the relevant data for determining the proper valuation, are shown next.
In addition, you noted a freight bill for voucher 12-23 in the amount of $200. This bill was
entered in the freight-in account. Virtually all freight was for the metal formers.
This is the first time Sea Gull Airframes has been audited by your firm.
Page 4

AUDIT OF INVENTORY
INVENTORY ITEMS POSSIBLY MISTATED

Description
Quantity
Price
A. L37 spars
3,000 meters
$ 8.00/meter
B. B68 metal formers
10,000 inches
1.20/foot
C. R01 metal ribs
1,500 yards
10.00/yard
D. St26 struts
1,000 feet
8.00/foot
E. Industrial hand drills
45 units
20.00 each
F. L803 steel leaf springs
40 pairs
69.00 each spring
G. V16 fasteners
5.50 dozens
10.00/dozen
Amounts are as stated on clients inventory.
Total1
$ 24,000
12,000
15,000
8,000
900
276
55
Required:
a. Review all information and determine the inventory misstatements of the seven items in
question. State any assumptions you consider necessary to determine the amount of the
misstatements.
b. Prepare an audit schedule to summarize your findings. Use the computer to prepare the
schedule (instructors option).
Voucher
number
7-68
11-81
12-06
12-09
12-18
12-23
12-61
12-81
INFORMATION FOR PRICING FROM INVOICES (SEA GULL AIRFRAMES)

Voucher Date paid Terms
Receiving
Invoice Description
date
Report Date
8-01-08
8-20-08
Net FOB
8-01-08
77 V16 fasteners at $10 per dozen
destination
10-16-13 11-15-13
Net FOB
10-18-13
1,100 yards R01 metal ribs at $8.20 per
destination
foot
12-08-13 12-30-13
2/10, n/30
12-10-13
180 L803 steel leaf spring at $69 each
FOB S.P.
12-10-13 12-18-13
Net FOB
12-11-13
45 industrial hand drills at $20 each;
destination
guaranteed for 4 years
12-27-13 12-27-13
2/10, n/30
12-20-13
4,200 meters L37 spars at $8 per meter
FOB dest.
12-24-13 1-03-14
2/10, n/30
12-26-13
12,800 inches B68 metal formers at $1.20
FOB S.P.
per foot
12-29-13 1-08-14
Net FOB
12-29-13
1,000 yards R01 metal ribs at $10 per yard;
destination
800 feet St26 struts at $8 per foot
12-31-13 1-20-14
Net FOB
1-06-14
2,000 meters L37 spars at $7.50 per meter;
destination
2,000 yards R01 metal ribs at $10 per yard
1
Page 5

AUDIT OF INVENTORY
II.
INTRODUCTION
Sea Gull Airframes Inc. has been operating its glorious business since 2008,
and still continuing its market expansion around the globe. This company has known for
its sophisticated services that offers to designs and manufactures aircraft
superstructures and airframe components.
III.
BACKGROUND
Sea Gull Inc. has been in the long run operating its business and exposed to its
numerous competitors to produce high-quality aircraft superstructures and airframe
components. Despite of its numerous competitors Sea Gull Inc. becomes the host and
the main supplier of the biggest aircraft industries. Such high as Sea Gull Inc. flies for its
success; there are still some points of lapses that come into their flight, where Sea Gull
Inc. is experiencing mismanagement of their inventory for the counts, billings and
processes.
The Audit team soon hired by the Sea Gull Inc. to add value and to assure that
the controls implemented by the company to its inventory management is still properly
fits for the process needed by the organization.
As the audit team conducts its procedures, the following information has been
observed and gathered:
1. Physical inventory at December 31, 2013 are satisfied and were properly
taken.
2. Pricing and extension test revealed that all 50 inventory items that has been
tested in details are said to be correct except for Items A to G presented
above, are believed to be misstated.
3. Usage of periodic inventory system and values at lower of FIFO cost or
market.
4. All invoices needed for the examinations are located
5. Freight bill for voucher 12-23 in the amount of $200 was entered in the
freight-in account where it should actually be accounted for the metal
formers.
Page 6

AUDIT OF INVENTORY
IV.
DISCUSSIONS
A. FINDINGS
A. L37 spars
B. B68 Metal formers
C. R01 Metal Ribs
The 1,500 yards of R01 metal ribs inventory items are said to be possibly
misstated. As supporting documents for these inventories, the invoice shows that these
inventories came from the voucher number 11-81 and 12-61 disregarding the voucher
number 12-81 because it was later received after 2013 year-end. Stated that the Sea
Gull Inc. uses FIFO method as for the valuation of their inventories, it clearly shows that
the inventory for the first 1,000 yards of R01 metal ribs with the price of $10 per yard will
be allocated at the voucher 12-61 and the remaining 500 yards of R01 metal ribs at the
voucher number 11-81 at the price of $9.50 per yard will be the composition of the
ending inventory for the said R01 metal ribs.
Clients Record
$15,000
Voucher 12-61 1,000 yards $ 10.00=$ 10,000

Voucher 11-81
500 yards $ 9.50=$ 4,750

$14,750
Overstatement
$250
The records of the client showed that the cost of ending inventory of R01 metal
ribs is amounted to $15,000. In comparison to the clients record, the amount of the
inventory as of December 31, 2013 should be $14,750. This clearly shows that there is
an overstatement for the inventory of R01 metal ribs amounting to $250.
D. St26 Struts
E. Industrial Hand Drills
F. L803 Steel Leaf Springs
The inventory for steel leaf spring were inaccurate. 50% of the material in ending
inventory were not accounted for because the record shows that 40(pair) springs which
should have been 80 springs each is multiplied by $69.00. Moreover, the amount
Page 7

AUDIT OF INVENTORY
showed in the ending inventory $267 have been misstated instead of recording $2670 if
40 springs is multiplied by $69.00
The amount showed in the clients ending inventory record of 40 pairs of steel leaf spring
amounted to $267 which should have been computed as (40 pair x 2 = 80 springs x
$69.00 each = $5,520). Therefore, the amount is understated by $5,244.
G. V16 Fasteners
B. AUDIT SCHEDULE SUMMARY
V.
ASSOCIATED RISKS AND RECOMMENDATION

A. L37 spars
Risk:
Recommendation:
B. B68 Metal formers
Risk:
Recommendation:
C. R01 Metal Ribs

Risk:
Recommendation:
The management might be doing

fraud on behalf of its own
Page 8
Sea Gull Inc. should use proper

documentation, such as the use of

AUDIT OF INVENTORY
organization. In this way, the
organization could manipulate their
financial statements, where in they
are making it more profitable in the
face of the statement which is
actually not just to attract potential
investors and creditors to aid the
distress that they are experiencing.
voucher packets.
Reconciliation of Purchase Order,
receiving Report and the Invoice from
the vendor.
Shift to perpetual inventory valuation.
This would help the maintenance of the
Inventory account records such as the
use of stock cards to maintain the
summary of the inventories inflow and
outflow.
D. St26 Struts
Risk:
Recommendation:
E. Industrial Hand Drills

Risk:
Recommendation:
F. L803 Steel Leaf Springs
Risk:
Failure to record the correct amount of
the materials may trigger manipulation
of inventory counts which can become
a loophole for the employees to commit
fraud by misappropriating the inventory
for his benefit
Recommendation:
Sea Gull Inc. should improve controls
to ensure the accuracy of recorded
inventory
Recalculate value of inventory by
multiplying inventory records by the
purchase price of the individual items
Physically segregate access and
secure
storage
areas
against
unauthorized
admission
by
identification pass
G. V16 Fasteners
Risk:
Recommendation:
Page 9

AUDIT OF INVENTORY
Page 10

Sea Gull Airframes

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Sea Gull Airframes

Uploaded by

Copyright:

Available Formats

SEA GULL AIRFRAMES, INC.