Lovegood Company, a manufacturer of small tools, provided the following

information from its accounting records for the year ended December 31, 2013:
Inventory at December 31, 2013 (based on physical count
on December 31, 2013)
Accounts payable at December 31, 2013
Net sales (sales less sales returns)

P1,520,000
1,200,000
8,150,000

Additional information follows:

a. Included in the physical count were tools billed to a customer FOB shipping
point on December 31, 2013. These tools had a cost of P31,000 and were
billed at P40,000. The shipment was on Lovegoods loading dock waiting to
be picked up by the common carrier.
b. Goods were in transit from a vendor to Lovegood on December 31, 2013. The
invoice cost was P71,000, and the goods were shipped FOB shipping point on
December 29, 2013.
c. Work in process inventory costing P30,000 was sent to an outside processor
for plating on December 30, 2013.
d. Tools returned by customers and held pending inspection in the returned
goods area on December 31, 2013, were not included in the physical count.
On January 8, 2014, the tools costing P32,000 were inspected and returned to
inventory. Credit memos totaling P47,000 were issued to the customers on the
same date.
e. Tools shipped to a customer FOB destination on December 26, 2013, were in
transit at December 31, 2013, and had a cost of P21,000. Upon notification of
receipt by the customer on January 2, 2014, Lovegood issued a sales invoice
for P42,000.
f. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m.
on December 31, 2013, were recorded on a receiving report dated January 2,
2014. The goods were not included in the physical count, but the invoice was
included in accounts payable at December 31, 2013.
g. Goods received from a vendor on December 26, 2013, were included in the
physical count. However, the related P56,000 vendor invoice was not

included in accounts payable at December 31, 2013, because the accounts

payable copy of the receiving report was lost.
h. On January 3, 2014, a monthly freight bill in the amount of P6,000 was
received. The bill specifically related to merchandise purchased in December
2013, one-half of which was still in the inventory at December 31, 2013. The
freight charges were not included in either the inventory or accounts payable
at December 31, 2013.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1.

The adjusted balance of Inventory as of December 31, 2013 is

a. P1,673,000
b. P1,672,000
c. P1,704,000
d. P1,670,000

2.

The adjusted balance of Accounts Payable as of December 31, 2013 is

a. P1,333,000
b. P1,262,000
c. P1,327,000
d. P1,330,000

3.

The adjusted Net Sales fro the year ended December 31, 2013 is
a. P8,103,000
b. P8,110,000
c. P8,150,000
d. P8,063,000

4.

When auditing merchandise inventory at year end, the auditor performs a

purchase cutoff test to obtain evidence that
a. All goods purchased before year end are received before the physical
inventory count.
b. All goods owned at year end are included in the inventory balance.
c. No goods held on consignment for customers are included in the inventory
balance.
d. No goods observed during the physical count are pledged or sold.

5.

Which of the following audit procedures would provide the least reliable
evidence that the client has legal title to inventories?
a. Confirmation of inventories at locations outside the client's facilities.
b. Observation of physical inventory counts.
c. Examination of paid vendors' invoices.
d. Analytical review of inventory balances compared to purchasing and sales
activities.