21–25 (continued)
CLIENT
a.
ISSUES
TO CONSIDER
b.
LOCATIONS TO VISIT
c.
POTENTIAL RISKS
OF MATERIAL
MISSTATEMENT
d.
AUDITOR
RESPONSES
TO RISKS
4. Food Giant
Three–fourths of the
inventory balance is
located at the five
independent storage
warehouses.
There is a very high
volume of different
inventory products that
have different unit
prices.
Grocery inventory is
highly perishable and is
of great demand by
employees and
customers.
Customers have direct
The auditor will most
likely visit the five
distribution centers to
inspect the inventory on
hand at those locations.
The auditor might be
able to obtain
confirmation from the
independent storage
warehouse
management, if the
amount at one of the
storage warehouses is
less material. The
auditor will also likely
select a sample of the
42 stores to visit for
inventory observations.
There is a risk of theft
given grocery inventory
is of high demand and
customers have direct
access to it in the
stores. Additionally,
given the large volume
of inventory items, there
is a risk of loss, which
would result in inventory
being recorded that is
nonexistent.
Furthermore, the
volume of products also
creates a risk of
inventory pricing errors,
which would lead to
inaccurate amounts
recorded. Obsolescence
The auditor would
examine inventory on
hand at the storage
warehouses and
conduct pricing tests of
the inventory records.
The auditor would also
examine controls over
the movement of
inventory from the
storage warehouses to
the stores. The auditor
would also likely
perform a number of
substantive analytical
procedures regarding
inventory at the store
locations to determine
if recorded inventory
21–20
Copyright © 2017 Pearson Education, Inc.
21–21
21–26 (see text Web site for Excel solution.– Filename P2126.xls)
a.
2016 2015 2014 2013
Gross margin % 26.3% 22.6% 22.4% 22.4%
Inventory turnover 6.6 7.6 7.6 7.9
b. Logical causes of the changes in the gross margin as a percent of
sales include:
in cost of sales.
2. The method of accounting for inventory was changed,
causing a higher ending inventory (more expenses absorbed
into inventory) and lower cost of sales.
items were sold than in previous years.
5. An improper journal entry was recorded, which adjusted the
gross margin upward.
Logical causes of the changes in the inventory turnover include:
1. The increased selling prices, which caused the gross margin
decreased the inventory turnover.
of increased sales in the future.
expected inventory)
$11.6 million – 9.0 million =
$2,600,000 potential misstatement
Both calculations indicate a potential misstatement exceeding
$2,000,000.
21–22
21–26 (continued)
21–27 a. 1. Exclude
2. Include
3. Include
4. Exclude
5. Exclude
b. 1. Goods held “on consignment” do not belong to the consignee,
and should not be included in inventory.
it should be included in inventory.
3. Title to goods shipped F.O.B. shipping point normally passes
to the buyer on delivery to the transportation agency, and in
this instance the goods belong to your client at December
31, 2016. There is an error in recording the acquisition.
materials and labor are appropriated to the job. When the
job is completed and ready for shipment as in this case, it
may be considered as a completed sale.
21–28 a. 1. Extension errors are as follows:
DESCRIPTION
EXTENSION
AS
RECORDED
OVER
(UNDER)
STATEMENT
Wood
Metal cutting tool
Cutting fluid
Sandpaper
$ 11.04
1,740.00
240.00
579.00
$ ( 99.36)
270.00
(800.00)
573.30
$ ( 56.06)
21–23
21–28 (continued)
2. The differences in the previous year’s and this year’s cost
indicate a problem. The auditor should attempt to obtain
support for the current year’s cost if the effect of the
reasonableness indicates the following:
a) Precision cutting torches are expensive. Maybe $800
or a price list.
b) Aluminum scrap values may fluctuate significantly.
The two prices may be reasonable. Look at sales
invoices for the two years.
c) Lubricating oil cost appears unreasonable for this
the need for disclosure of the misstatements.
3. Investigate the reasons for the omission of these tags from
final inventory compilation. If it is determined that the omission
4. Page total footing errors are as follows:
PAGE NO.
CLIENT
TOTAL
CORRECT
TOTAL
OVER– (UNDER–)
STATEMENT
14
82
$2,375.36
6,721.18
$2,375.30
6,421.18
$ 0.06
300.00
$300.06
must consider sampling error.
The net effect of the misstatements for which we were able
to compute the actual misstatement was an overstatement of
inventory by $244.00, which is a small amount (see items 1 and 4).
21–24
21–28 (continued)
reasonableness and obvious misstatements.
For the items for which the amount of the misstatement
could not be determined, the auditor should follow up as described
in 2 and 3 above. From the results of the follow–up, the effect of
c. Prior to compiling the inventory next year, Martin Manufacturing
should implement the following internal controls:
1. Review formulas in schedule for inventory compilation.
Accuracy of spreadsheet should be independently reviewed.
Material in Car #AR38162 — received
in warehouse on January 2, 2017 $ 8,120
Materials stranded en route
this case.
21–25
21–29 (continued)
b. Auditor’s worksheet adjusting entries:
1. Purchases $ 2,183
Accounts Payable $ 2,183
To record goods in warehouse but
not invoiced–received on RR 1060.
To reverse out of sales material
included in both sales (SI 966)
and in physical inventory
(after adjustment).
5. No adjustment required.
6. Claims receivable 1,600
Purchases 1,250
Freight In 350
To reverse out of sales invoices
#969, 970, 97l. The sales book
was held open too long. This
merchandise was in warehouse
at time of physical count and so
included therein.
21–26
■ Case
21–30 (see text Web site for Excel solution.– Filename P2130.xls)
Descriptions of the potential inventory misstatements for the seven items in
question are provided below:
A. A price of $8 is proper for pricing L37 spars at 12–31–16 since
the next shipment of spars was not received until 1–06–17.
However, the next invoice shows a lower cost, which indicates
B. The total is 10,000 inches/12 = 833.33 feet times $1.20 per
833 feet (10,000/12) = $1,155.79 or an overstatement of
inventory by $10,844.21.
C. FIFO value would be:
Voucher 12–61 1,000 yards at $10.00 per yard = $10,000
date is after year–end.
D. FIFO value would be:
the cost.
E. Pricing is correct if the item is for inventory. It is possible
that this item should be capitalized.
F. Proper FIFO cost is 40 pair x 2 = 80 springs x $69.00
each = $5,520. Inventory is understated by $5,244.
21–30 (continued)
b.
SEA GULL AIRFRAMES, INC.
SUMMARY OF INVENTORY MISSTATEMENTS
Quantity
Price
Item No. and
Description
Per
Inventory
Correct
Difference
Per
Inventory
Correct
Difference
Recorded
Amount
Correct
Amount
Amount of
Misstatement
A. L37 Spars
B. B68 Metal Formers
C. R01 Metal Ribs
D. St26 Struts
E. Industrial hand
drills
F. L803 Steel Leaf
Springs
G. V16 Fasteners
3,000
10,000
1,500
1,000
45
40
5.50
3,000
833
1,500
1,000
45
80
5.50
0
9,167
0
0
0
– 40
0
8.00
1.20
10.00
8.00
20.00
69.00
10.00
8.00
1.3875
10/9.50
8/8.20
20.00
69.00
10.00
0.00
– 0.1875
.50
– .20
0.00
0.00
0.00
24,000.00
12,000.00
15,000.00
8,000.00
900.00
276.00
55.00
24,000.00
1,155.79
14,750.00
8,040.00
900.00
5,520.00
55.00
0.00
– 10,844.21
– 250.00
40.00
0.00
5,244.00
0.00
Total misstatement
– 5,810.21
Items over $5,000
Items under
$5,000
– 11,054.21
5,244.00
– 5,810.21
CONCLUSION: (see next page for calculations)
REMARKS:
There is a material potential misstatement due to the
number and size of misstatements found relative to
the sample chosen. In order to determine a more
accurate estimate of the actual misstatement,
additional tests are necessary.
A. NRV [assumed] exceeds cost.
B. Quantity based on inches, not feet; freight not included.
C. 500 yards overpriced.
D. 200 feet underpriced. NRV [assumed] O.K.
E. [Assumed] not capitalizable.
F. Includes extension error in inventory.
G. Consider separately for obsolescence.
21–27
Copyright © 2017 Pearson Education, Inc.
21–28
21–30 (continued)
PROJECTED MISSTATEMENTS
Dollars tested
Sample items Over 5,000 Under $5,000
No exceptions 360,000 2,600
A 24,000
B 12,000
results are equally unacceptable.