KL Engineering Enterprise, a manufacturer of small tools, provided the following
information from its accounting records for the year ended December 31, 2020:
Inventory at December 31, 2020 (based on physical count
on December 31, 2020)
RM1,520,000
Accounts payable at December 31, 2020
1,200,000
Net sales (sales less sales returns)
8,150,000
Additional information follows:
a.
Included in the physical count were tools billed to a customer FOB shipping
point on December 31, 2020. These tools had a cost of RM31,000 and were
billed at RM40,000. The shipment was on KL Engineering Enterprise’s
loading dock waiting to be picked up by the common carrier.
b.
Goods were in transit from a vendor to KL Engineering Enterprise on
December 31, 2020. The invoice cost was RM71,000, and the goods were
shipped FOB shipping point on December 29, 2020.
c.
Work in process inventory costing RM30,000 was sent to an outside processor
for plating on December 30, 2020.
d.
Tools returned by customers and held pending inspection in the returned
goods area on December 31, 2020, were not included in the physical count.
On January 8, 2021, the tools costing RM32,000 were inspected and returned
to inventory. Credit memos totaling RM47,000 were issued to the customers
on the same date.
e.
Tools shipped to a customer FOB destination on December 26, 2020, were in
transit at December 31, 2020, and had a cost of RM21,000. Upon notification
of receipt by the customer on January 2, 2020, KL Engineering Enterprise
issued a sales invoice for RM42,000.
f.
Goods, with an invoice cost of RM27,000, received from a vendor at 5:00
p.m. on December 31, 2020, were recorded on a receiving report dated
January 2, 2021. The goods were not included in the physical count, but the
invoice was included in accounts payable at December 31, 2020.
g.
Goods received from a vendor on December 26, 2020, were included in the
physical count. However, the related RM56,000 vendor invoice was not
included in accounts payable at December 31, 2020, because the accounts
payable copy of the receiving report was lost.
h.
On January 3, 2021, a monthly freight bill in the amount of RM6,000 was
received. The bill specifically related to merchandise purchased in December
2020, one-half of which was still in the inventory at December 31, 2020. The
freight charges were not included in either the inventory or accounts payable
at December 31, 2020.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1.
The adjusted balance of Inventory as of December 31, 2020 is
a. RM1,673,000 b. RM1,672,000 c. RM1,704,000 d. RM1,670,000
2.
The adjusted balance of Accounts Payable as of December 31, 2020 is
a. RM1,333,000 b. RM1,262,000 c. RM1,327,000 d. RM1,330,000
3.
The adjusted Net Sales for the year ended December 31, 2020 is
a. RM8,103,000 b. RM8,110,000 c. RM8,150,000 d. RM8,063,000
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.