You are assigned to the December 31, 2016, 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, 2016, 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 of the entire amount of inventory consisted of the following:
|No. of Items||Total Value|
|More than $5,000||500||$4,150,000|
|Less than $5,000||4,500||4,125,000|
In performing pricing and extension tests, you have decided to test 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.
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Your sample consisted of the following:
|No. of Items||Total Value|
|More than $5,000||40||$439,000|
|Less than $5,000||10||4,131|
Sea Gull Airframes uses a periodic inventory system and values its inventory using FIFO (first in first out). You were able to locate all invoices needed for your examination.
You find no issue with 43 of the 50 items sampled. There are seven inventory items (A-G) in the sample which you believe may possibly be misstated, and you have decided to investigate further. You have pulled information from purchase records to help you determine if the items A-G are correctly stated. Information on the following page.
Inventory Items A-G As Reported by Client
Most Recent Inventory Purchase Records from Invoices – Related to Items A-G
Information For Pricing From Invoices (Sea Gull Airframes)
ADDITIONAL INFORMATION DISCOVERED:
In addition to the above purchase records, you discovered a freight bill for voucher 12-23 in the amount of $200. This bill was entered in the freight-in account and should have been added to the cost of the inventory item.
- Review all information and determine the inventory misstatements of the seven items in question. In the Excel file, Workpaper1 tab, complete the schedule for the seven items. Add remarks regarding each item A-G for any discrepancies.
- If the date paid is within the time frame to receive the 2% discount (2/10 n/30), be sure to adjust the cost of inventory for that discount. Compare the voucher date with the date paid to determine the number of days before the invoice was paid. (I changed the date paid on voucher 12-23 to have no issue with whether it was paid within 10 days or not — it was not paid in 10 days, there was no cash discount received)
- Don’t forget to add the freight bill to Voucher 12-23. Allocate the freight cost to the total number of units purchased with that shipment.
- There may not be any adjustments to some of the inventory items.
- Prepare an audit schedule to summarize your findings on Workpaper2 Extrapolate the results from the sample to the entire population. Project the total misstatement of Inventory as a whole. Refer to pages 241-243 of your book for the calculation to project sample results to a population. Ignore sampling risk for this calculation. Note: You will need to project the misstatement to the population for each stratum, and then add them together to summarize the whole population.
- As you were evaluating each inventory item, what concerns do you have regarding the valuation of inventory (the application of lower of cost or market / consideration of obsolete inventory) regarding items A-G?