[cpaswag]

So I heard this is something thats actually been tested and on CPA Exam or something similar does anybody have steps to solve it

Green, CPA, is completing audit procedures for the December 31 year 4 audits at JBU Co., a nonissuer. An auditor from Green attended the physical inventory obeservation at year end. JBU Co. maintains a perpetual inventory system that is integrated with its general ledger. The auditor noted some issues that require further investigation while reviewing JBU’s inventory count sheets and warehouse lacation maps.
The auditor established the following information relating to the inventory count and product lines of the JBU.
There was not product movement on the day of the count
The loading dock is part of warehouse A for the purposes of the count
All product lines within each storage area have been identified on the warehouse maps
The warehouse map is reflectieve of the warehouse on the day of the count
Inventory values in the perpetual inventory listing are based on the most recent purchase price
Materiality for the year end audit is 8000
Performance materiality is 5000
Email for the controller
Auditor, please see my response to your question inline below. Also, it should be noted that on closer look, there is an issue with physical counts of the 5mm widgets. The perpetual records are correct. This has been validated by your associate. Lastly, it looks like the perpetual inventory listing includes 750 units of SKU 267-1 that should have been moved out of the perpetual inventory system and onto the consigned inventory account.
Thanks Controller
Email from Auditor
Hi, Can you please tell me weather the items in the returns area have been included in the count?
(Controller) Yes, the counts are correct and returns have been included in the counts. However, they would not yet have been processed in the perpetual invenoty system.
Thanks Auditor,
Supplier Report Widget- Wiz Co
SKU 267-3
On September 25 year 4 JBU acquired 100 units of SKU 267-3 with a unit price of 7.99. Subsequent to this acquisition, JBU sold a total of 25 units of 267-3 to third parties for $11.99, and utilized 70 units of the product in the manufacture of equipment being held for sale in warehouse C.
SKU 267-5
The company has not made a purchase of SKU-267-5 subsequent to February year 3. In prior years, JBU had a regular customer for this product line during year 3. This customer became insolvent.
SKU 267-1
In March, year 4, JBU purchased 5,000 units of sku 267-1. Half of the units were used in the manufacture of equipment that has subsequently been sold. A further 30% of the units were sold to third parties during year 4 and 5% of the units are in ending inventory. The remaining 15% of the units were provided to a customer on a consignment basis on December 31, year 4 these units were sold by the customer on January 3 year 5.
SKU-267-4
In December year 3 the company acquired 10,000 units of SKU 267-4 at a price of $1.56 per unit. During year 4, the company sold 5898 units of the product of third parties. The last sale was made in November year 4, with shipment that same month.
Warehouse Map
Warehouse A Warehouse B
Hex Bolts (561-3) Bolts- ¾ inch (490-2) Bolts- ¾ inch (490-2) Widgets -10mm (267-1)
Flex Washers (671-0) Hex Bolts (561-3) Widgets-20mm (267-3) Flat washers (671-0)
Widgets-10mm (267-1) Copper coil (290-1) Wrenches (583-5)
Widgets-10mm (267-4) Copper Coil (290-1) Hex Bolts (561-3) Large Plates (352-2)
Loading docks Returns area
Large Plates (352-2) Copper Coil (290-1) Hex Bolts (561-3)
Inventory Count Sheets
Warehouse A
267-4 4098
490-2 541
267-3 —
561-3 7975
290-1 121
583-5 —
671-0 2683
267-1 131
352-2 —
Ware House B
267-4 —
490-2 491
267-3 5
561-3 1950
290-1 800
583-5 110
671-0 10188
267-1 119
352 136
Perpetual inventory list
Product sku last purchase date last purchase item cost item cost inventory value
Wrenches 583-5 6-3-yr-4 12.78 150 1917.00
Widgets-10mm 267-1 3-8-yr4 4.99 1000 4990.00
Bolts -3/4 inch 490-2 1-1-yr1 3.28 1032 3384.96
Flat washers 671-0 12-26-yr4 2.60 12871 33464.60
Widgets-20mm 267-3 9-25-yr4 7.99 5 39.95
Hex Bolts 561-3 9-30-yr3 12.89 9875 127288.75
Widgets-15mm 267-5 2-7-yr3 6.78 — —
Widgets-5mm 267-4 12-28-yr3 1.56 4102 6399.12
Copper coil 290-1 10-15-yr4 3.77 921 3472.17
Large plates 352-2 4-16-yr4 20.89 156 1698.84
182655.39
Based on the work performed above, form a conclusion on the ending inventory balance. Assume that the auditor performed any follow-up procedures to confirm the initial reasons for the differences identified and therefore any adjustments required are accurate and there are no other adjustments to consider other than those above.
Product Line Adjustment if any Justification for Adjustment
Widgets0-10mm
Widgets-5mm
Hex Bolts

[Cluster Slugs]

Took this earlier today. My steps were to take the three product lines in that the exam is seeking adjustments on, and determine everything I can about them. Since the perpetual inventory is tied to the G/L, I started there and wrote down what I knew about each (item name, SKU, price/unit, item count, inventory value were the most important).

The first item was the 10mm widgets, also known as SKU 267-1, which needed to be removed from the perpetual inventory and added to consigned inventory (per email from controller). This obviously requires an adjustment. Taking the 750 units multiplied by the price of $4.99/unit the adjustment is a credit of $(3,743) (rounds up to nearest dollar). Justification is items on consignment with customer. There were no other adjustments needed for this item

The second was the 5mm widgets, SKU 267-4. When looking at the detail, the physical counts do not reconcile to the perpetual inventory. The email from the controller states that it has been confirmed by an audit associate that the perpetual inventory records are correct. This means that no adjustment is required, as the perpetual inventory records are tied to the G/L. Justification is errors in the count.

The final item was the hex bolts, SKU 561-3. Looking at the detail here, you will see that the returns (on the warehouse map) were not counted in the perpetual inventory system yet, but were included in physical count (per controller email). This requires a debit adjustment to the inventory account for the 50 units that have not been processed as returns. The calculation is $12.89/unit times 50 units equals $645 (rounds up to nearest dollar). Justification is returns not processed in perpetual inventory system.

Lastly, the final question relates to materiality. The conclusion about the ending balance should be that the balance is not materially misstated because the required adjustments $(3,098) identified are less than performance materiality, $5,000.

Hope this helps

[cpaswag]

wow ok great so they are still testing this

[Cluster Slugs]

Sorry, that's not what I meant. I took the practice AICPA test this morning and saw the same problem and worked through it. I'm sitting this Friday

[Anonymous]

When i took AUD on Q4 '17 i had a similar sim such as this one but it had different emails from controller, purchasing department and a customer. I took the same approach as Cluster Slugs. I understood that adjustments were necessary and some calculation were needed.

[Anonymous]

yap. work through this problem and make sure you understand it. trust me

[Accounting123]

I am taking Audit next week. Your explanation really helped me understand this one so thank you. Is there any other recommendations either of you have?

[L]

Would just like to add to chest slugs excellent post –

The consigned 10mm widgets were actually properly included in inventory perpetual records, but were sold in entirety. The result is the same (a credit of $3743) to remove the items from the listing. Just didn't want anyone to get confused on this!

Good luck.

[Author]

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