AUDITING II HANDOUT PROBLEM 5 Score Name Section Essay Question (10 points). The

Question

AUDITING II HANDOUT PROBLEM 5 Score Name Section Essay Question (10 points). The following sales were selected for a cutoff test of Amaz Company, an audit client, for the December 31, 20X3 financial statements. All sales are credit sales and are shipped FOB shipping point. They are recorded on the billing date indicated. The company adds a 25% markup on cost to arrive at the selling price of its merchandise ARNAZ COMPANY SALES INVOICES SELECTED FOR CUTOFF TEST OF SALES FOR AUDIT YEAR ENDING DECEMBER 31, 20x3 Date Invoice Number 4520 4521 4522 4523 Invoice Amount 45,000 52,000 100,000 65,000 Shipped 12/28/X3 12/29/X3 /03/X4 1/02/X4 Billed 12/29 X3 1/02/X4 12/31/X3 1/03/X4 REQUIRED: () What adjusting journal entries, if any, would you make for each of these items? Consider both the revenue and cost implications of this cutoff. Assume the company uses a perpetual inventory system. 2) What complications are created by shipping terms of FOB destination when trying to determine when to record revenue? Under what circumstances might an auditor accept sales that are recorded when shipped, even though they are shipped FOB destination? (3)

Explanation / Answer

1.When selling of the goods are FOB Basis, the seller is responsible up to the goods are hand over to the purchaser,once goods are shipped revenue should be recognised according to ifrs 15.

a. NO ADJUSTMENT ENTRY FOR BILL 4520. Risk rewards has been transfered to the purchase on28 dec 2013

b.NO ADJUSTMENT ENTRY FOR BILL 4521. Risk rewards has been transfered to the purchase on29 dec 2013.

c. Adjustment entry of bill no 4522. Risk and reward is not transfered on 31 dec 2013. Because bill shipped on 3 jan 2014.

Sales in transit a/d dr 100000

To debtors in transit 100000

Inventory related with sales in transit a/c dr 80000

To cost of good sold 80000

d.No adjustment entry related with bill no 4523 because billing and shipment both pertain with 2014.

2.According to ifrs 15 revenue will be recognised when

1. risk and reward transfer to buyer

2. sales amount can be reliably measured

3.it is probable to economic benefit associated with the transaction will flow to the the entity.

when goods are sold FOB basis risk and reward transfer to buyer when goods shipped to him. here seller is no responsible for any transit loss while the delivery of goods.

3.when goods are shipped befor 31 dec 20x3 auditor can accept the sales of goods other wise he will pass adjustment entry.

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