Brony's Bikes Practice Case

Module VI: Sales and Purchases Cutoff Tests

Along with Richard Derick and the rest of the audit team, you observed Brony's Bikes December 31,

20X9 physical inventory. Derick is satisfied with the inventory-taking procedures and has considerable

confidence in the reliability of the ending inventory quantities. He is concerned, however, with the

methods used to value the ending inventories (especially the disposition of unfavorable budget

variances) and with possible misstatements relating to sales and purchases cutoff. With regard to

cutoff, Derick is particularly interested in learning why customers could not confirm details of sales

transactions recorded by Brony's Bikes on December 31, 20X9. In response to the confirmation and

cutoff concerns, he has asked you to examine the appropriate books of original entry and underlying

documentation for a few days before and after the balance sheet date. Specifically, Derick is interested

in the following:

1. Were purchases and sales recorded in the proper accounting period?

2. Were purchases that were recorded at year end included in the physical inventory?

3. Were all materials and purchased parts that were included in inventory recorded as purchases?

4. Were the finished goods inventory accounts properly relieved for all recorded sales?

You download Brony's Bikes' December voucher register and sales summary. These are partially

reproduced in Exhibits BB.13 (Link) and BB.14 (Link) referred to in Module II and are included in the

Excel file Brony's Bikes Module II Exhibits 7 to 16.xlsx (Link). Using these as a focal point, you requested

that the client provide you with the documentation supporting certain of the recorded transactions.

You now are prepared to record any necessary audit adjustments and reclassifications.

Requirements

1. Using the downloaded Excel data, retrieve the file labeled "20X9 Cutoff." (Link) Study WP 6.4,

"Inventory Cutoff," and compare it with the voucher register and sales summary portions reproduced in

Exhibits BB.13 and BB.14. Comment on any cutoff misstatements that you detect and determine their

effect on net income. Do the misstatements appear to be intentional or unintentional? Explain.

2. Draft any audit adjustments suggested by the analysis performed in requirement (1). (Remember

that Brony's Bikes maintains perpetual inventory records and adjusts its perpetual inventory to the

physical inventory through the appropriate "Cost of Goods Sold" accounts.)

WP 6.4 Prepared by:

                    Brony's Bikes Date:

                  Inventory Cutoff Reviewed by:

                  December 31, 20X9 Date:

PURCHASES CUTOFF

- - -

INVENTORY

DATE RECEIVING INCLUDED

RECORDED VOUCHER NO. REPORT NO. DATE SHIPPED DATE RECEIVED FREIGHT TERMS EXCLUDED COST

12/31/20X9 12456 01-12486 12/27/20X9 12/30/20X9 FOB destination Included $1,445,900

12/31/20X9 12457 01-12487 12/26/20X9 12/31/20X9 FOB ship. point Included $962,200

1/2/20Y0 12458 01-12488 12/28/20X9 12/31/20X9 FOB ship. point Included $488,754

1/3/20Y0 12459 01-12489 12/29/20X9 12/31/20X9 FOB ship. point Included $365,400

1/3/20Y0 12460 02-13001 12/30/20X9 1/2/20Y0 FOB ship. point Excluded $1,879,000 (1)

1/4/20Y0 12461 02-13002 1/2/20Y0 1/3/20Y0 FOB ship. point Excluded $438,870 (2)

(1) Voucher 12460 was for the purchase of raw materials

(2) Voucher 12461 was for the purchase of parts

SALES CUTOFF

- - - INVENTORY

SALES INVOICE INCLUDED

NUMBER DATE SHIPPED DATE RECORDED FREIGHT TERMS SELLING PRICE COST EXCLUDED

33002 12/30/20X9 12/30/20X9 FOB ship. point $266,800 $205,436 excluded

33003 1/2/20Y0 12/30/20X9 FOB ship. point $881,870 $679,040 included

33004 1/2/2008 12/30/20X9 FOB ship. point $443,760 $341,695 included

33005 12/31/20Y0 12/31/20X9 FOB ship. point $144,600 $111,342 excluded

33006 1/2/20Y0 12/31/20X9 FOB ship. point $773,200 $595,364 included

33007 1/3/20Y0 12/31/20X9 FOB ship. point $338,700 $260,799 included

33008 12/31/20X9 12/31/20X9 FOB ship. point $122,900 $94,633 excluded

33009 1/3/20Y0 12/31/20X9 FOB ship. point $1,322,800 $1,018,556 included

33010 1/4/20Y0 1/4/20Y0 FOB ship. point $488,900 $376,453 included

33011 1/4/20Y0 1/4/20Y0 FOB ship. point $788,211 $606,922 included

All adjustments of perpetual to physical inventories have been made

 through "Cost of Goods Sold."

Examined the following documents for a few days before and after the

 balance sheet date to determine that transactions were recorded

 in the proper accounting period:

  Vouchers

  Receiving Reports

  Freight Invoices

  Sales Invoices

  Bills of Lading

All sales are shipped "FOB shipping point."

Examined freight invoices for incoming shipments to locate possible

 goods in transit for which title had passed before year-end.

WP 6.4 (cont)

Audit Adjustment3

5300 Cost of Goods Sold

2020    Accounts Payable-Trade

 To record vouchers 12458 and 12459 representing

  parts inventories received and included in December 20X9

  inventory, but not recorded until January, 20Y0

Audit Adjustment 4

1310 Raw Materials Inventory

2020    Accounts Payable-Trade

 To record inventory in transit at 12/31/X9.

Audit Adjustment 5

4100 Sales-Grand Prix Touring Bike

4200 Sales-Phoenix Touring Bike

4300 Sales-Pike's Peak Mountain Bike

4400 Sales-Himalaya Mountain Bike

4500 Sales-Waistliner Stationary Bike

1201    Accounts Receivable-Trade

 To reverse the following sales recorded in 20X9;

  shipped in 20Y0 (goods were included in 12/31/X9 inventory):

Sales Account Number

 Invoice Number Amount 4100 4200 4300 4400 4500

- - - - - - -

33003 $881,870 $322,550 $23,400 $466,740 $32,500 $36,680

33004 $443,760 $77,200 $55,900 $223,060 $87,600 $0

33006 $773,200 $288,700 $0 $410,650 $22,300 $51,550

33007 $338,700 $44,860 $62,375 $122,400 $88,500 $20,565

33009 $1,322,800 $497,310 $88,760 $714,580 $22,150 $0

- - - - - -

$3,760,330 $1,230,620 $230,435 $1,937,430 $253,050 $108,795

= = = = = =