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 are as follows:

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 are as follows: No. of Items More than $5,000 Less than $5,000 Total Value 500 4.500 5,000 $4,150,000 4.125.000 $8,275,000 In performing pricing and extension tests, you have decided to test about 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. You find all items to be correct except for items A through G below, which you believe may be misstated. You have tested the following items, to this point, exclusive of A through G: Inventory Items Possibly Misstated Description Quantity Price Totall A. L37 spars 3,000 meters $ 8.00/meter $24,000 B.B68 metal formers 10,000 inches 1.20/foot 12,000 C. R01 metal ribs 1,500 yards 10.00/yard 15,000 D. St26 struts 1,000 feet 8.00/foot 8,000 E. Industrial hand drills 45 units 20.00 each 900 F. L803 steel leaf springs 40 pairs 69.00 each spring 276 G. V16 fasteners 5.50 dozen 10.00/dozen 55 1Amounts are as stated on client's inventory. PRICING INFORMATION from INVOICES - Sea Gull Airframes Voucher Number 7-68 Receiving Report Date Invoice Description 8-01-12 77 V16 fasteners at $10 per dozen Voucher Date Date Paid Terms 8-01-12 8-21-12 Net FOB destination 10-16-16 11-15-16 Net FOB destination 11-81 10-18-16 12-06 12-09 12-18 12-08-16 12-30-16 2/10, n/30 FOB 12-10-16 S.P. 12-10-16 12-18-16 Net FOB 12-11-16 destination 12-27-16 12-27-16 2/10, n/30 FOB 12-21-16 S.P. 12-24-16 1-03-17 2/10, n/30 FOB 12-26-16 dest. 12-29-16 1-08-17 Net FOB 12-29-16 destination 1,100 yards R01 metal ribs at $9.50 per yard; 2,000 feet St26 struts at $8.20 per foot 180 L803 steel leaf springs at $69 each 45 industrial hand drills at $20 each; guaranteed for 4 years 4,200 meters L37 spars at $8 per meter 12,800 inches B68 metal formers at $1.20 per foot 1,000 yards R01 metal ribs at $10 per yard; 800 feet St26 struts at $8 per foot 2,000 meters L37 spars at $7.50 per meter; 2,000 yards R01 metal ribs at $10 per yard 12-23 12-61 12-81 12-31-16 1-20-17 1-06-17 Net FOB destination In addition, you noted a freight bill for voucher 12-23 in the amount of $200. This bill was entered in the freight-in account. Virtually all freight was for the metal formers. 1-3 Audit Program for Inventory Pricing Audit Objectives: Valuation Accuracy PREPARED BY: REVIEWED BY: Sea Gull Airframes Inc. 12/31/2016 Inventory Procedure 1) Recompute the extended pricing Prepared by WP Ref 2) Verify pricing is reasonable by vouching pricing on inventory items to invoices. (Ignore purchase discounts) 3) Recompute inventory using FIFO cost flow assumption in a periodic inventory system. 4) Examine invoices to determine if further testing is required for lower of FIFO cost or net realized value rule. 5) Review freight-in charges determine if these charges have been properly capitalized to inventory. 6) Determine if items are properly classified as inventory. 7) Compare the dates of inventory purchases to the year-end physical of inventory items (units) to determine slow-moving merchandise which may indicate obsolescence. 8) Document a clear, concise comment for each inventory item investigated which would include if further testing is necessary. 9) Based on errors identified in your audit procedures, compute the projected misstatement on the population using the projected misstatement workpaper. 10) Document a clear, concise conclusion for this audit section. 1-4 SEA GULL AIRFRAMES, INC. SUMMARY OF INVENTORY MISSTATEMENTS QUANTITY PRICE Per Per Inventory Correct Difference Inventory Correct Difference PREPARED BY: REVIEWED BY: Recorded Amount Item No. and Description Correct Amount Amount of Misstatement Comments A. L37 Spars 3,000.00 8.00 24,000.00 B. B68 Metal Formers 10,000.00 1.20 12,000.00 C. RO1 Metal Ribs 1,500.00 10.00 15,000.00 D. S126 Struts 1,000.00 8.00 8,000.00 E. Industrial hand drills 45.00 20.00 900.00 F. L803 Steel Leaf Springs 40.00 69.00 276.00 G. V16 Fasteners 5.50 10.00 55.00 Total misstatement Items over $5,000 Items under $5,000 CONCLUSION