You are assigned to the December 31, 2011, 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, 2011, 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:

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:

Sea Gull Airframes uses a periodic inventory system and values its inventory at the lower of FIFO cost or market. You were able to locate all invoices needed for your examination. The seven inventory items in the sample you believe may be misstated, along with the relevant data for determining the proper valuation, are shown next.
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.
This is the first time Sea Gull Airframes has been audited by your firm.

Required
a. Review all information and determine the inventory misstatements of the seven items in question. State any assumptions you consider necessary to determine the amount of the misstatements.
b. Prepare an audit schedule to summarize your findings. Use the computer to prepare the schedule (instructor'soption).

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No. of Items Total Value More than $5,000 Less than $5,000 500 $4,150,000 4,125,000 $8,275,000 4,500 5,000 No. of Items Total Value More than $5,000 Less than s5,000 $360,000 2,600 36 INVENTORY ITEMS POSSIBLY MISSTATED Description Price Total Quantity 3,000 meters 10,000 inches 1,500 yards A 137 spars B. B68 metal formers C RO1 metal ribs D. St26 struts E Industrial hand drills F. L803 steel leaf springs G. V16 fasteners $ 8.00/meter 1.20/foot 10.00/yard 8.00/foot 20.00 each 24,000 12,000 15,000 8,000 900 276 1,000 feet 45 units 69.00 each spring 40 pairs 5.50 dozen 10.00/dozen Amounts are as stated on client's inventory INFORMATION FOR PRICING FROM INVOICES (SEA GULL AIRFRAMES) oucher Voucher Number Date Date Paid Terms Receiving Report Date Invoice Description 7-68 8-01-06 82-06 Net FOB destinaton 8-016 77 V16 fasteners at s10 per dozen 11-81 6 5 Net FOB destination ,100 yards Ro1 metal ibs at s9.50 per yard: 2,000 feet St26 struts at $8.20 per foot 12-06 208 12-09 2-10 02/10, n/30 FOBSP. 180 L803 steel leaf springs at $69 each 8 Net FOB destination 12-111 45 industrial hand drills at $20 each: guaranteed for 4 years 12-18 12-27 7 2/10, n/30 FOB S.P 4,200 meters 137 spars at s8 per meter 12-23 2-24 103-12 2/10, n/30 FOB dest. 12-26- 12,800 inches B68 metal formers at $1.20 per foot 12-6 2-29-1 8 Net FOB destination 12-91,000 yards RO1 metal ribs at s10 per yard; 800 feet St26 struts at s8 per foot 12-81 12-3 -20 Net FOB destination 06-12 2,000 meters L37 spars at $7.50 per meter; 2,000 yards RO1 metal ribs at s10 per yard