 Hello and welcome to the session in which we will review the CPA exam simulation that is part of the auditing and attestation exam The first thing you do when you are looking at a CPA exam simulation is to look at what type of simulation Am I dealing with? It looks like I'm dealing with some computational numbers one two three. This is computational and there's a drop-down list The reason for some sort of an adjustment. I am making to my inventory balance The type is drop-down list and some computation. It looks like the topic is inventory adjustment. This is what it looks like That's good, but let's confirm this before we proceed any further I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of Lectures, multiple-choice questions, true-false questions as well as exercises. Go ahead start your free trial today Now there's a lot of exhibits. I will not open the exhibits yet Okay, first let me take a look at what I'm giving then I will look at the exhibits later green CPA is Completing the audit procedures for December 31st for JBU company and I'm sure it looks like they have Inventory an auditor from green attended the count Observation at year-end JBU maintain a perpetual inventory system. That's integrated with a general ledger The auditor noted some issues that require further investigation while reviewing the inventory count sheet and warehouse Location listing so that's this is the this is the issue. There's some problem in the inventory good I know inventory. I understand inventory now your stress level should go down. I'm dealing with inventory The auditor is the auditor established the following information relating to the inventory count and product line of JBU There was there was no product movement on the day of the count Which is good the loading dock is part of warehouse a for the purposes of the count All product line within each storage area has been identified on the warehouse location listing So we located everything the warehouse location listing is reflective of the warehouse on the day of the count Inventory values in the perpetual listing are based on the most recent purchase price Materiality for year-end is 8000 for the audit performance materiality is 5000 Complete the inventory tasks below by using the information provided in the exhibit Enter increases to the perpetual inventory as positive enter decreases as negative and if there's no adjustment enter 0 Okay in column C select the justification for the required audit adjustment or the reason why no audit adjustment is required Adjustification can be used once more than once or not at all Assume there's only one reason for each product line discrepancy. There's only one reason. Okay, so here we go The first thing I'm looking at is three product line widgets 10 millimeter widgets 5 millimeter and the hex bolts Good three Items I need to know if I need to make any inventory adjustment for each for these items. Let's go ahead and get started First I'm gonna do I'm gonna look at my perpetual inventory system. Why because under my perpetual inventory system, it's gonna tell me two things one it's gonna tell me the the inventory value now for the Widget 10 millimeter and what you want to do now at this point is Take the value down. I have count of I counted 1000 unit 499 that's the last purchase price the total inventory value is 4990 heck and as The sq. Number is two six seven dash one. Okay, I'm dealing with this product I'm dealing with the five millimeter product, which is two sex two six seven dash four skew The the count item is four thousand one hundred and two the last purchase price is dollar fifty six and inventory value and I'm dealing with the hex bolts, which are right here. I Have nine thousand eight hundred seventy five each one of them is twelve eighty nine and this is the skew number well good So now I know I know how much I have under the inventory But the question is is this correct or not what I would do next is I'm gonna focus on one Item at a time So when you are dealing with a problem like this don't mix up anything you're saying, okay Now I'm gonna focus on the widget 10 millimeter and the widget 10 millimeter had has an skew of Two six seven dash one. Now what I'm gonna do I'm gonna look for the exhibit about any information about Two six seven dash one skew or what it says, you know 10 millimeter widget, so I'm gonna start to open my My exhibits I really don't know where can I find information? I'm gonna scan each one of them separately real quick email from the controller Please see my response to your questions in line below also it should be noted They're on a closer look. There's an issue with the physical count of the five millimeter. I'm not looking. I know there's an issue That's good. I'm gonna go back to that Lastly it looks at the perpetual inventory listing include 750 Units of skew to six seven dash one. Hold on a second. That's the one I'm looking for This is the inventory. I'm looking for two six seven dash one. Okay, there was some issue with that Let's come back. Let's come back to see what the issue is with it Okay, because this is what the email there's some information here 750 has been cosigned well Cosigned there's still our inventory that doesn't mean anything Can you please tell me whether the item in the return area has been included in the count? Yes, the counts are correct and return has been included in the count However, they they would not have been processed in the perpetual inventory. So there's something about the return I don't care about this now. All what I'm focusing on is two six seven We know that we co-signed two six seven seven hundred and dash one to to another party The inventory count sheet. Let's look at the inventory count sheet Two six seven Dash one so two six seven dash one and let's see in warehouse a in warehouse a In warehouse a we have one hundred and thirty one unit based on the item count in warehouse Be we have one hundred and nineteen one nineteen plus one thirty one is two fifty two fifty Why do I have a thousand? Oh? Hold on a second. I have a thousand because I cosigned 750 that's fine if I cosigned 750 it's still part of my inventory, but I'm not satisfied yet I want to look at other things because I have a lot of exhibits. Let's look at the supplier report So don't take it for granted yet in case there are more information about Sq to six seven dash one and if we look here, we do have something about it And there's more information about dash three dash five dash four. I'm looking at one. Okay in March We purchased five thousand unit half of the unit has been Used in the manufacturing of the equipment that has subsequently sold so we used up 2,500 a further 30% of the units were sold the third party during year four and 5% of the units are an ending inventory the remaining 15% of the units were provided to a customer on the consignment basis Yes, we know this as of December 31st all the consigned goods were sold Oh hold on a second or the consigned goods were sold now what I'm gonna do I'm gonna do like a little bit of reconciliation But I don't have to do reconciliation at this point if you're under time pressure if I know the consigned goods are sold It means I have to remove 750 from my from my From my sq to six Seven dash one why because those consigned unit are sold But let me just do real quick do some computation because you really want to verify what's going on here So let's do this. Let's go ahead and say we are told we purchased 5,000 unit 50% were used up and 30% were sold so 50 plus 30 equal to 80% so 80% of them are sold So what we left is 20% so 5,000 times 0.2 is a thousand This is the thousand that we have in the perpetual inventory when we counted the inventory. We only found 250 units in warehouse a and warehouse b We were told that 750 unit were in consignment. That's still our unit However, the consigned goods we are told here that were sold. What does that mean? It means if they're sold I need to reduce my inventory by 750 and I only have 250 left. What does that mean? It means I have to make an adjustment. What is the adjustment? Well, I'm gonna have to reduce 750 times 750 times 4.99. So I'm gonna have to come here and Reduce my inventory. So let me get my calculator ready. Let me just close these. There's so many windows open here close close Let's close So I'm gonna take 7 that's clear the tape 750 Whoops clear the tape again clear 750 times 4.99 and I'm gonna have to reduce my inventory count by 3742 dollars and 50 cent. Okay, I'm gonna round. Let me go down here Again The inventory will have to be an adjustment negative because it's un-reducing 3443 It's a reduction in the inventory Now Okay Close this again. The reason for the count damage item is not removed from inventory. No errors in the count There is no error in the count item consigned to company. Yes But look item consigned to company were sold. That's the reason just because they are consigned You don't remove them because they are sold you have to remove them. I would stop here. I don't have to read the rest Okay, I will stop here. So I'm done with widget 10 millimeter. Now. I focus on widget 5 millimeter Now I'm gonna ask you where should you start you have all this information? Where should you start? You want to start with the perpetual inventory? See what they have first See what they have on the record. So and it's widget 5 millimeter So let me take a look at the perpetual inventory record and we're looking at the 5 millimeter which is Right here on the record. They have 4102 unit. This is what the item count shows and it's SQ4, you know 267 they're all 267. It's gonna say SQ4 Okay in 156. Okay, that's fine. Let's go to the count and see if the count We want to make sure the count matches the general ledger to because kind of basically we want to verify But since I have this one open, let me see if I have something under one Under four look I have something under four. So there's something about this Five millimeter, but let me come I will come back to that. I know I have to look at this for sure But let me go to the count and See what the count is showing you just want to see what the count is showing. So I'm gonna go to the inventory count Okay, I have now SQ4 4098 Yeah, 4098 So when I counted I counted the count shows 4098 Hold on a second. I think the general ledger shows something else. Let's go to the general ledger perpetual general ledger and this one shows 40409 it looks like There's a discrepancy of four units because my count My count my actual count shows 4098 and Why is the system showing? 4102 so the system right now is over stating inventory by four units But remember you don't just say the count versus the ledger you want to look for more information be careful You want to scan those and looking now? You're zooming on the five millimeter to six seven four and we already we already saw that in the supplier report There was something about that. Let's take a look. What's about that in December the company acquired 10,000 unit at a price of $1.56 during year for the company sold 5,898 the third party the last sale was made In November year four, let me just make sure if I do this computation. What do I get? So we are told We are told we purchased 10,000 unit We purchased 10,000 unit We purchased 10,000 unit and we sold 5,898 Which we should be left with 4102, but why is the count? Showing four units less again. There's a discrepancy. We have to keep on looking Let's look at the email from the controller. See if we can find something about that Now this is five six one, okay five ten millimeter Please see my response your questions also should be noted on a closer look. There's an issue with the physical Oh, there's an issue with the count the perpetual record are correct. This has been validated by the associate. Lily here We go there. They're telling us look there was a problem with the count the look we looked at how much we purchased We look at how much we sold we're supposed to have four thousand one hundred and two the record showing 4102 but why is the count showing for four units less because whoever counted made the mistake now They're telling us look the record is good. What does that mean? It means nothing. There is no adjustment for this There's no adjustment Damaged items not removed Error in the counts Basically error in the counts. Yes, that's that's the problem error in the counts But there is no you don't need to make any adjustment. It is correct The error was the problem the error in the count But we don't have to change the system because we counted again and it's good Now let's zoom in on the hex bolts. Okay, again, where do you start now? You know where to start we're gonna start with the perpetual inventory See what they have on record on the computer system. What is it showing? It is showing that we have the hex bolts 9875 that's this Q number three and The last purchase price is $12.89 now the next thing I'm gonna do I'm gonna see how much they counted see if the count matches the record at least Let's start with there. Let's start there. Let's start there. Let's go to the count So I'm gonna pull the count Where's the count? Okay, let's go back to the count sheet and this is SQ number what number is that? Yeah, you want to write you want to write these down because I forgot what number we're dealing with last the the bolts The hex bolts I just go back to perpetual inventory Number three, okay, let's look at the count Inventory count and Number three there is zero here nothing in warehouse one and Five Two six seven three again, this is what on the exam you're gonna be like, you know, I'm under time pressure. What should I do? Again, let's go back to the perpetual inventory. Let me copy this down five six one dash three five six one dash three and The count is nine thousand eight hundred and seventy five. You should be writing this Next to you on on the exam day So you don't you want to go back back and forth Making those mistakes. Let's go to the inventory count five six one dash three we have in warehouse one warehouse a Seven thousand nine hundred and seventy five. Let's see if you anything in warehouse B Five six one dash three One thousand nine hundred and fifty. Well, what what am I gonna do next? I'm gonna add them up I'm gonna add them up to see what if they add up to the See if they add up to the To the general ledger so seven thousand nine hundred and seventy five plus One thousand nine hundred and fifty That's equal to nine thousand nine hundred and twenty five if my math is right Which is seventy nine seventy five plus Nineteen fifty what did the let me see so ninety nine twenty five Let's see what the record shows with the general ledger Again, I should you should have took that information down perpetual ledger it's showing It's there's a discrepancy. It's showing nine thousand eight hundred and seventy five So the count is showing more The count is showing more than the general ledger. Let's see the difference You want to figure out what the difference is because this is what you you're you're gonna be looking to to reconcile So ninety nine twenty five minus Minus ninety eight seventy five minus Ninety eight seventy five and I'm looking there's a discrepancy of fifty Units there's a discrepancy of fifty units in the hex bolts again. Let's clarify the what we counted is more than what's in the system, so We have more but sometimes somehow it's not showing in the system. It's not recorded in the system We counted ninety nine twenty five the count could be wrong. That could be another reason, but we have to figure out Why okay because remember in the prior example the count was wrong So whoever did the count maybe did it did it let's go back and see if there's anything about item nine six one Dash three nine six one dash three in the email There's nothing in this email. I can close this email because there's it's not helpful for me at this point Close it Close it. Okay. The general ledger. I'm done with that. Let me close that as well Let me close it the count. I already know the count close it Five six one dash three. Do I have anything here five six one dash three? I don't have anything here. I Don't have anything in this information. Let me go back to see what else do I have? memo from staff That's what's that? Oh And it's about the Five millimeter. No, that's not helpful I met with the controller to resolve this is sq4. Oh Yeah, here actually we did not look at this, but this is where it's it's confirming the count It's confirming the count. Remember, we just accepted what's in the email, but look here They confirm the count that it is correct. Okay, it's not helpful. That's not what we need warehouse locating listing we didn't see that yet Okay, storage area not much here that's helpful for me Storage area, let's see. What else do I have here? Perpetual inventory count supplier report. I looked at this already. There is nothing. Let me go back to the email Anything about the email? Hmm. So now what I'm looking at is the I need to not find out What's the problem? What is it account issuers? It's something else again on the exam day But again, I'm simulating this so you understand on the exam day, but you know what you are looking for I'm looking for some information about the hex bolt and maybe I looked at it, but I'm not seeing it Anything else anymore? Inventory count sheet we looked at this. Let's look at the inventory count sheet again. Not much Nothing here. See here. Oh Oh right here right here. Look what look where it was. There is return area hex bolts five Six one dash three. It means there's some some unit in The return area in the return area because we did the count Okay in storage D. We found some units where there are some units in the return area now. We have to look at If there's any information about the return area, we're gonna assume that that's the case But we cannot let's see if we can confirm this. Let's see if we somehow we can confirm this information Ah Let's look at the memo. There's nothing about The hex bolts and the memo I'm gonna have to assume. That's where the units are located the 50 units, but let's see Can you please tell me whether the return area has been included? Oh, there's something here about the return area Okay, now we know it's there was some units in the return area Let's see. There's some information about the return area return area here Can you please tell me whether the items in the return area has been included in the count? Let me make this bigger Yes, the counts are correct and returns has been included in the count However, they would not have been processed in the perpetual inventory. Okay Okay, so there we go. So when they counted they counted them The count is correct. It's nine thousand nine hundred and twenty five the count is correct Okay, however the general ledger system is not correct. Why because it was not updated This is what this email is saying. Oh, what does that mean? It means I have to go back and add 50 units of the hex bolt at at 1298 so if I take 50 units at 12.98 or I have to kind of basically update the system. So I have to add six hundred twelve point I'm sorry eight nine twelve point eight nine. So I'm gonna add 50 units times twelve point eight nine and I'm gonna add 644 dollars. It's a positive. It's a positive adjustment. Yeah, the system is not good. They should have you know return It should be updating the perpetual inventory and the reason is Return not yet processed in the perpetual inventory right at the bottom except Now the the last question is based on the work performed about select the option Select the option listed provided a conclusion on the ending inventory balance So we have to kind of make a determination is the inventory balance fairly stated or not assume the auditor perform any follow-up procedures to confirm the initial Reasoning for the difference identified and therefore any adjustment required their accurate. There are no other adjustments So basically they're saying this is the final adjustment Which is in total is we have to reduce the inventory by 3000 and almost a hundred dollar three thousand one hundred dollar all together This is what it looks like if my math is right, right? If my math is right. This is what it should look like Do we have Do we have with what options do we have based on the inventory work performed the inventory is materially misstated is It material materially misstated not it's not materially misstated because it's less than the performance the performance is 5000 We go back to here. We see that the performance materiality is 5000. So it's not materially materially misstated Based on the inventory work performed the inventory balance is materially misstated because the required adjustment exceeds the performance materiality It does not exceed that Let's take a look at the third one Based on the work performed the inventory balance is not materially misstated this because the required adjustment are less than the audit materiality No, not less than the audit materiality. We're looking at performance materiality. Let's see if the last option is Based on the inventory work performed the inventory balance is not materially misstated because the required adjustment are less than the Performance materiality. Yes, it is less than the performance materiality. It's also less than the audit materiality but what we're looking for is the performance materiality here. So let me wrap up this this this simulation. What is it about? It's about performing some computation. What's the topic? Inventory. No journal entries. You just have to know worth the here is you have to know where to look for the information. Basically the skills here needed is can you reconcile what's in the general ledger to the inventory count if there's any discrepancy. Figure out what the discrepancy is and find an explanation for it. There's no way someone can prepare you. So on the exam you might see something totally different but again where would you start if it's inventory? It's start with the perpetual inventory. See what the system is showing. Compare what the count is. So those two should match. The inventory count and the perpetual should match. If they don't match you're looking for the discrepancy in these memos and this is how you should be approaching CPA exam simulations. Well really this simulation it's very hard to turn into a multiple choice because it's so easy from a multiple choice perspective. You're just doing reconciliation looking for stuff. Look. Farhad lectures can help you understand the material better. Invest in yourself. Invest in your career. Subscribe and good luck.