 Hello and welcome to the session. This is Professor Farhad. In this session, we would look at an actual CPA simulation. Why do I say actual? Because this simulation was released by the AI CPA. AI CPA is the organization that administer the CPA exam. So we are dealing with the real deal here. This simulation is for auditing and attestation. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,500 plus, actually 1,600 plus. Accounting, auditing, finance, and tax lecture. This is a list of all the courses that I cover, including CPA as well as a complete auditing and attestation course in case you are studying for your CPA exam. On my website, you will find additional resources such as notes, PowerPoint slides, true, false, multiple choice. If you're studying for your CPA exam, 2,000 plus CPA questions. So let's go ahead and take a look at the simulation so we can work it together. This is what the simulation would look like. You want to make sure you're comfortable with all the features. For example, if you're not a polar calculator or the Excel sheet, in case you need to work with this. So basically, this is an example, and here we are going to be dealing with inventory. And here's what I need to tell you about simulations. I tell you this in every recording, but I have to remind you because this maybe this is the first time you are listening to me. Simulation is no more than an exercise. An exercise from your college textbook. And most of the time, it covers one topic. So simply put, they want to know if you know something about this topic. So rather than giving you multiple choice where you can guess the answer or answer it correctly by mistake, they give you a simulation to test your knowledge. And this is where your actual knowledge is actually tested, okay? So that's what the simulation is. What does that mean to you? It means you have to understand the topics. What does that mean to you? How can I help you? Well, I do have lessons about all auditing. So if you want to learn master the topic, go to my website and start there. So let's take a look at this question. So we are giving a few exhibits, we'll look at them. But let's first look at this, see what we are giving, okay? Green, CPA is completing audit procedure for December 31st, year four audit of JBU company and I'm sure it's a private company. An auditor from Green attended the physical inventory observation at year end. JBU maintain a perpetual inventory system that's integrated with the general ledger. The auditor noted that some issues that require further investigation while reviewing the inventory count sheet and the warehouse location maps. So I guess the maps have it all in here. The auditor established the following information relating to the inventory count and product lines of JBU. There were no product movement on the day of the count. The load and dock is part of the off warehouse A for the purpose of the count. All product lines within each storage area have been identified on the warehouse maps. The warehouse map is reflective of the warehouse on the day of the count. Inventory value in the perpetual inventory listing are based on the most recent purchase price. Materiality for year end audit is 5,000. Performance materiality is 5,000. There's a lot of information here. Just make sure you scan it, scan through it. You can go back and look at the details. Complete the inventory tasks below by using the information provided in the exhibit above. So we're gonna have to examine the exhibit. So let's take a look at what they're asking us first and column B quantified the required adjustment, if any, to the product line in the perpetual inventory system. So in this column B, we have to put a number, the adjustment, okay? Enter increase in the perpetual inventory as positive whole dollars. So in case it was an increase entered as a positive, enter a decrease to the perpetual inventory system as negative. So if you need to reduce inventory and enter the number as negative, so you have to be careful. If no adjustment, if everything looks good, the count matches the record, enter zero and make sure to enter zero. In column C, select the justification for the required audit adjustment or the reason why no audit adjustment is required by selecting the option listed provided. Oh, great. So basically they've given us a bunch of options why something is wrong, okay? A justification can be used more than once, more than once or not, just if it can be used, can be used once, more than once or not at all. Assume there is only one reason for each product discrepancy. So only one product discrepancy. And basically we have three product that they want us to look at. The widgets, 10 millimeter, the widgets, five millimeter and the hacks bolt. Actually, funny is because I do, when I did audit, when I was in practice, I did audit companies similar to this one in a sense that they have all these tools and items. So that's interesting. That's bringing back memories. It doesn't matter. So now we're gonna, what you would do next, now you kind of know what you're looking for. You're looking to adjust inventory, okay, not only for three product. What you should do, just go through real quick, look at the exhibit. So email from the controller and make sure you read them. Just at least it's not the first time in detail, but make sure you look at the date. This is the first email, year five, after the year end of the audit because we're doing year four. Returns, hi, can you please tell me whether the items in the return area have been included in the count? Controller, yes, the counts are correct and returns have been included in the count. However, they would not have been yet processed in the perpetual inventory. So they did count them, but they're not been processed in the perpetual inventory. We don't know anything yet, but we might need this information later. The auditor, please see my response to your question in line below. Also, it should be noted that on closer look, there's an issue with the physical count of the five millimeter widget. The perpetual record are correct. This has been validated by the associate Lilly. So there's something to do with the five millimeter widget, which is we know we have to look at. Lastly, it looks like the perpetual inventory listing items include 750 of SQU 271, that has been, that has been cosigned. So we, you know, there's some information about this product, SQU 27-1, that's fine. This is the first email, that's good enough. So we can close it, we can close this email. Let's look at the second exhibit inventory count sheet. So this is the actual count, excellent. So this is what we counted in inventory A, the SQU and the inventory count. We're gonna come back to that no more than the count here. This is what the actual count was. The supplier report, let's look at the supplier report here. We have information about SQU 67-3, 67-5, 67-1, 67-4. What I suggest at this point, don't read those because there's four product here and there's only three issues to deal with. So don't waste your time yet on this. You'll come back to this, so close it for now. Perpetual inventory listing and you look at the perpetual inventory listing. So this is what the system is showing. This is the perpetual inventory listing. So we're gonna be dealing with the hex bolt. We're gonna be dealing with the widget, 15 millimeter and the widget, five millimeter. What you would do now is, I'm sorry, the widget, nine millimeter, nine, I'm sorry, nine, not nine. 10 millimeter, the hex bolt and, I don't know what's the third one. Here, what you would need to do, this is where you get the SQU for each number, the skew for each number, the skew, okay? So let's close this and this is the warehouse map because they talked about the map. Just scan the map here real quick. They talked about the return areas. There's hex bolts in the return area, five, six, dash three. Okay, so kind of we got an idea what we are giving. So you basically scan through this. Now you're gonna go down here and start to focus. Now the widget, 10 millimeter. Now what do we need to do? Well, the widget 10 millimeter, what you would do first is look at the perpetual inventory. See what the perpetual inventory says. I'm gonna start there. If I look at the perpetual inventory because you need to get the skew number for this anyway. So the 10 millimeter, the skew is two, six, seven, dash one. So this is the skew and the count is what we said, item count is 1,000 unit. Now we know that there's some information about this two, six, seven, okay? So this is what we are saying now. The inventory value that 4,990, okay? If you wanna write this down somewhere on a piece of paper, you write it down on a piece of paper, 1,000 unit. And we have them 499, which is 4,990. And this skew number is two, six, seven, dash one, okay? This is good enough. Let's close this. Let me look at the count real quick. See what did they count for this? So let's look at the inventory count sheet. The inventory count sheet for skew two, six, seven, dash one. Two, six, seven, dash one. So we have 131, just kind of 131 for the count in warehouse A and 119 in warehouse B plus 119. It seems we have 250, that's good. So the count is 250. Also the record is showing 1,000. Now remember when we started this process, there was something about this product. It looks like the perpetual listing include 750 that has been cosigned. So notice here, so the reason we only have 250, okay? Is because 750 are cosigned, okay? So 750 are cosigned, all right? Let's see if we can find more information about this product, okay? So that's why we only found 250, although the record showing is 750. So let's look at the supplier report and see if there's anything about, and there is something about skew two, six, seven, dash one. What does it read? In March 4th, we purchased 5,000 unit of this product. Half of the unit were sold. So of half of were sold, that's 2,500. 30% of the unit were sold to a third party. So simply put 50 plus 30, 80%. So 80% of $5,000, if you don't know this, it's $4,000, but real quick, simply put. So here they made it easy for you, even you don't have to use a calculator, let me show you what happened. We bought 5,000 of those, 50 and 30, 80. So 0.8 are gone, what we left with this 0.2, which is 1,000. So we should still have 1,000, which is this is what we thought we had. This is what the record is showing. So a further 30 of the unit were sold to third party during year four. 5% were in ending inventory, and the remaining 15 of the unit were provided to a customer on consignment. Those are the 750. As of December 31st, year four, all of the consigned goods were sold by the customer. Excellent. So guess what? Those 750, that they are still in our record, they are sold. Guess what? So the only thing that we have left is the actual 250. So the count is good. All that we have to do is reduce this number. Let me go back here. All that we have to do now is go back to the perpetual inventory listing, and this is incorrect. What's incorrect here is we have 1,000, they should only be 250. I mean, this was correct. The only thing we did not take into account that the 750 that were consigned were sold. Now if they were not sold, this would have been no change whatsoever. Now we know we have to reduce this by 750 units, 750 unit. What does that mean? Well, let's look at the price one more time. That's 750 unit at 499. So now you're gonna say, okay, what's my adjustment? Well, let me make this smaller so we can see everything on the same screen here. You get your calculator. We have to reduce, clear the tape. We're gonna take 750 unit times 4.99. And we have to reduce our inventory by 3,700 round up to 43. Okay, so we have to reduce it. Why? Because they are sold. Excellent news. We like this. They were sold. Remember, reduction are negative. So you're gonna make sure you put it in parentheses or negative 37, 43, 37, 43. So simply put, all the information is given. You just had to read, see what's going on. Now we have to choose why. Well, item damage, item not removed. No error in the count, there was no error in the count. Item consigned to the company. Well, yes, item consigned to the customer were sold. This is the right answer. So just be careful, read them all to find the exact one. This is what you would select. Item consigned to the customer were sold. If they were sold, then you have to remove them from inventory, because if they were not sold, you would keep them because although they're not at your place of business, they are cosigned to someone else that sell your inventory. We're done with this one. Let's take a look at widget, widget five millimeter. What I would start with is the perpetual inventory count. And just to get this Q number as well, the five millimeter, our record shows we should have 4102. So just copy this number down, 4102. And this Q number is 267-4. All right, 267-4. Let's see what the count show. Inventory count, 267-4. So let me take a look at this here, 267-4. I have 4098. The count shows 4098. So when I counted them, there was 4098. My record shows I have 4102, okay? There's nothing in warehouse B. There's only in warehouse A. So let's see if we have any information about 267-4. I think there was something in the email about this product. Let's go back there. No, that was 267-1. I don't need the email anymore. I did the inventory count. Let's look at the supplier report. Oh, 267-4. Let's take a look at this. In December year three, the company acquired 10,000 units of skew 267-4 at a price of $65 per unit. During the year, the company sold 5898 to third parties. Okay, what do you would do here? Just kind of say, okay, say, it's good to kind of see how they came up with the record. Just a double check that the record is good. So if they purchased 10,000 units and they sold, the record shown, they sold 5898, their perpetual inventory is correct, 4102, but why is when I did the count, there was only 4,098 units. So there's something's not right, okay? So I know there's a discrepancy. And what you do here, just find the number if you're comfortable with this. So minus 4,098 to simply put, there's four units. There are four units that unaccounted for. Okay, I need four unit missing. The last sale was made November 4th with shipment of that month. Okay, that doesn't help me, not much. Let's see, supplier report, we looked at it. Let's say look at the memo from staff accountant. Let's see if there's anything about this. What, there's something about SKUS 26-4. I met with the controller on December 31st, year four. And this is Lily, the staff auditor to resolve the discrepancy between the perpetual inventory listing and the count sheet prepared during the inventory observation. I then visited the warehouse again with the controller to perform a recount of these items. I counted 4,102 through another count and it matches the inventory. I validated that the perpetual inventory for SKUS 26-4 was correct and the initial count reflect on the inventory was incorrect. So basically we did the second count and it worked by the staff auditor. So guess what? It is 4102, the inventory record showing 4102. Do we need to do anything? Absolutely not. 4102 is correct. This is how many units we have. The reason is error in the count. This is what happened. There were error in the count. We had to count it again. Good, easy. Hex bolts. Well, let's start with the perpetual inventory system. Okay. Perpetual inventory system and we'll get the SKU number as well because we need this. So the hex bolts, they're showing they have 9870. Copy this number down. 90, I'm sorry, 9875. That's the perpetual, this is the accounting record and the SKU is 561-3 because you're gonna need this. Go to the inventory count and see how many they have. So 561-3, they have some in warehouse A. That's 4975. They have some in warehouse B. 1950, make sure because they have two warehouses. You counted both. Now just add up those two and you wanna compare them to the perpetual inventory just to kind of get an idea of what's going on here. 7975 plus 1950, that's equal to 9925. 9925. Now we're gonna take the difference between this number and the perpetual inventory, which is 9875 minus 9875 and there's a discrepancy of 50 unit. So what we're saying is this, when we did the count, the record is showing 9875 and when we did the count, it seems we have more. We have 9925, 9,925. So we have 50 more units, 50 more units for this 561-3. Now we need to kind of learn what's going on in this system basically, okay? So we should have more, that's okay. So 561-3, okay, we take this one out. Email from the controller. Nothing in the email about this, okay? Nothing in the email. Well, let's take, look, I mean, we learned something about the company from the email, but nothing in here. Supply report 561-3, there's nothing in the supply report. Perpetual inventory, we looked at memo from the staff, memo from the staff was about this Q267-4. Let's look at the warehouse map, at the warehouse map, okay? We see that in the return area here, if you see the return area in warehouse B, there is Hacksbolt 561-3. There's some in the return area, okay? So notice there's some in the return area. What does that mean? Well, it means there was some items returned to us and they're sitting in the area. So there's a good chance, there's a good chance they're not in the system yet. So let's take a look at the email from the controller. I remember something about the return area. Could you please tell me whether the items in the return area have been included in the count? Yes, the counts are correct and the return has been included in the count. However, they would not have been yet processed in the perpetual inventory system. So we did count them. So the count is correct. So the count, the 99-25 is correct. But what happened is, so we did count them, but we did not update them in the inventory perpetual inventory system because the inventory system only showing 98-75. What does that mean? It means we need to add 50 units at 12-89, okay? So we need to add here more. So we're gonna get 50 units times, because we already know there's 50 unit times 12.89 and we're gonna have to add 644.5, which is 645. So we're gonna add 645 positive, except, and the reason for this is error in the count, no error in the count, item consigned to company, no consignment, item pulled for sales order have not yet been processed. Nope, item ready for shipment, FOB, item ready for shipment, FOB, and misplacement of inventory in the warehouse. Upsolescence now, return not yet processed in the perpetual inventory system. That's the correct answer, okay? Now we have the total adjustment, which is negative 3098, which is less than the 5,000, the performance materiality, because we have to determine. So based on our inventory, based on our inventory work, perform the inventory balance as materially misstated, not really, based on the inventory work, perform the inventory balance as materially misstated because no, based on the inventory work, perform the inventory balance as not materially misstated because the required adjustments are less than the identifiable audit, no, based on the inventory, based on the inventory work performed, the inventory balance is not materially misstated because the required adjustment are less than the performance materiality, the performance materiality is 5,000. So it's less, we accept, we accept, and that's it. So again, notice here, it's just, if I gave you those questions, if I give my students those questions in a multiple choice, each one separately, it will not be as intimidating, but this looks intimidating because you have to look for the information in different places. So my goal is, my suggestion is, see what do they want you to do? What are they asking for? Look at the big picture, then go back and start to scan the exhibit first, see where information is located, then go back and start to work on each one separately. Although it looks intimidating, it's really not that intimidating. I know on the exam day, you're under pressure and that's why you have to familiarize yourself with those simulations. So on the exam day, you don't take any chances, you're more comfortable psychologically. So the screen is not, is not, is not threatening you. Once you know, I know this, once you know, I learned this, I just have to kind of sit down and look for it, then it's not as intimidating and get used to the calculator, get used to the Excel sheet, get used to the screen, that's what I would suggest the most, okay? And have confidence. Once again, this topic is, you know, inventory cycle, I have it heavily covered in my auditing and attestation course on YouTube and I have more resources for you on my website. I strongly suggest you go visit, sign, sign up. You only study for your CPA once, it's a lifetime investment, make it worth it. Good luck and study hard and I'm always here to help.