Case Study -

The following errors or omissions have been discovered in relation to the inventory records of Kowloon Trading Company:

1. In recording raw material purchases, the improper unit price was included in the perpetual inventory master files.      As a result, the inventory valuation was overstated because the physical inventory was priced by referring to the perpetual inventory records.

2. On the day of the physical inventories were counted, the last shipments for the day were excluded from inventory counting but were not included in Sales until the subsequent financial period.

3. After the inventories were counted, the clerk in charge of the perpetual inventory master file altered the quantity on an inventory count tag to cover up the shortage of inventories caused by his theft during the year.

4. After the auditor left the premises, several inventory count tags were lost and were not included in the final inventory listing.

5. During the physical inventory counting, several obsolete items were included. No note was made on the count tags stating that the items are obsolete.

6. Because of a significant increase in volume during the current year and excellent control over manufacturing overhead costs, the manufacturing overhead applied to inventory was far greater than the actual cost.

Discussion

a. For each error, state an internal control that should have prevented it from occurring.

b. For each error, state a substantive procedure that could be used to uncover it.

c. For each error, state the effect on the financial statements if the error is not corrected.