Characters:

A1: Auditor 1/ Vianca

A2: Auditor 2/ Saito
CEO/ Vangel
AR: Accounts Receivable Clerk/ Marcia
AP: Accounts Payable Clerk/ Marcia
IC1: Inventory Clerk 1/ Raymond
IC2: Inventory Clerk 2/ Mel
WP: Warehouse Personnel / Jan

Dialogue:

A1: Mr. Saito, can you please lead the prayer.

A2: prayer

A1: Good morning to everyone. I would like to welcome you all to this
years exit conference. I am Vianca Pearl Amores, CPA. This is my
fellow auditor Maaku Saito, CPA.
A2: Good morning! I would like to recognize the presence of the
following:
Evangel Sison, CEO
Marcia Butastas, the A/R and A/P Clerk
Raymond Gapas and Mel Ebo, Inventory Clerks
Jan Paares, Warehouse Personnel

A1: Also, the team would like to thank all the personnel and of course
the CEO for helping us with the audit, especially with providing us
with the necessary documents.
CEO: Yes, I also want to express my gratitude to you guys. Thank you
for helping us improve our company. We really appreciate the effort.
A2: Anytime, Maam
A1: Okay! So lets start the exit conference!
CEO: Mr. Gapas, can you please take note of the minutes of the
meeting.
IC2: Okay, Maam Sison.
A2: Ms. Amores will be distributing a copy of the executive summary.
You will see there the findings weve discovered during our audit. We
will be discussing each, and we will give each responsible individual a
chance to explain the finding.
Auditor : Can you go over the executive summary and go over the first
two findings. These were were observed during the conduct of
inventory test count procedures when the audit team visited the
warehouse. Thus, I would like to address this one to the warehouse
personnel of the company.
(inventory clerk steps forward/stood up to face the auditor)

Warehouse man: Sir. I am willing to answer any audit findings that is

related to my responsibility as the warehouse man of the company
and will be open to any suggestion and recommendation to any
weakness that you had observed.
Auditor : Thank you for that Sir.
When the audit team visited the companys warehouse to conduct the
observation for the test count of inventory, the following are observed:
first, the company employs a poor physical inventory count
procedure. No proper inventory tagging was observed and identical
inventories were not orderly placed together. These result to
difficulties in performing the inventory count, and worse, a possibility
that not all inventories shall be accounted because of the absence of
inventory tags.
Second, when we procured documents relating to the inventory cutoff procedures that were employed by the company, we found out that
such are ineffective resulting to improper accounting of year-end
inventories.
Warehouse man: Sir, regarding your first observationthat the
physical inventory count procedure employed is poor because of the
absence of the inventory tagging, I admit that we are not practicing
such because the company employs a perpetual inventory system
wherein the inventories are only accounted in the recording process
which is handled by the inventory clerk.
Regarding also your observation regarding identical inventories not
orderly placed together, I admit that such is not observed because
inventories are placed together based on when they are

manufactured because of the first-in first-out policy of the company.

We are not allowed to placed inventories together, even identical ones
because we are monitoring the date when they are manufactured.
Lastly, regarding your findings about the ineffective cut-off procedures
which would possibly result to improper accounting of inventory, I
believe that such is a matter that would be properly discussed
between us and the inventory clerk who handles the recording of
inventories. I think thats all that I can say sir.
Auditor: Okay, thank you for that Sir. Regarding your explanation
about the absence of inventory tagging, we actually know already that
the company is employing a perpetual inventory system, however,
despite such fact, inventory tagging is still necessary because at
year-end, inventory balance per book shall be reconciled with the
inventory on-hand and any difference shall be accounted for properly.
Thus, it is very necessary that every single inventory shall be counted
because such is the ultimate purpose of inventory tagging.
Warehouse man: Thank you for that sir.
Auditor: regarding also your explanation about the placing of identical
inventories, the audit team is not questioning your argument
regarding your date of production, what we are actually concerned of
is the orderliness of the piling. Because when we visited the
warehouse to conduct the observation, there are inventories which
are difficult to be classified because they are not properly and orderly
placed.
Warehouse man: Okay Sir, noted.

Auditor: So based on this discussion the following is recommended:

There should be a proper tagging of inventories before the
physical count shall be conducted. This procedure will ensure
that every inventory shall be accounted and thus, proper
reconciliation between inventory records and inventory on-hand
shall take place.
Review accounts payable cut-off procedures. This will ensure
the proper accounting of year-end inventories. This task will be
accomplished with the help of the inventory clerk.
Educate the employees in proper and orderly placing of
inventories.

A1: Now, lets discuss about our next audit finding with regards to the
accounts payable. We would like to address this finding to _____, the
companys A/P clerk.
AP clerk: Sure .
A2: In the course of our audit, specifically in our inspection of the
purchases and disbursements of the period subsequent to the period
under audit, we have found out that there was no proper cut-off
procedures implemented.

A1: Because of this, there were unrecorded liabilities.

AP Clerk: Really? That shouldnt happen. I have done my task with
reasonable diligence for it not to contain any error! I was confident
enough that I made no mistake!
CEO: Well, I admire your usually confidently assertive self ____, but
let us first let the auditor finish. Proceed!
A2: As I was saying, there were unrecorded liabilities because
inventories that were received before the balance sheet date were not
recorded until the subsequent period.
A1: As a result, the cost for the current period is understated and the costs
in the following period when the liability is actually recorded will be
overstated.

AP Clerk: Wait, I can explain! First of all, in case you dont know me,
Im a summa cum laude graduate from the University of San Carlos,
and top 10 in the CPA Board Exam 2014. Its still my second year in
this company, but I believe that I am competent enough to be in this
position. And so, with regards to that unrecorded liabilities, I didnt
record it because the company didnt receive the suppliers invoice
until after the subsequent period. And as I remember from my
Auditing Theory, under the class of Mrs. Bernardo, the trigger that
causes the liability to be recognized and reported as accounts

payable is the receipt of the suppliers invoice. Thats theory, so I just

followed what was taught to me.
A2: Yes, the theory that you said was right, but I think your teacher
forgot that the management, you, should have procedures for
identifying invoices that relate to the audit period, and adjust the
liability account for those inventories received before the year end.
A1: Right, you just cant rely on the audit procedures we undertake for
this matter.
AP Clerk: What?! Oh no! My foundation just collapsed like that! I think
my minds being crushed and grounded to pieces right now! Shame
on me! No, shame to my teacher who taught that! (walks out pero
pwede rapud dli.haha)
WP (whispers): Just when she thinks so highly of herself, karma
struck..She deserves it! (Other people whispering)
CEO: Well, itll be a shame to our company as well if we dont fix this
mess right away, right? So, calm we might as well listen to what the
auditor could recommend.
A2: Okay, for this matter, I recommend that inventories, especially
those received near the end of the period, be vouched and reviewed

for proper recording. Liabilities and costs should be adjusted

accordingly. Also, you should take note that the actual date when
ownership of the purchased asset is transferred to the company or
the actual date the service is performed should be used to record the
liability, not necessarily the invoice date.
A1: As for the unrecorded liabilities for the period under audit, we
recommend that we make adjustments on this. We think that would
be all.

A2: Okay! Lets proceed to next finding.

A1: We have examined the processes regarding the company and we
came by this first finding which we would like to address to the
inventory clerk (kanang tig record sa inventory). In light with this
review, we found out that obsolete inventories were recorded and
included in the inventory account of the company.
A2: By doing such, it does not only overstate inventories, it also
overstates the companys net income which could then affect, of

course, the company and all its stakeholders who are relying on the
financial statements prepared by the company.
CEO: Then perhaps ________ (inventory clerk or unsay tawag ana)
can explain to us as to why this problem is present in the company.
IC1: Well, as matter of fact, I have not recorded such obsolete items
as part of inventories. I have been an employee of this company for
almost 5 years now and this is the first time that this problem arose. I
graduated in University of San Carlos with a degree of Accountancy
and by that, I know I am competent enough to know and apply that
such obsolete items shouldnt be part of the Inventory account.
(snob2) So I am suspecting that somebody manipulated my records
and it may be the new inventory clerk which was only hired a few
months ago.
IC2 (kinda hesitant to speak): If you were referring to me and I
suppose you were, and then let me speak up. First things first, I am
not very good at accounting matters to start with. I may have
graduated with a degree of Accountancy but I wasnt able to pass the
Board exam and my grades during my college were very low as you
can imagine especially in Financial Accounting which includes the
topic about inventories. As I was applying for a job, no company

would want to hire me knowing that I lack the competence to be part

of their team. So lets get back to the topic. I thought that what I did
was right although I am not so sure with it. After Mr. IC1 prepared the
records, I had to look and see his work because I was curious
enough if he was really doing the right thing. Then I thought he made
a mistake and so I corrected it.
IC1 (furious): How dare you question my competence!!! I have served
this company for a long time now and before you came by, things
were going so well. So you dont have the right to. . . . .UGGGHHH!
CEO: Okay now, let him finish!
IC2: Dont get the wrong idea; I was just testing how far my
knowledge can take me. Im very sorry Mr. IC1 for having offended
you. I know I am foolish not to believe on the work that you have
performed. What concerns me is that we are supposed to work as a
team but you didnt even give a thing to do. It really makes me feel
useless.
CEO: So this is becoming a huge problem now. Okay so this has to
stop.
IC1: We need to dump this useless guy/girl over here because he
cant bring any good to our company.

CEO: Keep your calm, Mr IC1. What I suggest is that we should

educate Mr./Ms. IC2 in order for him/her to be useful in the company.
You, both, need to work together to make your jobs much easier than
you think it would.
A1: Thank you Mr. CEO for acting so calm about this matter. Well, it
isnt much of a problem really since the amounts of these obsolete
inventories are not that much that could affect the companys
performance anyway. However, we will be applying measures so as
not to increase the problem in the near future.
A2: We suggest that we reverse the entry of recording those obsolete
items as part of inventory. Another thing is that these inventories may
have a salvage value, although minimal, we should still record these
amounts as part of inventory. I suppose that the warehouse clerk has
physically segregated those items which are obsolete from the good
items. So there is nothing more to improve in such problem.

Insert Vangels finding.

A1: Okay, let's proceed to our next finding. We'd like to address this
finding to Sir ____, the A/R clerk. Upon the course of our audit, we
discovered that no allowance was recorded for uncollectibles for
Other Accounts.

A2: As a consequence, receivables and income are overstated.

CEO(nervously demanding in secret the A/R clerk) : Say something!

AR(nervous): Uhmmm, I'm just not aware that aging is a necessity.

A2: Hmm, but if i'm not mistaken you served as an a/r clerk for 10
years now(shows employee record) . And as presented in our
previous working paper(shows working paper), an aging has always
been done except for the past fiscal year. Can you please explain this
to us?

CEO(glaring at the A/R)

E1(to the A/R): Are you okay?

E2: Ooh, I can feel the tension.

A/R: Fine! I lied 5 mins ago about being unaware. Yes, I am aware
that aging receivables is necessary. I am a competent graduate of
USC. My brilliant professors from USC taught me this. Of course, I
know that by heart! But youuuuuuuuu(points at the CEO), he/she told
me not to age the A/R because he/she is pressured with how high the
net income should be. Don't blame me. Blame the CEO. I dont want
to practice insubordination. I'm just following rules! Why am i always
wrong?!?! I'm never right!

A1: Okay, please relax Mr. A/R. No one is blaming you for a crime.
We were just asking for a response regarding this finding.

CEO: How dare you? I hired you when no one else would! You're
fired!!!

AR: You can't fire me because I resign from this no good company!
(Walk out and slam the door)

A1(still acting professional despite what happened): Okay. Lets just

calm down and control our emotions. I will now proceed to our
recommendations(while showing working paper). The AR department
should review the probability of collection of receivables. After doing
so, the department should age receivables. The detailed information
in the accounts receivable subsidiary ledger is used to prepare a
report known as the aging of accounts receivable. This report directs
your attention to accounts that are slow to pay. It is also useful in
determining the balance amount needed in the account Allowance for
Doubtful Accounts. The aging of accounts receivable report is
typically generated by sorting unpaid sales invoices in the subsidiary
ledgerfirst by customer and then by the date of the sales invoices. If
a company sells merchandise (or provides services) and allows

customers to pay 30 days later, this report will indicate how much of
its accounts receivable is past due. It also reports how far past due
the accounts are. And yes, it is necessary to age the relevant
receivables. Thus, we recommend that the client make an adjustment
____.