You are working as a summer intern for AAA Auditing You have

You are working as a summer intern for AAA Auditing. You have been asked to help resolve discrepancies noted in the audit for Dolfin Company, a retailer of specialty aquarium supplies.

As a merchandising company, Dolfin Company uses the perpetual inventory system. To prepare for this assignment, you have been asked to review your knowledge of sales and purchase transactions by completing the table below.

Consider the effect of each transaction on the three accounts listed, then use checkmarks to identify which accounts are debited or credited. If none of these accounts is affected by the transaction, check the “No Effect” box.

Inventory

Estimated Returns Inventory

Cost of Goods Sold

No Effect

Debit

Credit

Debit

Credit

Debit

Credit

Auditing Observations

After going through the accounting records of Dolfin Company in detail, the auditor made a list of observations. You have been asked to review the effect of these observations.

For each observation, use checkmarks to identify which items on the income statement are overstated or understated. If none of these items is affected by the observation, check the “No Effect” box.

Observations

Sales

Cost of Merchandise Sold

Gross Profit

Operating Expenses

Income from Operations

No Effect

Overstated

Understated

Overstated

Understated

Overstated

Understated

Overstated

Understated

Overstated

Understated

		You are working as a summer intern for AAA Auditing. You have been asked to help resolve discrepancies noted in the audit for Dolfin Company, a retailer of specialty aquarium supplies. As a merchandising company, Dolfin Company uses the perpetual inventory system. To prepare for this assignment, you have been asked to review your knowledge of sales and purchase transactions by completing the table below. Consider the effect of each transaction on the three accounts listed, then use checkmarks to identify which accounts are debited or credited. If none of these accounts is affected by the transaction, check the “No Effect” box. Inventory Estimated Returns Inventory Cost of Goods Sold No Effect Debit Credit Debit Credit Debit Credit Freight paid for sales with FOB destination Purchase of merchandise for resale Freight paid for merchandise purchased FOB shipping point Customer payment on account Sale on account Customer returns Return of merchandise purchased for resale Yearly estimate for customer returns Cash sale of merchandise Payment of service fee for processing credit card sales Auditing Observations After going through the accounting records of Dolfin Company in detail, the auditor made a list of observations. You have been asked to review the effect of these observations. For each observation, use checkmarks to identify which items on the income statement are overstated or understated. If none of these items is affected by the observation, check the “No Effect” box. Observations Sales Cost of Merchandise Sold Gross Profit Operating Expenses Income from Operations No Effect Overstated Understated Overstated Understated Overstated Understated Overstated Understated Overstated Understated All freight costs were charged to Delivery Expense regardless of the terms of sale. Office supplies expense was included in administrative expenses. Inventory shrinkage was credited to Miscellaneous Selling Expense. Sales tax collected on each sale was credited to Cost of Merchandise Sold. Customer returns and allowances were sometimes debited to Estimated Returns Inventory and credited to Sales. Credit card processing fees were debited to Cost of Merchandise Sold. While the company accountant was on vacation, the cost of each sale was not recorded for sales transactions.

Solution

Inventory Inventory Estimated Returns Inventory Cost of Goods Sold No Effect Debit Credit Debit Credit Debit Credit Freight paid for sales with FOB destination x Purchase of merchandise for resale x Freight paid for merchandise purchased FOB shipping point x Customer payment on account x Sale on account x x Customer returns x x Return of merchandise purchased for resale x Yearly estimate for customer returns x Cash sale of merchandise x x Payment of service fee for processing credit card sales x Auditing Observations Observations Sales Cost of Merchandise Sold Gross Profit Operating Expenses Income from Operations No Effect Overstated Understated Overstated Understated Overstated Understated Overstated Understated Overstated Understated All freight costs were charged to Delivery Expense regardless of the terms of sale. X Office supplies expense was included in administrative expenses. X Inventory shrinkage was credited to Miscellaneous Selling Expense. X X X Sales tax collected on each sale was credited to Cost of Merchandise Sold. x x x Customer returns and allowances were sometimes debited to Estimated Returns Inventory and credited to Sales. X X X Credit card processing fees were debited to Cost of Merchandise Sold. X X X While the company accountant was on vacation, the cost of each sale was not recorded for sales transactions. X X X If any doubt please comment