Davis & Smith, CPAs, have performed a variety of audit tests as part of their audit of

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Question:

Davis & Smith, CPAs, have performed a variety of audit tests as part of their audit of Silva Inc. and must now evaluate their results. For each of the following situations, identify whether the selected balance (shown in parentheses) is overstated, understated, or fairly stated.

Situations	Effect on Financial Statement Item in parentheses A. Overstated; B. Understated; C. Fairly Stated.
1. One of Silva's suppliers shipped goods to Silva on December 26, Year 1, FOB destination, with a scheduled arrival date of December 30, Year 1. The goods did not arrive at Silva's receiving dock until January 2, Year 2. The goods were included in Silva's ending inventory based on the scheduled arrival date of December 30. (inventory)
2. On December 31, a major customer of Silva's requested a rush order of goods. Silva shipped the goods just before the close of business on the 31st, FOB shipping point. Silva did not include the goods in its year-end inventory balance. (inventory)
3. One of Silva's customers is holding goods on consignment for Silva. The goods were delivered to the customer on December 31, Year 1. Silva has included the retail value of these goods in its sales for Year 1. (sales)
4. December 31, Year 1 falls on a Wednesday, but Silva pays its employees on Fridays. The payroll expense for the year includes all checks written through December 31. (expense)
5. On December 31, Silva sold goods to a related party. The goods were sold above Silva's cost but below the normal retail value. (sales)