Audit Quiz - CH 12, 14

Is it difficult to substantiate the existence of inventory?

Yes, because... 1. Inventory is often a large figure 2. Inventory can contain a lot of errors an fraud 3. There are several alternate valuation methods 4. Inventory could be obsolete

When does an auditor search for Unrecorded Payables? How?

first few weeks after year-end. CANT do this before year end. Examine selected cash disbursements in the period subsequent to year-end.

Auditors are generally required to observe physical inventory. What is the one exception to this rule?

if it's immaterial

Examples of accrued liabilities

Accrued Property Taxes Accrued Payrolls Pension Plan Accruals Post-employment Benefits other than Pensions Accrued Vacation Pay Product Warranty Liabilities (estimate) Accrued Commission and Bonuses Income Tax Payable (estimate) Accrued Professional Fees (likely estimated)

What are "tags" used for during physical inventory?

Client will Tag each item of inventory. Items in boxes will be tagged on the box. Most often the tags are paper even if the inventory can be scanned by Bar Code. The tags allow the auditor to recount and verify. Tags prevent omission of inventory from count and also prevent double counting.

What is the client's role during the taking of physical inventory? What is the auditor's role?

Clients perform the physical inventory count at year-end. Auditors Observe the physical inventory count and perform tests counts.

Is the audit of inventory only about counting the physical inventory? If not, what else is involved?

No, valuation - is Inventory and COGS properly valued? Is the company using a proper method? Accuracy - related to Valuation above. Are calculations accurate? Software reliable? Existence of Inventory (the risk is that Inventory is Overstated—prove it's all there) Completeness of Inventory (the risk is that Inventory is Understated-how do we make sure they report it all?) Cutoff - Timing at year-end Rights - is anything on Consignment and not really theirs? Disclosure - Costing methods; classifications (raw, wip, finished);any pledged inventory?

An auditor has accounted for the units of inventory on a series of inventory tags and is now going to trace information on representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly? a. Completeness b. Existence c. Legality d. Valuation

a. Completeness

Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper? a. Testing the entity's computation of standard overhead rates b. Obtaining confirmation of pledged inventory c. Performing a cutoff test d. Tracing test counts to the entity's inventory listing

a. Testing the entity's computation of standard overhead rates

Cutoff of inventories can be audited by reviewing receiving reports and purchase invoices near year-end. a. True b. False

a. true

Which of the following is not true relating to the auditors' observation of the client's physical inventory? a. The auditors should evaluate the client's planning of the physical inventory b. The auditors should supervise the taking of the inventory c. The auditors should evaluate the adequacy of the client's counting procedures d. The auditors should take test counts of the client's inventory

b. The auditors should supervise the taking of the inventory

Which of the following is not a reason for the importance of verifying inventory? a. The determination of inventory valuation directly affects net income b. The existence of inventory is inherently difficult to substantiate c. Special valuation problems of exist for inventory d. Inventories are often the largest asset of an enterprise

b. The existence of inventory is inherently difficult to substantiate

Which of the following best describes the reason for the auditors' review of the client's cost accounting system? a. To obtain evidence regarding the quantities of good described as work in process b. To obtain evidence about the valuation of work in process, finished goods, and cost of goods sold c. To obtain evidence about the profit margin on specific jobs d. To obtain evidence about compliance with Cost Accounting Standards

b. To obtain evidence about the valuation of work in process, finished goods, and cost of goods sold

Excessive dust or rust on an inventory item could mean which of these? a. Obsolete inventory b. Consigned inventory c. All of these d. An old fixed asset that is rarely used by the company e. Dirty conditions in the shop

c. All of these

Inventory costs, at their most basic, are based on which of these? a. An inventory costing approach b. Amounts charged to customers c. Supplier invoices d. None of these

c. Supplier invoices

Ordinarily, the most significant assertion relating to accounts payable is

completeness

Which of the following is not one of the independent auditor's objectives regarding the examination of the inventories? a. Verifying that inventory counted is owned by the client b. Verifying that the client has used proper inventory pricing c. Ascertaining the physical quantities of inventory on hand d. Verifying that all inventory owned by the client is on hand at the time of the count

d. Verifying that all inventory owned by the client is on hand at the time of the count

how are accrued liabilities are typically audited?

obtaining client details and calculations and proving/testing them.

Accounting department personnel should match invoices to what type of document before payment?

receiving report and purchase order

Does an auditor need to understand how a client costs its inventory? Why?

yes. Client will prepare working papers that EXTEND the Units out with cost values. 5000 UNITS X $25 PER UNIT = $125,000 Auditor will: -Recalculate the working paper -Trace prices to Supplier Invoices -Understand method LIFO/FIFO/Specific ID and prove that, as needed. -Tie the amounts per the detailed working papers to the General ledger.