CH 13

The observation of the physical inventory is the primary audit step used to verify the _____ assertion.

existence

The observation of physical inventory provides evidence on the ______ assertions. existence valuation cutoff accuracy

existence valuation accuracy

The document that authorizes the release of raw materials from the raw materials department is the _____ ______.

material requisition

The observation of inventory _____. may be done by the internal auditor is not required to be done by an auditor must be done by the external auditor only

may be done by the internal auditor

Inventory is often difficult to audit, and its valuation _____. may result in disagreements with the entity depends on auditor knowledge of the industry is straightforward

may result in disagreements with the entity

With respect to the valuation assertion for inventory, the auditor must consider _____. classification obsolete inventory costs or standard costs lower-of-cost-or-market perpetual inventory

obsolete inventory costs or standard costs lower-of-cost-or-market

With respect to the ______ assertion, the auditor should also be concerned that goods may be stolen. authorization occurrence completeness accuracy

occurrence

To prevent theft, the entity should maintain ______ over inventory that are consistent with the susceptibility and value of the goods. physical safeguards periodic records standard costs just-in-time policies

physical safeguards

From an auditing perspective for the manufacturing area, there must be adequate control over the _____ flow of the goods and proper accumulation of the costs attached to _____.

physical, inventory

The auditor should document the achieved level of control risk using either _____ amounts or _____ terms.

quantitative, qualitative

The most complex or troublesome area(s) of inventory auditing include _____. lower-of-cost-or-market assigning costs obsolescence quantity of inventory

lower-of-cost-or-market assigning costs obsolescence

The judgment process followed for setting control risk in the inventory management process is ______ the process used with other processes. the same as different from

the same as

Possible reasons for book-to-physical differences in inventory include _____. theft failure to adjust to fair market value cutoff errors unreported spoilage

theft cutoff errors unreported spoilage

When the auditor follows a(n) _____ strategy when auditing inventory, (s)he places no reliance on the control activities in the inventory management process and sets the level of control risk at the maximum.

substantive

Once the controls in the inventory system have been tested, the auditor sets the level of _____ risk.

control

The auditor can examine a sample of receiving documents for a few days before and after year-end for recording of inventory to test the _____ assertion. occurrence accuracy completeness cutoff

cutoff

The auditor obtains information regarding ______ by observing inventory items in the entity's warehouse and understanding and testing the entity's count procedures addressing validity, and through the auditor's test counts. accuracy completeness cutoff existence

existence

When an entity purchases inventory, _____ of the inventory can normally be accomplished by vouching the costs to vendors' invoices.

valuation

The results of inventory processing in terms of actual costs versus standard or budgeted costs is presented in a(n) _____ report.

variance

True or false: Segregation of duties is a particularly important control in the inventory management process because of the potential for product costing errors.

False

The quantity of goods needed and the time at which goods must be ready in order to meet demand is determined on the ______ _____.

production schedule

Typically, the control activities for the completeness assertion over inventory are contained within the _____ process. human resource management purchasing asset revenue

purchasing

The inventory management process is affected by the control activities previously discussed for the _____ processes. long-term liabilities long-term assets purchasing revenue human resource management

purchasing revenue human resource management

Substantive analytical procedures are useful for _____. identifying problems with overhead costs examining the reasonableness of inventory determining the physical inventory on hand identifying obsolete inventory

identifying problems with overhead costs examining the reasonableness of inventory identifying obsolete inventory

The auditor is _____. not required to observe inventory required to observe all inventory required to observe inventory that is material

required to observe inventory that is material

The auditor can examine the costs included in _____ to be sure that such costs can be appropriately assigned to the product.

overhead

The auditor needs to be sure that the raw materials store _____. records pilferage of inventory authorizes receiving reports safeguards the assets prepares materials requisitions

safeguards the assets

A copy of the _____ _____ is used to remove goods from the entity's perpetual inventory records.

shipping order

Usually, the finished goods inventory master file is updated when a receiving report is processed or when a ______ is generated. inventory status report production schedule shipping order materials requisition

shipping order

For accuracy and proper valuation, _____ costs should approximate actual costs.

standards

To ensure accuracy, inventory management personnel should periodically review inventory on hand for _____ inventory. high-value obsolete excess specialized slow-moving

obsolete excess slow-moving

True or false: In most manufacturing companies, proper valuation can be achieved by determining which manufacturing processing department has control of the inventory on the date of the physical count.

False (Proper classification, not valuation can be achieved.)

The production schedule provides the auditor _____. information on the planned level of operating activity details on the control activities in the production process knowledge of stock outs the exact level of inventory at all times

information on the planned level of operating activity

All the important information related to the entity's inventory, including the perpetual inventory records is contained in the _____ _____ file.

inventory master

In a manufacturing company, the _____ _____ file usually contains the standard costs used to value the inventory at various stages of production.

inventory master

A procedure to provide assurance over accuracy of inventory is _____. observing physical safeguards over inventory reviewing the entity's procedures for identifying excess inventory reviewing authorized production schedules observing proper segregation of duties

reviewing the entity's procedures for identifying excess inventory

The auditor must be sure that the inventory on hand belongs to the entity to satisfy the ______ assertion. valuation and allocation completeness accuracy rights and obligations

rights and obligations

Important disclosure issues related to inventory include _____. the value of stockouts the production schedule LIFO liquidation the components of inventory the cost method used for valuation

LIFO liquidation the components of inventory the cost method used for valuation

The inventory compilation is footed, and the mathematical extensions of quantity multiplied by price are verified to test the _____ assertion. accuracy cutoff occurrence completeness

accuracy

The inventory compilation is footed, and the mathematical extensions of quantity multiplied by price are verified. Additionally, test counts made by the auditor during the physical inventory and tag control information are traced into the compilation to test the ____ assertion.

accuracy

From an auditing perspective for the manufacturing area, there must be _____. shipping orders for all finished goods that are shipped receiving reports for all raw materials inventory adequate control over the physical flow of the goods proper accumulation of the costs attached to inventory

adequate control over the physical flow of the goods proper accumulation of the costs attached to inventory

Controls over the aggregation or disaggregation of transactions are important to properly _____. value ending finished goods inventory calculate the cost of inventory sold during the period allocate costs to appropriate classes of inventory

allocate costs to appropriate classes of inventory

The auditor's concern with _____ in the inventory system is that purchase or production activities could occur that may lead to excess levels of certain types of finished goods. occurrence authorization accuracy completeness

authorization

Accuracy is important assertion because inventory transactions that are not properly recorded result in misstatements that directly affect _____. both cost of goods sold and inventory all financial statement accounts inventory only cost of goods sold only

both cost of goods sold and inventory

Failure to record inventory in the proper period can result in misstatements on the _____. income statement only balance sheet and income statement statement of cash flows only balance sheet only

balance sheet and income statement

An important assertion for a manufacturer, but not for a merchandiser is _____.

classification

Determining the quantity of inventory on hand is usually _____ complex when compared to assigning costs to value inventory. More Less Equally

less

The cost accumulation report aggregates _____. direct labor direct materials production variances manufacturing overhead

direct labor direct materials manufacturing overhead

A common control to ensure inventory disclosures are complete, relevant, and understandable is a(n) _____ _____

disclosure checklist

During the observation of the physical inventory count, the auditor should _____. ensure that no production is scheduled make sure that the entity's count teams are following the inventory count instructions ensure that there is no movement of goods during the inventory count vouch a sample of inventory additions to receiving reports and purchase requisitions

ensure that no production is scheduled make sure that the entity's count teams are following the inventory count instructions ensure that there is no movement of goods during the inventory count

Ensuring that all inventory and costs of production are properly accumulated, classified, and summarized in accounts is the main objective of the _____ _____ function.

general ledger

Reconciliation of the perpetual inventory records to the inventory accounts is an important control performed by the _____ _____ function.

general ledger

If the auditor follows a substantive strategy when auditing inventory, the auditor places _____ on the control activities in the inventory management process and sets the level of control risk at the _____. reliance; minimum reliance; maximum no reliance; minimum no reliance; maximum

no reliance; maximum

Changes in technology or a drop in customer demand may result in a material misstatement in inventory due to _____.

obsolescence

During the observation of the physical inventory count, the auditor should _____. perform test counts and record a sample of counts in the working papers trace a sample of receiving reports to the inventory records ensure inventory tags are issued sequentially to departments observe the condition of the inventory

perform test counts and record a sample of counts in the working papers ensure inventory tags are issued sequentially to departments observe the condition of the inventory

The accurate processing of inventory transactions involves _____. removing the actual number of items shipped from inventory using a perpetual inventory system authorizing purchases by the purchasing department applying the correct price to the actual quantity received recording the proper cost to cost of goods sold

removing the actual number of items shipped from inventory applying the correct price to the actual quantity received recording the proper cost to cost of goods sold

For accuracy and proper valuation, standard costs should approximate _____. costs at capacity actual costs prior year costs efficient production costs

actual costs

The auditor gathers evidence regarding overhead costs by reviewing the entity's method of overhead allocation for _____. reasonableness cost driver linkages compliance with GAAP consistency ease of application

reasonableness compliance with GAAP consistency

When products are completed by the manufacturing function, they are transferred to _____ _____ stores.

finished goods

Determining the materials cost requires examining the_____ of materials included in the product. order size type price quantity

type price quantity

Engagement and operating characteristics that are important to the assessment of inherent risk for inventory include ______. type of product sold related party transactions for inventory purchases difficulty with valuation drop in customer demand for product industry competition

type of product sold related party transactions for inventory purchases difficulty with valuation

In order to set the control risk for the inventory management process, the auditor will need a thorough understanding of the process used by the entity to _____. handle inventory returns value inventory manufacture goods prepare purchase requisitions

value inventory

Audit research has shown there is a relatively ______ risk that inventory contains material misstatements. high low

high

If the entity holds inventory on _____, such inventory should not be included in the physical inventory.

consignment

True or false: In general, prior year misstatements of inventory are not indicative of potential misstatements in the current year

False

True or false: Observing that count teams have placed count tags on all inventory items provides evidence regarding the cutoff assertion.

False

If the results of tests of controls for the inventory system do not support the planned level of control risk, the auditor sets _____ risk higher and _____ risk lower, leading to increased _____ procedures

control, detection, substantive

Industry factors that may indicate the presence of material misstatements in inventory include _____. changes in technology new control system in warehouse intense competition drop in customer demand turnover of key personnel

changes in technology intense competition drop in customer demand

Control activities to ensure that inventory is recorded as raw materials, work in process or finished goods is important for the _____ assertion.

classification

In most manufacturing companies, proper _____ can be achieved by determining which manufacturing processing department has control of the inventory on the date of the physical count.

classification

The control activities for the _____ assertion relate to recording inventory that has been received.

completeness

Important disclosure issues related to inventory include _____. consigned inventory related party purchases ordinary write-downs due to damage or obsolescence long-term purchase contracts

consigned inventory related party purchases long-term purchase contracts

The tests related to the observation of the physical inventory count provide assurance that all goods on hand are included in inventory, which is the _____ assertion. cutoff completeness accuracy existence

completeness

In gathering evidence on the _____ assertion for inventory, the auditor attempts to determine whether all sales of finished goods and purchases of raw materials are recorded in the proper period.

cuttoff

The cycle for inventory begins when goods are purchased and stored and ends when the _____. finished goods are shipped to customers raw materials have been purchased and inventory finished goods are stored in the warehouse work in process is complete

finished goods are shipped to customers

When an order is placed by a customer, a shipping order is produced by the revenue process and forwarded to the _____ _____ _____ department.

finished goods stores

Individuals involved in the inventory management and inventory stores functions should not have access to _____. general ledger the warehouse cost accounting records inventory records

general ledger cost accounting records inventory records

If the entity uses IT for monitoring the flow of goods and accumulating costs, the auditor will need to evaluate both the _____ IT controls and the inventory _____ controls.

general, application

Valuable evidence on unrecorded inventory or fictitious inventory may be provided by comparing the current _____ _____ percentage to previous years or industry data.

gross profit

During the observation of the physical inventory count, the auditor should ____. obtain tag control information for testing inventory compilation ensure that bill-and-hold items are included in the inventory count inquire about goods held on consignment

obtain tag control information for testing inventory compilation inquire about goods held on consignment

With respect to _____ of inventory, the major control activity for preventing fictitious inventory transactions from being recorded is proper segregation of duties.

occurrence

Excess levels of finished goods can become obsolete, which can result in ending inventory being _____. understated overstated

overstated

If items are recorded as sold in the incorrect period, revenue, cost of goods sold and receivables will be ______ and inventory will be ______ for that period. overstated, understated correctly stated, understated overstated, correctly stated understated, overstated

overstated, understated

rue or false: Labor costs included in inventory are often tested in conjunction with payroll expense.

True

The pattern of a significant _____ in inventory coupled with a substantially _____ inventory turnover may indicate the presence of obsolete inventory. increase; slower decrease; faster decrease; slower increase; faster

increase; slower

The type and amount of product on hand is shown on the _____ _____ report.

inventory status

The inventory status report _____. summarizes the variances in terms of actual costs versus standard or budgeted costs is basically a summary of the perpetual inventory records contains all the important information related to the entity's inventory can be used to determine the status of goods in process

is basically a summary of the perpetual inventory records can be used to determine the status of goods in process

The determination of labor costs requires evidence about the type and amount of labor needed for production and the _____. union agreement labor utilization labor hours labor rate

labor rate

If the likely misstatement is _____ the tolerable misstatement, the auditor may accept the inventory account as _____. less than; fairly presented less than; not fairly presented greater than; fairly presented

less than; fairly presented

The quantity and type of materials for production are tested by reviewing _____. material lists invoices from vendors engineering specifications blueprints

material lists engineering specifications blueprints

To release raw materials from the raw materials department, personnel prepare a: materials requisition cost accumulation report shipping order receiving report

materials requisition

The intended purpose of substantive tests of transactions is to detect monetary _____ in the inventory account.

misstatements

When performed as part of audit planning, _____ can effectively identify whether the inventory and cost of goods sold accounts contain material misstatements. tests of details of transactions preliminary analytical procedures tests of details of account balances control testing

preliminary analytical procedures

Auditor's tests of controls around management's use of a chart of accounts, proper codes for recording inventory transactions and the financial reporting process should provide adequate assurance for the _____ assertion.

presentation

When goods are requested for production through the issuance of a materials requisition, the _____ _____ _____ function issues the goods to the appropriate manufacturing department.

raw materials stores

A copy of the ______ accompanies the goods to the inventory department and is used to update the entity's perpetual inventory records. materials requisition production schedule shipping order receiving report

receiving report

Because the inventory management process interacts with the _____ processes, transactions involving the receipt of goods, shipment of goods, and assignment of labor costs are normally tested as part of those processes. revenue purchasing asset acquisition human resource management

revenue purchasing human resource management