Chapter 13 & 16 Smartbook

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

False

There may be problems with the proper valuation of inventory in terms of lower-of-cost-or-market values if industry ______ is intense.

competition

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

completeness

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.

completeness

Items should not be included in the physical inventory if an entity is holding them on _________.

consignment

Once the controls in the inventory system have been tested, the auditor sets the level of ______ ______

control risks

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.

control, detection

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

cutoff

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.

cutoff

Engagement and operating characteristics that are important to the assessment of inherent risk for inventory include ______.

difficulty with valuation related party transactions type of product sold

The auditor should document the achieved level of control risk for the inventory management process using ______.

either quantitative amounts or qualitative terms

By observing inventory items in the entity's warehouse, understanding and testing the entity's count procedures addressing validity, and through test counts, the auditor obtains information regarding ______.

existence

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

existence

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

The cycle for inventory begins when goods are purchased and stored and ends when the ______.

finished goods are shipped to customers

Individuals involved in the inventory management and inventory stores functions should not have access to ______.

general ledger, cost accounting records, and inventory costs

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

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

high

Substantive analytical procedures are useful for ______.

identifying problems with overhead costs, obtaining assurance on the valuation assertion, examining the reasonableness of inventory

The production schedule provides the auditor ______.

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

The determination of labor costs requires evidence about the type and amount of labor needed for production and the ______.

labor rate

The auditor may accept the inventory account as fairly presented if the likely misstatement is ______ the tolerable misstatement.

less than

To evaluate the audit findings, the _______misstatement is compared to the_____ misstatement allocated to the inventory account.

likely, tolerable

With respect to the valuation assertion for inventory, the auditor must consider ______.

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

The quantity and type of materials for production are tested by reviewing ______.

material lists, blueprints, engineering specifications

To release raw materials from the raw materials department, personnel prepare a ______.

material requisition

The observation of inventory ______.

may be done by the internal auditor

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

misstatements

When auditing inventory and cost of goods sold and the auditor chooses to follow a substantive strategy, ______.

no reliance is placed on the control activities, internal control over inventory is inadequate

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

overhead

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

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

To help prevent fictitious inventory transactions from being recorded, ______.

prenumbered documents should be used for all inventory transactions, proper segregation of duties is important

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

presentation

The quantity of goods needed and the time at which goods must be ready in order to meet demand are determined on the________ ________

production schedules

The major control activity for preventing fictitious inventory transactions from being recorded is ______.

proper segregation of duties

Typically, the control activities for the completeness assertion over inventory are contained within the ______ process.

purchasing

Determining the materials cost requires examining the ______ of materials included in the product.

quantity, type, and price

Determining the materials cost requires examining the ______ of materials included in the product. Multiple select question. price

quantity, type, price

Responsibility for the receipt, custody, and issuance of materials into production rests with the______ ______ _______ function.

raw material stores

The auditor gathers evidence regarding overhead costs by reviewing the entity's method of overhead allocation for ______.

reasonableness, compliance with GAAP, and consistency

A copy of the _____ accompanies the goods to the inventory department and is used to update the entity's perpetual inventory records.

receiving report

Goods are accompanied to the inventory department with a copy of the _____ _____ which is used to update the entity's perpetual inventory records.

receiving report

When internal controls are deemed to be adequate, the auditor will generally follow a ______ strategy for auditing inventory and cost of goods sold.

reliance

The auditor is ______.

required to observe inventory that is material

The document that authorizes the release of raw materials from the raw materials department is the materials______

requisition

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, human resource management, purchasing

The inventory management process is affected by the control activities previously discussed for the ______ processes.

revenue, purchasing, and payroll

The auditor must be sure that the inventory on hand belongs to the entity to satisfy the ______ assertion.

rights and obligations

The raw materials store function is responsible for ______.

safeguarding the assets

Because of the potential for theft and fraud, ______ is a particularly important control in the inventory management process.

segregation of duties

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

standard

In a manufacturing company, it is not unusual for the inventory master file to contain the ______ costs used to value the inventory at various stages of production.

standard

Which of the following are useful audit tests for examining the reasonableness of inventory and cost of goods sold?

substantive analytical procedures

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

the same as

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

true

Possible reasons for book-to-physical differences in inventory include ______.

unreported spoilage, cutoff errors, theft

When an entity purchases inventory, vouching the costs to vendors' invoices can normally accomplish _______of the inventory.

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 ______.

value inventory

The inventory compilation is footed, and the mathematical extensions of quantity multiplied by price are verified to test the ______ assertion.

accuracy

The observation of physical inventory provides evidence on the ______ assertions.

accuracy, existence, valuation

For accuracy and proper valuation, standard costs should approximate ______.

actual cost

The accurate processing of inventory transactions involves _____.

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

That purchase or production activities could occur that may lead to excess levels of certain types of finished goods is the auditor's concern with______ in the inventory system.

authorization

Failure to record inventory in the proper period can result in misstatements on the______.

balance sheet and income statement

The totals from the compilation for inventory should agree with the general ledger if the entity has made a(n)_____ -to-_____ adjustment.

book to physical

Accuracy is an important assertion because inventory transactions that are not properly recorded result in misstatements that directly affect ______.

both cost of goods sold and inventory

Industry factors that may indicate the presence of material misstatements in inventory include ______.

changes in technology, intense competition, drop in customer demand

A common control to ensure inventory disclosures are complete, relevant, and understandable is a disclosure .

checklist

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

classification

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

classification

In most manufacturing companies, determining which manufacturing processing department has control of the inventory on the date of the physical count achieves proper______.

classification