Chapter 9 LearnSmart
Which of the following statements are correct?
- A small inventory cost manipulation can result in a large misstatement. - The manipulation of inventory has a double effect on financial statements.
Which of the following statements are true?
- Inventory is a high-risk areas that is susceptible to errors. - Work-in process inventory can be especially difficult to value.
After inventory has been counted, the client summarizes the count by item number and applies a chosen costing method to determine the total inventory owned, which is compared with the amount in the general ledger. This step is normally referred to as the ______ and ______ procedure.
- compilation - pricing
The headings on an Internal Control Questionnaire for the production cycle typically include occurrence, ______, ______, ______, and classification.
- completeness - accuracy - cutoff
The headings on an Internal Control Questionnaire for the production cycle typically include ______.
- completeness - cutoff - classification - accuracy
Tests of controls are designed to test production accounting in two directions: ______ and ______.
- completeness - occurrence
RFID technology ______.
- eliminates the need for a second count - switches the major focus to sampling items
Physical observation procedures are designed to audit for ______ and ______.
- existence - completeness
Examining shipping and receiving documents issued before and after the manual physical inventory count is an important ______ procedure.
cutoff
Physical counts of selected inventory throughout the year are called ______ ______.
cycle count
When the auditors were not present for the count of beginning inventory they must ______ opinion on the income statement.
disclaim an
Auditors must verify that items included in inventory were in inventory on the balance sheet date to address the ______ assertion.
existence
When the auditor is satisfied that controls have been examined and transactions and balances are fairly presented according to GAAP, the audit ______
focus must move to required disclosures
The use of scanner and computers ______ the number of inventory counts required.
has no impact on
Auditors generally ______.
make test counts of inventory
The release of raw materials and supplies to production is authorized by a ______.
materials requisition
If auditors were not present for the count of beginning inventory, and cannot perform alternative procedures to provide evidence the number is not materially misstated they ______.
may have concerns about statement of cash flows
Descriptions of significant deficiencies, control weaknesses and inefficiencies ______.
must be communicated to the audit committee
If the risk of material misstatement is high, inventory observations and test counts should be scheduled ______.
near the year-end date
When performing tests of controls, auditors are interested in determining that WIP and finished good inventory items were actually produced as part of the ______ direction.
occurrence
If auditors want to use a sales forecast for audit decisions ______.
overall tests for reasonableness should be performed
A record of all counts must be obtained and used for the existence-direction tests if a company does not maintain ______ inventory records.
perpetual
Because a small misstatement in inventory can result in a much larger error in net income, auditors identify inventory as a(n) ______ error.
pervasive
Because an inventory error has a cascading effect that affects many areas of the financial statement, auditors identify it as a(n) ______ error.
pervasive
The acquisition cycle is linked to the revenue cycle through the ______ cycle.
production
The schedule for manufacturing designed to ensure quality goods are available at the appropriate time for the lowest cost is called the ______ ______.
production plan
One of the most critical jobs in any manufacturing operation is ______.
production planner
The production planner uses the ______ to determine if there is sufficient stock to complete production
raw material inventory status report
GAAP requires inventory to be stated at the lower of cost or net ______ ______.
realizable value
If there is an intervening period between the count date and year-end, additional inventory ______-______ auditing procedures must be performed on transactions during that period.
roll-forward
If it is incorrect and either underestimates or overestimates product demand, the cost to the company can be in the millions, which is why the ______ ______ is one of the most important documents in any organization.
sales forecast
Production activities start a marketing projection based on past performance and marketing initiatives called a(n) ______ ______.
sales forecast
Cost accounting generally records finished goods at ______ costs.
standard
To prevent the client from adding inventory items by creating more at a later date, it is critically important to know which ______ ______ or count sheets were or were not used
tag numbers
To prevent the client from adding inventory items by creating more at a later date, it is critically important to know which ______ ______ or count sheets were or were not used.
tag numbers
The materials requisition is also called a materials ______ ______.
transfer ticket
The pricing and compilation tests audit for ______.
valuation
Holding supervisors accountable for production is an important component of control over ______ inventory.
work in progress
The most difficult inventory control issues relate to ______.
work in progress
Observing the movement of inventory from raw materials to finished goods can help the auditor ensure proper ______.
authorizations and documentation
Selecting items from a perpetual inventory record and obtaining a test count can be done to produce evidence for the ______ balance assertion, while tracing items from the inventory floor to the inventory records produces evidence for the ______ balance assertion.
- existence - completeness
The most significant risks in the production cycle often relate to the ______ and ______ of inventory.
- existence - valuation
To help detect inventory fraud auditors should ______.
- focus test counts on high-value items - be skeptical of client personnel making notes
After observation is complete, auditors should have sufficient appropriate evidence that ______ the inventory compilation.
- goods in transit (purchased but not yet received) were included in - goods in the perpetual records but not owned were excluded from
After observation is complete, auditors should have sufficient appropriate evidence that ______ the inventory compilation.
- goods on hand that have been sold were excluded from - consigned-out goods were included in - goods on hand were counted and included in
Sales forecasts ______.
- help auditors understand management's strategy - can be used in valuing inventory
The use of scanner and computers ______.
- improves efficiency - improves accuracy
Control risk assessment is important because it governs the ______, ______, and ______ of substantive procedures that will be performed in the audit of inventory.
- nature - timing - extent
if the auditor decides to perform tests of controls over inventory they will often include ______.
- observation - inspection
If every product is tagged with individual RFID labels ______.
- out-of-stock situations are reduced - inventory management is more efficient - inventory levels are recorded automatically
Observation can be used to help determine ______.
- physical controls over inventory - proper inventory authorizations - separation of duties in the inventory area
All additions and reductions of inventory are accounted for in the payroll, ______, ______ and ______ cycles.
- production - acquisition - revenue
Cycle counts ______.
- require the auditors' presence at some of the counts only - assist with maintaining accurate perpetual inventory records
Inventory disclosures must ensure that the presentation and disclosure assertions of occurrence, ______ and obligations, ______, classification and understandability, and accuracy and ______ are all met.
- rights - completeness - valuation
To help detect inventory fraud auditors should ______.
- sample lower-value inventory items - look for excessive amounts of an inventory item
When ending inventory is overstated, ______ is (are) also overstated.
- total assets - net income
True or false: A sales forecast is prepared to ensure that quality products will be available at the appropriate time for the lowest costs
False
True or false: Inventory roll-forward procedures are required if inventory is counted either before or after the balance sheet date.
False
True or false: Standard costing is an acceptable, recognized method per GAAP.
False
True or false: The tests of controls an auditor performs is highly dependent on the type of company and the type of inventory.
True
Auditors must ensure that cost of goods sold has been properly accounted for using an acceptable GAAP method. This addresses the ______ assertion.
accuracy
A specification of the type and quantity of components required for production is found on the ______.
bill of materials
The overall physical inventory count is generally taken by ______.
company personnel
When performing tests of controls, auditors are interested in determining that all production that was started was recorded as part of the ______ direction.
completeness
Because it governs the nature, timing, and extent of substantive procedures that will be performed in the audit of inventory, ______ ______ assessment is important.
control risk
Differences between the inventory count and the perpetual records are adjusted by increasing or decreasing ______.
cost of goods sold
Significant risk in the production cycle relates to the correct valuation of ______.
cost of goods sold