Chapter 9 Pre-Builts

1. A commitment to competence with respect to plant personnel is important to ensure that the ______ process is both effective and efficient. 2. Purchasing and cash disbursements can provide lots of opportunity for ______ by employees. 3. If purchasing employees are _______, they may negotiate bad purchases or purchase terms for the company. 4. If purchasing agents accept _______, the entire purchasing cycle is compromised. 5. Levels of authority in the manufacturing process need to be clearly __________.

1. Manufacturing 2. Fraud 3. Incompetent 4. Kickbacks 5.Communicated

BACKGROUND: The control environment reflects the company's attitude, awareness, and actions of management and the board concerning the importance of control and how it is used. This is very relevant to an auditor's consideration of inventories and should include: a) commitment to competence and HR policies and practices; b) integrity and ethical values; and c) organizational structure and assignment of authortity and responsibility. Central Park Associates CPAs is conducting an audit of a U.S. manufacturing company. When reviewing the company's inventory policy and physical inventory policy, the auditors noted the following facts: 1) Physical inventory will be conducted this year by temporary workers, at a wage cheaper for management than the "regular" workers; 2) Approvals for purchase orders with discounts are not required any longer; 3) The shop manager is no longer responsible for the physical inventory, it is now the responsibility of the CFO; 4) The physical inventory will be held four days after year end. Consider these facts in answering the following questions.

1. What aspect of the control environment is affected by the company's decision to hire temporary workers? - Commitment to competence 2. What aspect of the control environment is affected by the company's decision to no longer require approvals for purchase order discounts? - Integrity and ethical values 3. What aspect of the control environment is affected by the company's decision to no longer have the shop manager in charge of inventory? - Organizational structure 4. What aspect of the control environment is affected by the company's decision to hold the physical inventory four days after year end? - Commitment to competence

For each of the following independent events, indicate the (1) effect of the error or fraud on the financial statements and (2) what auditing procedures could have detected the misstatement resulting from error or fraud. Required: a. The physical inventory count of J. Payne Enterprises, which has a December 31 year-end, was conducted on August 31 without incident. In September, the perpetual inventory was not reduced for the cost of sales. b. Holmes Drug Stores counted its inventory on December 31, which is its fiscal year-end. The auditors observed the count at 20 of Holmes's 86 locations. The company falsified the inventory at 20 of the locations not visited by the auditors by including fictitious goods in the counts. c. Pope Automotive inadvertently included in its inventory automobiles that it was holding on consignment for other dealers. d. Peffer Electronics Inc. overstated its inventory by pricing wiring at $200 per hundred feet instead of $200 per thousand feet. e. Goldman Sporting Goods counted boxes of baseballs as having one dozen baseballs per box when they had only six per box.

A. Overstate assets and net income; Roll-forward procedures B. Overstate assets and net income; Surprise location visits C. Overstate assets and net income; Examine purchase records and inquire about consigned goods D. Overstate assets and net income; Examine purchase invoices E. Overstate assets and net income; Examine purchase invoices

To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis

By product

A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?

Credit memos for several items returned by customers had not been recorded

To determine the client's planned amount and timing of production of a product, the auditor reviews the

Production plan

Which of the following internal control activities most likely addresses the completeness assertion for inventory?

Receiving reports are renumbered, and the numbering sequence is checked periodically.

An auditor observed Bizarre Costume Shop's physical inventory count on the last day of the client's fiscal year, October 31, 2020. In addition to being somewhat disturbed by the costumes, the auditors identified several variances in the test counts relative to the client's recorded inventory. Through inquiry, YBBD obtained explanations from the client's management. Required:For each variance listed and client response, select the audit response the auditor would most likely make from the list of possible responses. Each response may be used once, more than once, or not at all. Write only the letter of the response in the space provided. Possible audit responses: A. Inspect supporting documents and agree quantities received to purchase order. B. Inspect supporting purchase documents for proper shipping terms and receiving information to verify exclusion from inventory count. C. Inspect supporting purchase documents for proper shipping terms and receiving information to verify inclusion in inventory count. D. Inspect supporting sale and shipment documentation for proper shipping terms for exclusion in inventory count. E. Inspect supporting sale and shipment documentation for proper shipping terms for inclusion in inventory count. F. Request that client make appropriate correction to record additional inventory. G. Request that client make appropriate correction to reduce inventory.

Test control number 1. E. Inspect supporting sale and shipment documentation for proper shipping terms for inclusion in inventory count. 2. G. Request that client make appropriate correction to reduce inventory. 3. F. Request that client make appropriate correction to record additional inventory. 4. F. Request that client make appropriate correction to record additional inventory. 5. E. Inspect supporting sale and shipment documentation for proper shipping terms for inclusion in inventory count.

An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions do GAAS require tests of controls be performed by an auditor?

The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about

Valuation and allocation

You are auditing Martha's Prison Clothes Inc. as of December 31, 2014 which uses the FIFO inventory method. The inventory for orange jumpsuits shows 1,263 suits at $782 for a total of $987,666. When you look at the invoices for the jumpsuits, you see the following: a. Determine the adjusting entry, if any, for the cost of inventory at December 31, 2014. b-1. Would your answer to part (a) be different if you saw an invoice dated January 9, 2015, for 500 suits at $750? b-2. If yes, determine the adjusting entry.

a. Dr COGS 3315 Cr Inventory 3315 b-1 - Yes b-2 Dr COGS 40416 Cr Inventory 40416