Chapter 9 Smartbook

Sales forecasts ______. -- help auditors understand management's strategy -- can be used in valuing inventory -- should not be used for audit decisions

-- help auditors understand management's strategy -- can be used in valuing inventory

The use of scanner and computers ______. -- reduces the required number of counts from two to one -- improves accuracy -- improves efficiency

-- improves accuracy -- improves efficiency

If the auditor decides to perform tests of controls over inventory they will often include ______. -- inspection -- observation -- reperformance

-- inspection -- observation

If every product is tagged with individual RFID labels ______. -- there is still a need to two inventory counts -- inventory levels are recorded automatically -- inventory management is more efficient -- out-of-stock situations are reduced

-- inventory levels are recorded automatically -- inventory management is more efficient -- out-of-stock situations are reduced

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 counts

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

Physical observation procedures are designed to audit for _____ and _____.

existence completeness

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

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

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 risk of material misstatement is high, inventory observations and test counts should be scheduled ______.

near the year-end date

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) _____ errror.

pervasive

The acquisition cycle is linked to the revenue cycle through the _____ cycle.

production

All additions and reductions of inventory are accounted for in the payroll, _____, _____, and _____ cycles.

production acquisition revenue

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

GAAP requires inventory to be stated at the lower of cost or net _____ _____.

realizable value

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

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

The materials requisition is also called a materials _____ _____.

transfer ticket

The pricing and compilation tests audit for ______.

valuation

GAAS requires auditors to be present to observe the client's physical inventory count ______.

when inventory is significant

Holding supervisors accountable for production is an important component of control over ______ inventory.

work in process

The most difficult inventory control issues relate to ______.

work in process

True or false: Standard costing is an acceptable, recognized method per GAAP.

False

The headings on an Internal Control Questionnaire for the production cycle typically include occurrence, _____, _____, _____, and classification.

accuracy completeness cutoff

Which of the following statements are correct? -- A small inventory cost manipulation can result in a large misstatement. -- Inventory errors are easily identified by auditors. -- Unethical managers generally prefer to manipulate direct labor costs instead of inventory. -- The manipulation of inventory has a double effect on financial statements.

-- 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? -- Cost build-ups for inventory can be complex, especially when valued using FIFO. -- Work-in process inventory can be especially difficult to value. -- Inventory is a high-risk areas that is susceptible to errors. -- Management can use inventory manipulation to understate assets and income.

-- Work-in process inventory can be especially difficult to value. -- Inventory is a high-risk areas that is susceptible to errors.

The headings on an Internal Control Questionnaire for the production cycle typically include ______. -- accuracy -- existence -- cutoff -- completeness -- classification -- rights

-- accuracy -- cutoff -- completeness -- classification

Cycle counts ______. -- are most appropriate when a high level of control risk is present -- assist with maintaining accurate perpetual inventory records -- require the auditors' presence at some of the counts only

-- assist with maintaining accurate perpetual inventory records -- require the auditors' presence at some of the counts only

To help detect inventory fraud auditors should ______. -- be skeptical of client personnel making notes -- sample lower-volume inventory items -- follow a predictable pattern in all locations will not be observed -- focus test counts on high-value items

-- be skeptical of client personnel making notes -- focus test counts on high-value items

After observation is complete, auditors should have sufficient appropriate evidence that ______ the inventory compilation. -- goods in the perpetual records but not owned were excluded from -- consigned-in goods were included in -- goods in transit (purchased but not yet received) were included in -- goods on hand that have been sold were included in

-- goods in the perpetual records but not owned were excluded from -- goods in transit (purchased but not yet received) were included in

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 -- goods in transit (purchased but not yet received) were excluded from

-- goods on hand that have been sold were excluded from -- consigned-out goods were included in -- goods on hand were counted and included in

True or false: Inventory roll-forward procedures are required if inventory is counted either before or after the balance sheet date.

False

To help detect inventory fraud auditors should ______. -- look for excessive amounts of an inventory item -- sample lower-value inventory items -- advise client personnel of locations to be visited as soon as possible -- focus test counts on high-volume items

-- look for excessive amounts of an inventory item -- sample lower-value inventory items

The documents that authorize the inventory record keepers to update the raw material inventory files are the ______. -- materials requisition -- raw material inventory status report -- bill of materials -- production order

-- materials requisition -- production order

When ending inventory is overstated, ______ is (are) also overstated. -- net income -- cost of goods sold -- total assets -- total liabilities

-- net income -- total assets

Observation can be used to help determine ______. -- physical controls over inventory -- proper recording and allocation of labor and material costs -- separation of duties in the inventory area -- proper inventory authorizations

-- physical controls over inventory -- separation of duties in the inventory area -- proper inventory authorizations

RFID technology ______. -- switches the major focus to sampling items -- eliminates the need for a second count -- eliminates the need for a physical inventory

-- switches the major focus to sampling items -- eliminates the need for a second count

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: 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

Observing the movement of inventory from raw materials to finished goods can help the auditor ensure proper ______.

authorizations and documentation

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

Tests of controls are designed to test production accounting in two directions: _____ and _____.

completeness occurrence

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