ACC 450 Chapter 12
Circumstance: Engaged to audit after year-end
Audit Procedure: Alternative procedures
Circumstance: Client requests auditor not to observe taking of inventory
Audit Procedure: Cannot give unqualified opinion; must give qualified/no opinion
Circumstance: Inventory determined periodically by physical count
Audit Procedure: Extensive test counts
Circumstance: Material inventory stored in public warehouse
Audit Procedure: Go to public warehouse and observe system, make test counts
Circumstance: Perpetual records kept, adjusted periodically for physical count
Audit Procedure: Less test counts
Circumstance: First year audit; auditor not satisfied with opening inventory
Audit Procedure: Unqualified opinion on B/S only, not on I/S and statement of cash flows
The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the:
Bill of lading
McPherson Corp. does not make an annual physical inventory count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examination, Mullins:
Can issue an unqualified opinion without disclosing that she did not observe year-end inventories
What is the general rule for inventory?
Client counts at end of year, auditor observes the counting
An auditor has accounted for a sequence of inventory tags and is now tracing information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly?
Completeness
During the inventory count, an auditor selects items and determimes that the proper description and quantity were recorded by the client. This procedure is related to:
Completeness
The organization established by Congress to narrow the options in cost accounting that are available under GAAP is the:
Cost Accounting Standards Board
What is not a part of the auditors' responsibility during a client's count of its inventory?
Determine which counts they will make and which counts the client will make
What should be included as part of inventory costs of a manufacturing company?
Direct labor, raw materials, and factory overhead
Potential problems with inventory:
Double-counting and missing items, consignment, public warehouses for storing excess inventory, auditing for prior year, inventory is obsolete, cutoff problems, inventory requires a specialist
What is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold?
Establish that the client includes only inventory on hand at year-end in inventory totals
An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is related to:
Existence
When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is:
Existence
Types of non-manufacturer inventory:
Finished goods
Why is the audit of inventory so important?
Fraud can occur by overstating inventory--which understates COGS and overstates income
When should physical inventory counts take place?
Generally near Balance Sheet date
Tagging process for existence
Inventory accumulation sheet-Tag-Inventory items
Church and Shefchick Study 2012 indicates the financial accounts most often impacted by audit deficiencies include:
Inventory and cost of sales
Tagging process for completeness
Inventory items-Tag-Inventory accumulation sheet
How do you perform the inventory analytic procedure of comparing inventory turnover? What does it test for?
Inventory turnover = COGS / Average Inventory This tests for inventory obsolescence
Valuation rule
Lower of cost or market: Cost - LIFO, FIFO, etc Market - What it can be sold for
Document for issuing goods
Material requisitions
Am I correct that our observation of the counting of the inventory primarily addresses the existence of inventory, and not the completeness of the count?
No
At the completion of the count, should I leave Jilco Inc. personnel with a copy of all my inventory test counts to help assure inventory accuracy?
No
Do I need to count all items in the inventory?
No
Jilco Inc. has inventory at many locations. Do we need to be present for the count at all locations?
No
Must I document all my test counts in the working papers?
No
Should Jilco's inventory be valued at the lower of standard cost of market?
No
When I take test counts of items, does this eliminate the need for Jilco Inc. personnel to count those items?
No
Substantive test: Obtain listings of inventory and reconcile to ledgers
Objective: Existence/Occurrence/Rights
Substantive tests: -Evaluate client's planning of inventory -Observe taking of inventory -Inventory cutoff -Obtain a copy of the completed physical inventory and test its accuracy
Objective: Existence/Occurrence/Rights/Completeness/Valuation/Cutoff
Substantive test: Perform analytical procedures
Objective: Existence/Rights/Completeness/Valuation/Accuracy
Substantive test: Evaluate F/S presentation and disclosure
Objective: Presentation and Disclosure
Substantive test: Evaluate the bases and methods of inventory pricing. Test the pricing of inventories
Objective: Valuation
Substantive test: Determine whether any inventories have been pledged
Objective: Valuation/Presentation and Disclosure
What is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory?
Observe merchandise and raw materials during the client's physical inventory taking
The primary objective of a CPA's observation of a client's physical inventory count is to:
Obtain direct knowledge that the inventory exists and has been properly counted
A way to overstate profits is to:
Overstate inventory
In most audits, are auditors more concerned with an under- or overstatement of inventory?
Overstatement, because net income would be overstated also
The receiving department is least likely to be responsible for the:
Preparation of a shipping document
Documents for production schedule
Production orders, move tickets, time tickets
Documents for purchase of goods
Purchase requisitions, purchase orders
Types of manufacturer inventory:
Raw materials, work in progress, finished goods
Document for receiving goods
Receiving report
Consignment of goods
Selling the goods for another company
Documents for shipping goods
Shipping documents, bill of lading
The auditor's analytical procedures will be facilitated if the client:
Uses a standard cost system that produces variance reports
An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and:
Valuation
An auditor most likely would analyze inventory turnover rates to obtain evidence about:
Valuation
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address:
Valuation
An auditor would most likely analyze inventory turnover rates to obtain evidence about which assertion?
Valuation
When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably:
Want the client to schedule the physical inventory count at the end of the year
Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and:
Well-kept records of perpetual inventory are maintained
Is it correct that, since Jilco Inc. manufactures a product, direct labor and overhead ordinarily become a part of inventory costs?
Yes
Is it safe to assume that any inventory items present as "consigned in" should not be included in the clients' inventory?
Yes
With strong internal control, may Jilco Inc.'s inventory count be performed during the year rather than at year end?
Yes