Audit Homework 7

Substantive Testing of Inventory VariancesAn 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.

1C - This is a purchase that was correctly recorded - verify terms. 2E - This is a sale that has not been completed since it is F.O.B. destination. The client correctly has not recorded the sale, and thus details of the sale should be inspected. 3F - This sale is improperly recorded. The requirements for revenue recognition are not met when the goods have not been legally transferred to the customer. 4F - This is an understatement of inventory and accounts payable. Goods should be recorded upon receipt by the client. 5E - This is correctly not recorded as a sale since the inventory has not been transferred to the customer yet.

When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that a. Physical inventories agree substantially with book inventories b. The system is in accordance with generally accepted accounting principles and is functioning as planned c. Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold d. Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand

c

Which cycle is not directly linked to the production cycle? a. Revenue and collection cycle b. Acquisition and expenditure cycle c. Finance and investment cycle d. Payroll cycle

c

A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably a. Request the client to schedule the physical inventory count at the end of the year b. Insist that the client perform physical counts of inventory items several times during the year c. Apply gross profit tests to ascertain the reasonableness of the physical counts d. Increase the extent of tests of controls relevant to the inventory cycle

a

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods? a. Confirmation b. Observation c. Calculation d. Inspection

a

An auditor reviews job cost sheets to test which transaction assertion? a. Accuracy b. Classification c. Completeness d. Occurrence

a

An auditor usually traces the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are a. Included in the final inventory schedule b. Owned by the client c. Not obsolete d. Physically present at the time of the preparation of the final inventory schedule

a

An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about a. Valuation b. Rights and obligations c. Completeness d. Existence

a

From the auditors' point of view, inventory counts are more acceptable prior to the year-end when a. Accurate perpetual inventory records are maintained b. Significant amounts of inventory are held on a consignment basis c. Inventory is slow moving d. Internal control is weak

a

When evaluating inventory controls, an auditor would be least likely to a. Consider policy and procedure manuals b. Make inquiries c. Inspect documents d. Observe procedures

a

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? a. Inventory is complete b. Inventory is properly presented in the financial statements c. The entity has rights to the inventory d. Inventory is properly valued

a

Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars? a. Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records b. Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record c. Have an independent accounting firm prepare an internal control report on the effectiveness of the controls over inventory d. Require a manager's signature for the removal of any inventory item with a value of more than $50

a

Which of the following results of analytical procedures would most likely indicate possible unrecorded inventory? a. Current ratio of 3:1 as compared to 5:1 for the prior period b. Inventory turnover of 3.25 during the current year compared to 3.75 during the prior year c. Inventory balance increase of 10% during the current period d. Accounts payable turnover of 6 as compared with 8 for the prior period

a

Your client counts inventory three months before the end of the fiscal year because controls over inventory are excellent. Which procedure is not necessary for the roll-forward? a. Request the client to recount inventory at the end of the year b. Trace receiving reports for the last three months to perpetual records c. Check that shipping documents for the last three months agree with perpetual records d. Compare gross margin percentages for the last three months

a

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. Required: a. Determine the adjusting entry, if any, for the cost of inventory at December 31, 2014. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 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. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

a. Debit: COGS 3,315 Credit: Inventory 3,315 b-1. Yes b-2. Debit: COGS 40,416 Credit: Inventory 40,416

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. Financial Statement Effect: Overstate assets and net income Procedure to Detect: Roll-forward procedures b. Financial Statement Effect: Overstate assets and net income Procedure to Detect: Surprise location visits c. Financial Statement Effect: Overstate assets and net income Procedure to Detect: Examine purchase records and inquire about consigned goods d. Financial Statement Effect: Overstate assets and net income Procedure to Detect: Examine purchase invoices e. Financial Statement Effect: Overstate assets and net income Procedure to Detect: Examine purchase invoices

A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference? a. No journal entry had been made on the retailer's books for several items returned to its suppliers b. Credit memos for several items returned by customers had not been recorded c. Inventory items had been counted, but the tags placed on the items had not been taken off and added to the inventory accumulation sheets d. An item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records

b

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? a. The auditor hopes to reduce the amount of work to be done in assessing inherent risk b. The auditor believes that testing the controls could lead to a reduction in overall audit time and cost c. Tests of controls are always performed when the auditor begins to assess control risk d. Significant weaknesses were found in the company's internal control

b

To determine the client's planned amount and timing of production of a product, the auditor reviews the a. Sales forecast b. Production plan c. Inventory reports d. Purchases journal

b

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items a. Represented by tags were reduced to the lower of cost or market b. Included in the listing were properly valued c. Represented by tags were included on the listing d. Included on the listing were properly counted

c

To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis a. For the company as a whole b. By division c. By product d. All of the choices are correct

c

An auditor is testing internal controls in the manufacturing of a client's inventory. Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls? a. Observation b. Inspection of documents c. Inquiry d. Reperformance

c

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about a. Completeness b. Existence c. Valuation and allocation d. Rights and obligations

c

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of a. Rights and obligations b. Valuation and allocation c. Completeness d. Existence

c

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to a. Receiving reports b. Perpetual inventory records c. Material requisitions d. Cost ledgers

c

Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? a. Inspect the open purchase order file for significant commitments that should be considered for disclosure b. Trace test counts noted during the entity's physical count to the entity's summarization of quantities c. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens d. Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales

c

When auditing inventories, an auditor would least likely verify that a. The client has used proper inventory pricing b. Damaged goods and obsolete items have been properly accounted for c. The financial statement presentation of inventories is appropriate d. All inventory owned by the client is on hand at the time of the count.

d

Which of the following internal control activities most likely addresses the completeness assertion for inventory? a. Employees responsible for custody of finished goods do not perform the receiving function b. There is a separation of duties between the payroll department and inventory accounting personnel c. The work-in-process account is periodically reconciled with subsidiary inventory records d. Receiving reports are prenumbered, and the numbering sequence is checked periodically

d

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? a. Supplies of relatively little value are expensed when purchased b. Perpetual inventory records are maintained only for items of significant value c. The cycle basis is used for physical counts d. The warehouse manager is responsible for maintenance of perpetual inventory records

d