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