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