ACC404 CH. 9
An auditor reviews job cost sheets to test which transaction assertion?
Accuracy
WCGW The amount of cost of goods sold has been properly accounted for using an acceptable GAAP accounting method.
Accuracy
From the auditors' point of view, inventory counts are more acceptable prior to the year-end when
Accurate perpetual inventory records are maintained
When auditing inventories, an auditor would least likely verify that
All inventory owned by the client is on hand at the time of the count
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
Completeness
WCGW All inventory items have been included.
Completeness
WCGW Cost of goods sold includes all costs of the inventory items sold during the year.
Completeness
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?
Confirmation
When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that
Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold
A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?
Credit memos for several items returned by customers had not been recorded
Which of the following results of analytical procedures would most likely indicate possible unrecorded inventory?
Current ratio of 3:1 as compared to 5:1 for the prior period
WCGW Items included in inventory were in inventory on the balance sheet date.
Existence and cutoff
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
Which cycle is not directly linked to the production cycle?
Finance and investment cycle
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?
Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records
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
Included in the final inventory schedule
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?
Inquiry
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?
Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens
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?
Inventory is complete
The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to
Material requisitions
WCGW Proper presentation and disclosures have been provided for inventory.
Presentation and disclosure
To determine the client's planned amount and timing of production of a product, the auditor reviews the
Production plan
Which of the following internal control activities most likely addresses the completeness assertion for inventory?
Receiving reports are prenumbered, and the numbering sequence is checked periodically
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
Represented by tags were included on the listing
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?
Request the client to recount inventory at the end of the year
A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably
Request the client to schedule the physical inventory count at the end of the year
WCGW Items included in inventory were the property of the client.
Rights
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?
The auditor believes that testing the controls could lead to a reduction in overall audit time and cost
Which of the following statements are correct? The manipulation of inventory has a double effect on financial statements. Inventory errors are easily identified by auditors. A small inventory cost manipulation can result in a large misstatement. 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.
Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
The warehouse manager is responsible for maintenance of perpetual inventory records
True or false: The tests of controls an auditor performs is highly dependent on the type of company and the type of inventory.
True
An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about
Valuation
WCGW Inventory has been properly accounted for and properly valued using an acceptable GAAP accounting method.
Valuation
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about
Valuation and allocation
Which of the following statements are true? Work-in process inventory can be especially difficult to value. Cost build-ups for inventory can be complex, especially when valued using FIFO. 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.
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
To help detect inventory fraud auditors should ______.
be skeptical of client personnel making notes; focus test counts on high-value items
The headings on an Internal Control Questionnaire for the production cycle typically include ______.
completeness; classification; cutoff; accuracy; occurrence
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
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
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
The use of scanner and computers ______ the number of inventory counts required.
has no impact on
Sales forecasts ______.
help auditors understand management's strategy; can be used in valuing inventory
The use of scanner and computers ______.
improves efficiency; improves accuracy
if the auditor decides to perform tests of controls over inventory they will often include ______.
inspection; observation
Auditors generally ______.
make test counts of inventory
The release of raw materials and supplies to production is authorized by a ______.
material 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 (also may be incorporated in a letter to the client)
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
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 every product is tagged with individual RFID labels ______.
out-of-stock situations are reduced; inventory levels are recorded automatically; inventory management is more efficient
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 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
All additions and reductions of inventory are accounted for in the payroll, _____, _____ and _____ cycles.
production; acquisition; revenue
The production planner uses the ______ to determine if there is sufficient stock to complete production
raw materials inventory status report
GAAP requires inventory to be stated at the lower of cost or net _____ _____.
realizable value
Cycle counts ______.
require 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
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
RFID technology ______.
switches the major focus to sampling items; eliminates the need for a second count
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
When ending inventory is overstated, ______ is (are) also overstated.
total assets; net income
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 process
The most difficult inventory control issues relate to ______.
work in process
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
Observation can be used to help determine ______.
proper inventory authorizations; physical controls over inventory; separation of duties in the inventory area
To help detect inventory fraud auditors should ______.
sample lower-value inventory items; look for excessive amounts of an inventory item -Focus test counts on high-value items and sample lower-value items. Test count a sufficient dollar amount of the inventory -If all locations will not be observed, do not follow an easily predictable pattern. Advise client personnel as late as possible of the locations to be visited -Be skeptical of large and unusual test count differences or of client personnel making notes or displaying particular interest in procedures and test counts -Be alert for inventory not used for some time; stored in unusual locations; or showing signs of damage, obsolescence, or excess quantities
True or false: Standard costing is an acceptable, recognized method per GAAP.
False
After the observation is complete, auditors should have sufficient appropriate evidence of the following physical quantities and valuations:
-Goods in the perpetual records but not owned were excluded from the inventory compilation -Goods on hand were counted and included in the inventory compilation -Consignment (consigned-out) goods or goods stored in outside warehouses (goods owned but not on hand) were included in the inventory compilation -Goods in transit (goods actually purchased and recorded but not received) were added to the inventory count and included in the inventory compilation -Goods on hand that have been sold and by agreement are being held by the client were excluded from the inventory compilation -Consignment (consigned-in) goods were excluded from the inventory compilation
To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis
By product
When evaluating inventory controls, an auditor would be least likely to
Consider policy and procedure manuals
The overall physical inventory count is generally taken by ______.
company personnel
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
Tests of controls are designed to test production accounting in two directions: _____ and _____.
completeness; occurrence
After observation is complete, auditors should have sufficient appropriate evidence that ______ the inventory compilation.
consigned-out goods were included in; goods on hand that have been sold were excluded from; goods on hand were counted and included in
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
