Audit - Ch. 9

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:

A. observe physical counts of the inventory items.

The following test of controls could be performed during the audit of the controls in the production cycle. Required. For the procedure below, identify the primary assertion being addressed. PROCEDURE: Balance and reconcile detailed production cost sheets to the work-in-process inventory control account. a. Rights and Obligations. b. Presentation and Disclosure. c. Completeness. d. Valuation or Allocation. e. Existence or Occurrence.

C. Completeness

A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?

C. credit memos for several items returned by customers had not been recorded

The following question is from an internal control questionnaire for the production cycle. Assume that the answer to the question is "no." QUESTION: Are summary entries reviewed and approved by the cost accounting supervisor? Required: For the preceding question determine the following: I. Assertion addressed [A-E]. A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation E. Presentation and Disclosure II. Example of an error fraud that could occur [1-10]. 1. Errors in summary entries not detected and corrected. 2. Inventory transactions posted in wrong period. Cutoff errors. 3. Scrap reporting incorrect. Incorrect perpetual inventories. 4. Failure to disclose agreements in footnotes. 5. Materials withdrawn from inventory or hours worked for unauthorized projects. 6. Lost forms resulting in inventory not charged to Cost of Goods Sold. 7. Incorrect costs used; inventory improperly valued. 8. Production orders lost and accounting incomplete. 9. Labor or material used but not recorded. 10. Errors in labor costs.

I. E. Presentation and Disclosure II. 1 Errors in labor costs.

The following is an independent event. EVENT: Dodgy Automotive inadvertently included in its inventory automobiles that it was holding on consignment for other dealers. Required: For each of the preceding independent events indicate: I. The effect of the error or fraud on the balance sheet [1-6]. 1. Assets overstated 2. Assets understated 3. Liabilities overstated 4. Liabilities understated 5. No effect on balance sheet 6. Cannot be determined II. What auditing procedures, if any, could have detected the misstatement resulting from error or fraud [a-f]. a. Examination of purchase invoices should indicate that the per-unit-pricing. Also, comparison to prior periods should show the large change in value. b. As part of the roll-forward procedure, auditors would examine the entries to reduce inventory for the cost of sales. c. During the observation of the physical inventory, auditors should request that inventory within containers be opened. Also, purchase records should indicate how many items are contained in each container. d. Locations should be visited for an inventory count on a surprise basis. e. Examination of purchase records should reveal that the inventory items were not purchased. Inquiry of the client about consignments should also alert auditors to the presence of goods not owned by the client. f. None of the above.

I. I. Assets overstated. II. e Examination of purchase records should reveal that the inventory items were not purchased. Inquiry of the client about consignments should also alert auditors to the presence of goods not owned by the client.

The following is an independent event. EVENT: 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. Required: For each of the preceding independent events indicate: I. The effect of the error or fraud on the income statement [A-D]. A. Income overstated B. Income understated C. No effect on income D. Cannot be determined II. The effect of the error or fraud on the balance sheet [1-6]. 1. Assets overstated 2. Assets understated 3. Liabilities overstated 4. Liabilities understated 5. No effect on balance sheet 6. Cannot be determined

I. a II. 1

The following question is from an internal control questionnaire for the production cycle. Assume that the answer to the question is "no." QUESTION: Are labor usage reports compared to job time tickets? Required: For the preceding question determine the following: I. Assertion addressed [A-E]. A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation E. Presentation and Disclosure II. Example of an error fraud that could occur [1-10]. 1. Errors in summary entries not detected and corrected. 2. Inventory transactions posted in wrong period. Cutoff errors. 3. Scrap reporting incorrect. Incorrect perpetual inventories. 4. Failure to disclose agreements in footnotes. 5. Materials withdrawn from inventory or hours worked for unauthorized projects. 6. Lost forms resulting in inventory not charged to Cost of Goods Sold. 7. Incorrect costs used; inventory improperly valued. 8. Production orders lost and accounting incomplete. 9. Labor or material used but not recorded. 10. Errors in labor costs.

I. a II. 10

The following is an independent event. EVENT: Dodgy Automotive inadvertently included in its inventory automobiles that it was holding on consignment for other dealers. Required: For each of the preceding independent events indicate: I. The effect of the error or fraud on the income statement [A-D]. A. Income overstated B. Income understated C. No effect on income D. Cannot be determined II. The effect of the error or fraud on the balance sheet [1-6]. 1. Assets overstated 2. Assets understated 3. Liabilities overstated 4. Liabilities understated 5. No effect on balance sheet 6. Cannot be determined

I. a Income overstated. II. 1. assets overstated

The following is an independent event. EVENT: Hunger Games Sporting Goods counted boxes of baseballs as having six baseballs per box when they actually had only twelve per box. Required: For each of the preceding independent events indicate: I. The effect of the error or fraud on the income statement [A-D]. A. Income overstated B. Income understated C. No effect on income D. Cannot be determined II. What auditing procedures, if any, could have detected the misstatement resulting from error or fraud [a-f]. a. Examination of purchase invoices should indicate that the per-unit-pricing. Also, comparison to prior periods should show the large change in value. b. As part of the roll-forward procedure, auditors would examine the entries to reduce inventory for the cost of sales. c. During the observation of the physical inventory, auditors should request that inventory within containers be opened. Also, purchase records should indicate how many items are contained in each container. d. Locations should be visited for an inventory count on a surprise basis. e. Examination of purchase records should reveal that the inventory items were not purchased. Inquiry of the client about consignments should also alert auditors to the presence of goods not owned by the client. f. None of the above.

I. b Income Understated II. c During the observation of physical inventory, auditors should request that inventory within containers be opened. Also, purchase records should indicate how many items are contained in each container.

The following is an independent event. EVENT: Hunger Games Sporting Goods counted boxes of baseballs as having six baseballs per box when they actually had only twelve per box. Required: For each of the preceding independent events indicate: I. The effect of the error or fraud on the income statement [A-D]. A. Income overstated B. Income understated C. No effect on income D. Cannot be determined II. The effect of the error or fraud on the balance sheet [1-6]. 1. Assets overstated 2. Assets understated 3. Liabilities overstated 4. Liabilities understated 5. No effect on balance sheet 6. Cannot be determined

I. b invome understated. II. 2 assets understated.

The following test of controls could be performed during the audit of the controls in the production cycle. Required. For the procedure below, identify the primary assertion being addressed. PROCEDURE: Locate the material issue forms and determine whether they are kept in a secure location, and available to unauthorized persons.

a. Existence or Occurrence

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.

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 inventory turnover analysis is useful to the auditor because it may detect

b. the existence of obsolete merchandise

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. completeness b. existence c. valuation d. rights and obligations e. occurrence

c. valuation

The following test of controls could be performed during the audit of the controls in the production cycle. Required. For the procedure below, identify the primary assertion being addressed. PROCEDURE: Select a sample of the material issue forms in the production department file. Examine them for raw materials stores clerk's signature or initials. a. rights and obligations b. completeness c. valuation or allocation d. existence or occurrence e. Presentation and disclosure

c. valuation or allocation

An auditor selected items for test counts while observing a client's physical inventory count. 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

The following test of controls could be performed during the audit of the controls in the production cycle. Required. For the procedure below, identify the primary assertion being addressed. PROCEDURE: Scan closed production cost sheets for missing numbers in the sequence.

completeness

which audit procedure is most likely related to the classification and understandability of the financial statements with respect to inventory?

confirming inventories pledged under loan agreements.

The following test of controls could be performed during the audit of the controls in the production cycle. Required. For the procedure below, identify the primary assertion being addressed. PROCEDURE: Select a sample of the material issue forms in the production department file. Examine them for production order number. a. Presentation and Disclosure. b.Rights and Obligations. c.Valuation or Allocation. d.Completeness. e. Existence or Occurrence.

d. Completeness

Which of the following procedures is the auditor least likely to perform on the actual date the physical inventory count is observed?

d. Examine documentation supporting the acquisition of highly material inventory items on hand at the count date.

Which of the following internal control activities most likely addresses the occurrence assertion for inventory?

d. There is a separation of duties between the payroll department and inventory accounting personnel.

An auditor reviews job cost sheets to test which transaction assertion?

d. accuracy

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. check that shipping documents for the last three months agree with perpetual records. b. trace receiving reports for the last three months to perpetual records. c. compare gross margin percentages for the last three months. d. all of the above are necessary.

d. all the above are necessary.

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. cutoff b.rights and obligations c. existence d. completeness e. valuation

e. valuation

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about rights and obligations.

false

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to perpetual inventory records

false

To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis by division.

false

For control purposes, the quantities of materials ordered may be omitted from the copy of the purchase order that is

forwarded to the receiving department

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

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