CH 12 Audit

Auditors may engage in direct written communication with consignors to:

-confirm the quantity and value of goods held at the balance sheet date -disclose client liability for unremitted sales proceeds from inability to collect consignment accounts receivable.

A purchase invoice was received and recorded on Dec. 31. The actual goods were not received until several days later and thus were not include in the year-end physical count of inventory. As a result, at Dec 31:

-inventory is understated -retained earnings are understated.

The lower-of-cost-or-market test involves comparing inventory purchase price to the replacement cost, within the ceiling or floor. In this case, the ceiling represents:

net realizable value.

best 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 financial statements should disclose details of any arrangements relating to

pledged inventory in order to secure bank loans.

When bank balances and indebtedness are confirm, the

pledging of inventories to secure bank loans may be brought to light.

A decreasing rate of inventory turnover suggests:

the possibility of obsolete inventories.

Auditors should inspect inventory to determine its existence and condition and make test counts:

while attending the client's physical inventory count.

An auditor most likely would analyze inventory turnover rates to obtain evidence about:

valuation

The shipping department will generate a prenumbered shipping document to be:

-sent to the billing department -retained by the shipping department -enclosed as a packing slip with the goods.

If management is inclined to engage in fraudulent financial reporting, the fraud will likely involve

overstatement of inventory.

Circumstances that may allow the auditors to obtain satisfaction concerning inventories even when the physical count was not observed include:

-strong internal control -records showing a well planned year-end count -making of test counts.

An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to:

existence

For any significant risk related to inventory and cost of goods sold, the auditors evaluate the design of the controls and determine if they are:

implemented.

An inventory system that shows the quantity of goods on hand at all times is called a

perpetual inventory system

A vital procedure in the audit of a manufacturing concern is determining that

factory overhead cost allocations are reasonable

Auditors will test the pricing of inventories by:

selecting items of large total value.

During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to:

completeness

Auditors will testing the pricing of goods in process and finished goods by referencing:

cost accounting records

To help identify overvalued inventory items, auditors may compare:

cost per unit to sales prices or net realizable values.

The standards related to the observation of physical inventory counts is

dependent on whether the client uses a periodic or perpetual inventory system.

When performing substantive procedures, auditors will obtain listing of inventories that will be reconciled to the general ledger and subsidiary ledgers. The goal in this step is to make sure the inventory records agree with the:

financial statements

A decreasing rate of inventory turnover suggests that the amount of inventory being held is too:

high.

when auditors are engaged after year end and thus were unable to observe the taking of physical inventory an

unqualified opinion can only be issued if compensating tests are possible.

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 make inquiries of production and sales personnel concerning possible obsolete inventory to address:

valuation

The risk of material misstatement of the financial statement is reduced when

management evaluates and manages the risk related to purchasing and producing goods and services.

Inventories may include:

raw materials supplies used in production purchase parts

The process of accepting goods, which includes the determination of quantities of goods accepted, the detection of damages merchandise, and the preparation of a receiving report, and the prompt transmittal of goods to the stores department is known as the

receiving department.

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.

should be included as a part of inventory cost of a manufacturing company

1. direct labor 2. raw materials 3. factory overhead

If the test of controls reveal problems, the auditors should reassess the risks of

material misstatement for the financial statement assertions about inventories and cost of goods sold.

Overall production should be controlled by a

master production schedule that presents the gross production needs for a particular period.

Prior to the McKesson & Robbins fraud case, it was customary to limit the audit work on inventories to examination of:

records only.

The actual counting, filling in of the inventory tags and pulling of these tags is done by:

client employees.

Stores department

counts, inspects, and receipts goods and notifies the accounting department of the amount received and placed in stock.

Auditors record the serial number of the final receiving and shipping documents issued before the taking of inventory. This is to help with the accuracy of the

cutoff assertion.

when a primary risk related to an audit is possible overstated inventory , the assertion most directly related is

existence

A contractual obligation to buy goods at fixed prices, entered into well in advance of scheduled delivery dates is called a

purchase commitment.

After the auditors have prepared a flowchart of internal control, they should determine that the controls are being implemented by procedures such as:

-inspection of documentation -observation -inquiry

Companies having significant supply contracts with certain U.S government agencies are subject to standards established by the

Cost Accounting Standards Board.

An IT-based inventory system eliminates the need for normal segregation of duties in the purchasing, receiving, storing, processing, and shipping functions.

FALSE

Auditors must observe physical inventories on the balance sheet date.

FALSE

If a client changes methods of inventory pricings from one year to the next, the auditor will not be able to issue an unqualified opinion of the financial statements.

FALSE

Comes first in the audit of inventories and cost of goods sold:

Obtain an understanding of internal control

When goods are shipping using a common carrier, a shipping document called a

bill of lading is provided to the carrier.

The controls that assure the fair valuation of inventory are found in

both the purchases and conversion cycles.

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. -purchases in transit should also be considered

Labor and machine time devoted to a particular production job is accumulated on a

job time ticket.

Job time tickets accumulated both

labor and machine hours.

The effect on the financial statements of failing to include a year-end in-transit purchase as part of physical inventory is often not a serious one, provided the related

liability is not recorded until the following period.

The document that authorizes the production of specific products is the

production order.

In a first-year audit, the auditors may be able to obtain evidence that the beginning inventories are fairly stated by:

reviewing the predecessor firm's working papers.

A contractual obligation to offer customers goods at fixed prices, entered into well in advance of scheduled delivery dates is called a

sales commitment.

Auditors often test 100% of the transactions related to direct labor and

direct materials charged to production jobs.

An IT-based inventory system:

-makes it easier to maintain control over inventories, purchasing, and manufacturing -improves inventory tracking -may be linked to a system of suppliers to allow EDI to coordinate purchasing and production.

In reviewing the final inventory listings, auditors test extensions and watch for two sources of substantial errors including:

-misplaced decimal points -incorrect extension of count units by price units.

Important aspects of the control environment related to inventories and cost of sold include:

-organizational structure and assignment of authority and responsibility -integrity and ethical values. -a commitment to competence and human resource policies and practices.

Relevant monitoring controls for the purchases cycle include management reviews of reports of:

-purchases from suppliers -accounts payable balances -inventory on hand.

In planning the physical inventory, the client should consider factors such as:

-use of inventory tags -suspending production -date selection and production

Inherent risks related to inventories include:

-valuation of inventory affects cost of goods sold and net income -the use of various methods for valuation -determining inventory values can be complex.

Internal controls for inventories affect nearly all the functions involved in :

producing and disposing of the company's product.

An adequate cost accounting system is

necessary to account for the usage of raw materials and supplies, to determine the content and value of goods in process inventories, and to compute the finished goods inventory.

In planning for inventory counts where only some of the client's locations will be observed, the auditors should:

not inform the client of the specific locations in advance.

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.

WHen performing test of controls related to inventories, auditors may examine significant aspects of a sample of

purchase transactions.