ACC 269 Ch. 13 SmartBook

True or false: In most manufacturing companies, proper valuation can be achieved by determining which manufacturing processing department has control of the inventory on the date of the physical count.

False Reason: Proper classification, not valuation, can be achieved.

In most manufacturing companies, determining which manufacturing processing department has control of the inventory on the date of the physical count achieves proper ______. classification cutoff disclosure valuation

classification

In most manufacturing companies, determining which manufacturing processing department has control of the inventory on the date of the physical count achieves proper ______. cutoff disclosure classification valuation

classification

There may be problems with the proper valuation of inventory in terms of lower-of-cost-or-market values if industry ______ is intense. risk timing analysis competition

competition

Once the controls in the inventory system have been tested, the auditor sets the level of ______ ______.

control risk

If the entity uses IT for monitoring the flow of goods and accumulating costs, the auditor will need to evaluate both the ______ IT controls and the inventory ______ controls.

general application

Select all that apply Individuals involved in the inventory management and inventory stores functions should not have access to ______. general ledger cost accounting records the warehouse inventory records

general ledger cost accounting records inventory records

Valuable evidence on unrecorded inventory or fictitious inventory may be provided by comparing the current ______ ______ percentage to previous years or industry data.

gross profit or margin

Audit research has shown there is a relatively ______ risk that inventory contains material misstatements. high low

high

The presence of obsolete inventory may be indicated when there is a pattern of a significant ______ in inventory coupled with a substantially ______ inventory turnover. increase; faster decrease; slower increase; slower decrease; faster

increase; slower

The type and amount of product on hand is shown on the ______ ______ report.

inventory status

Select all that apply The inventory status report ______. summarizes the variances in terms of actual costs versus standard or budgeted costs contains all the important information related to the entity's inventory is basically a summary of the perpetual inventory records can be used to determine the status of goods in process

is basically a summary of the perpetual inventory records can be used to determine the status of goods in process

The auditor should document the achieved level of control risk for the inventory management process using ______. either quantitative amounts or qualitative terms quantitative amounts only qualitative terms only both quantitative amounts and qualitative terms

either quantitative amounts or qualitative terms

Because of the potential for theft and fraud, ______ is a particularly important control in the inventory management process. segregation of duties updating of inventory records issuance of materials requisitions approval of purchase requisitions

segregation of duties

Select all that apply To ensure accuracy, inventory management personnel should periodically review inventory on hand for ______ inventory. slow-moving excess specialized obsolete high-value

slow-moving excess obsolete

Which of the following are useful audit tests for examining the reasonableness of inventory and cost of goods sold? substantive analytical procedures tests of details of transactions tests of details of account balances control tests

substantive analytical procedures

When an entity purchases inventory, vouching the costs to vendors' invoices can normally accomplish ______ of the inventory.

valuation

In order to set the control risk for the inventory management process, the auditor will need a thorough understanding of the process used by the entity to ______. value inventory handle inventory returns manufacture goods prepare purchase requisitions

value inventory

Control activities to ensure that inventory is properly recorded as raw materials, work in process, or finished goods are important for the ______ assertion. occurrence cutoff presentation classification

classification

The inventory compilation is footed, and the mathematical extensions of quantity multiplied by price are verified to test the ______ assertion. occurrence cutoff accuracy completeness

accuracy

Select all that apply Important disclosure issues related to inventory include ______. long-term purchase contracts related party purchases consigned inventory ordinary write-downs due to damage or obsolescence

long-term purchase contracts related party purchases consigned inventory

The observation of inventory ______. may be done by the internal auditor is not required to be done by an auditor must be done by the external auditor only

may be done by the internal auditor

Valuing inventory as part of an audit ______. is straightforward depends on the auditor's knowledge of the industry may result in disagreements with the entity

may result in disagreements with the entity

The intended purpose of substantive tests of transactions is to detect monetary ______ in the inventory account.

misstatements or misstatement

Select all that apply When auditing inventory and cost of goods sold and the auditor chooses to follow a substantive strategy, ______. the entity likely has an integrated cost-accounting/inventory management system no reliance is placed on the control activities internal control over inventory is inadequate the level of control risk is set at high

no reliance is placed on the control activities internal control over inventory is inadequate

With respect to the ______ assertion, the auditor should also be concerned that goods may be stolen. occurrence authorization completeness accuracy

occurrence

Excess levels of finished goods can become obsolete, which can result in ending inventory being ______. overstated understated

overstated

The major control activity for preventing fictitious inventory transactions from being recorded is ______. periodic or annual comparison of goods on hand with amounts shown in perpetual inventory records physical safeguards over inventory proper segregation of duties preparation and review of authorized purchase or production schedules

proper segregation of duties

Typically, the control activities for the completeness assertion over inventory are contained within the ______ process. purchasing asset human resource management revenue

purchasing

When internal controls are deemed to be adequate, the auditor will generally follow a ______ strategy for auditing inventory and cost of goods sold. reliance substantive

reliance

Select all that apply Important disclosure issues related to inventory include ______. the cost method used for valuation the value of stockouts LIFO liquidations the production schedule the components of inventory

the cost method used for valuation LIFO liquidations the components of inventory

The judgment process followed for setting control risk in the inventory management process is ______ the process used with other processes. the same as different from

the same as

Select all that apply Possible reasons for book-to-physical differences in inventory include ______. theft failure to adjust to fair market value cutoff errors unreported spoilage

theft cutoff errors unreported spoilage

Items should not be included in the physical inventory if an entity is holding them on ______.

consignment

If the results of tests of controls for the inventory system do not support the planned level of control risk, the auditor sets ______ risk higher and ______ risk lower.

control detection

The auditor attempts to determine whether all sales of finished goods and purchases of raw materials are recorded in the proper period in gathering evidence on the ______ assertion for inventory.

cutoff

The auditor can examine a sample of receiving documents for a few days before and after year-end for recording of inventory to test the ______ assertion. cutoff occurrence completeness accuracy

cutoff

True or false: Observing that count teams have placed count tags on all inventory items provides evidence regarding the cutoff assertion.

False Reason: It provides evidence regarding the completeness of the count.

That purchase or production activities could occur that may lead to excess levels of certain types of finished goods is the auditor's concern with ______ in the inventory system. completeness accuracy authorization occurrence

authorization

Failure to record inventory in the proper period can result in misstatements on the ______. income statement only balance sheet only statement of cash flows only balance sheet and income statement

balance sheet and income statement

The totals from the compilation for inventory should agree with the general ledger if the entity has made a(n) ______ -to-______ adjustment.

book physical

Accuracy is an important assertion because inventory transactions that are not properly recorded result in misstatements that directly affect ______. both cost of goods sold and inventory cost of goods sold only all financial statement accounts inventory only

both cost of goods sold and inventory

Select all that apply Industry factors that may indicate the presence of material misstatements in inventory include ______. changes in technology drop in customer demand new control system in warehouse intense competition turnover of key personnel

changes in technology drop in customer demand intense competition

A common control to ensure inventory disclosures are complete, relevant, and understandable is a disclosure ______.

checklist

An important assertion for a manufacturer, but not for a merchandiser is ______.

classification

The control activities for the ______ assertion relate to recording inventory that has been received. accuracy authorization occurrence completeness

completeness

The tests related to the observation of the physical inventory count provide assurance that all goods on hand are included in inventory, which is the ______ assertion. cutoff existence accuracy completeness

completeness

Select all that apply During the observation of the physical inventory count, the auditor should ______. vouch a sample of inventory additions to receiving reports and purchase requisitions ensure that there is no movement of goods during the inventory count ensure that no production is scheduled make sure that the entity's count teams are following the inventory count instructions

ensure that there is no movement of goods during the inventory count ensure that no production is scheduled make sure that the entity's count teams are following the inventory count instructions

Select all that apply Substantive analytical procedures are useful for ______. examining the reasonableness of inventory determining the physical inventory on hand identifying problems with overhead costs obtaining assurance on the valuation assertion

examining the reasonableness of inventory identifying problems with overhead costs obtaining assurance on the valuation assertion

By observing inventory items in the entity's warehouse, understanding and testing the entity's count procedures addressing validity, and through test counts, the auditor obtains information regarding ______. accuracy existence completeness cutoff

existence

The observation of the physical inventory is the primary audit step used to verify the ______ assertion. occurrence existence accuracy rights and obligations

existence

Select all that apply When auditing inventory and cost of goods sold and the auditor chooses to follow a substantive strategy, ______. the entity likely has an integrated cost-accounting/inventory management system internal control over inventory is inadequate the level of control risk is set at high no reliance is placed on the control activities

internal control over inventory is inadequate no reliance is placed on the control activities

The auditor may accept the inventory account as fairly presented if the likely misstatement is ______ the tolerable misstatement. greater than greater than or equal to less than or equal to less than

less than

To evaluate the audit findings, the ______ misstatement is compared to the ______ misstatement allocated to the inventory account.

likely tolerable

Excess levels of finished goods can become obsolete, which can result in ending inventory being ______. understated overstated

overstated

If items are recorded as sold in the incorrect period, revenue, cost of goods sold, and receivables will be ______ and inventory will be ______ for that period. correctly stated, understated overstated, understated understated, overstated overstated, correctly stated

overstated, understated

Select all that apply During the observation of the physical inventory count, the auditor should ______. perform test counts and record a sample of counts in the working papers trace a sample of receiving reports to the inventory records ensure inventory tags are issued sequentially to departments observe the condition of the inventory

perform test counts and record a sample of counts in the working papers ensure inventory tags are issued sequentially to departments observe the condition of the inventory

Auditors' tests of controls around management's use of a chart of accounts, proper codes for recording inventory transactions, and the financial reporting process, including the use of a disclosure checklist, should provide adequate assurance for the ______ assertion. classification accuracy completeness presentation

presentation

Select all that apply The accurate processing of inventory transactions involves ______. recording the proper cost in cost of goods sold using a periodic inventory system applying the correct price to the actual quantity received authorizing purchases by the purchasing department removing the actual number of items shipped from inventory

recording the proper cost in cost of goods sold applying the correct price to the actual quantity received removing the actual number of items shipped from inventory

Select all that apply Engagement and operating characteristics that are important to the assessment of inherent risk for inventory include ______. industry competition related party transactions drop in customer demand difficulty with valuation type of product sold

related party transactions difficulty with valuation type of product sold

Select all that apply The accurate processing of inventory transactions involves ______. removing the actual number of items shipped from inventory recording the proper cost in cost of goods sold authorizing purchases by the purchasing department using a periodic inventory system applying the correct price to the actual quantity received

removing the actual number of items shipped from inventory recording the proper cost in cost of goods sold applying the correct price to the actual quantity received

The auditor is ______. not required to observe inventory required to observe inventory that is material required to observe all inventory

required to observe inventory that is material

Select all that apply Because the inventory management process interacts with the ______ processes, transactions involving the receipt of goods, shipment of goods, and assignment of labor costs are normally tested as part of those processes. revenue human resource management purchasing asset acquisition

revenue human resource management purchasing

A procedure to provide assurance over accuracy of inventory is ______. observing physical safeguards over inventory reviewing authorized production schedules reviewing the entity's procedures for identifying excess inventory observing proper segregation of duties

reviewing the entity's procedures for identifying excess inventory

The auditor must be sure that the inventory on hand belongs to the entity to satisfy the ______ assertion. completeness valuation and allocation rights and obligations accuracy

rights and obligations