AUDIT CH 11/12

____- Accounting ¨ Accounts for usage of raw materials ¨ Determines content and value of goods in progress ¨ Computes finished inventory

Cost

¨ _____ inventory system ¡ Provide information essential to purchasing, sales, and production-planning policies ¡ Allows companies to control high costs of holding excessive inventory

Perpetual

_____ Function: ¡ Determines quantity of goods received ¡ Detects damaged or defective merchandise ¡ Prepares receiving report ¡ Prompt transmittal of goods received to stores department

Receiving

- ______ Function: ¡ Counts, inspects, and receives goods ¡ Notifies accounting of receipt

Storing

- The selection of an accounting method and the _____ of its application also affect the valuation of both inventories and cost of goods sold.

consistency

An ____ confirmation is audit evidence obtained by the auditors as a direct written response to the auditors' confirmation request sent to a third party.

external

Receivables should be confirmed, unless: ¨ Accounts receivable are _____, ¨ The use of confirmations would be _____, or ¨ The auditors' combined assessment of inherent and control risk is low, and audit risk can be reduced to acceptably low level with substantive tests

immaterial ineffective

- What questions might an auditor include on an internal control over inventories and cost of goods sold questionnaire? 1) Are perpetual inventory records ____ for each class of inventory? 2) Are perpetual inventory records _____ by physical inventories at least once each year 3) Do the procedures for physical inventories include the use of ______ tags with all tag numbers accounted for? 4) Are differences between physical inventory counts and perpetual inventory records _____- before the perpetual records are adjusted is a separate department responsible for purchasing all materials?

maintained verified prenumbered investigated

- The use of _____ confirmation requests consists of a communication addressed to the debtor asking it to advise the auditors only if the balance shown is incorrect.

negative

- What is a "___ receivable"? Written promises to pay certain amounts at future dates

note

- What is "______ of receivables"? To assign to a bank, factor, finance company, or other lender an exclusive claim against accounts receivable as security for a debt.

pledging

The use of ___ confirmation requests consists of a request addressed to the debtor asking for a reply.

positive

- The controls that assure the fair valuation of inventories are found in the_____ cycle.

purchases (acquisition)

- What questions might an auditor include on an internal control over receivables and revenue questionnaire? o Are orders from customers insisted and ___ by the sales department? o Are sales invoices prenumbered and all numbers ___ for? o Are all sales approved by the credit department before ___? o Are ___ of revenue performed by competent personnel using appropriate methods?

reviewed accounted shipment estimates

- Note the ten items that strengthen internal control over credit sales. 1. Preparation of the ____ order 2. Credit approval 3. Issuance of _____ from stock 4. Shipment 5. _____ 6. Invoice verification 7. Maintenance of ____ accounts 8. Maintenance of customer ledgers 9. Approval of sales ____ and allowances 10. Authorization of write offs of uncollectible accounts

sales merchandise Billing control returns

- The vast majority of a company's accounts receivable are ___ receivables that arise from credit sales of goods or services to customers.

trade

__________ ¡ Easier to control inventories ¡ EDI to coordinate production and purchasing

¨ IT systems

_____ Function: Stores department issues goods to requesting department (Prenumbered requisition) ______ (Conversion) Function: ¡ Controlled with master production schedule ¡ Production orders ¡ Materials requisitions and move tickets ¡ Job time tickets

Issuing Production

__________ Fraud Case -- Significant impact on responsibility of auditors with respect to validity of inventories -- Case decided in 1939 - the audited financial statements contained $19 million of fictitious assets including $10 million of nonexistent inventories -- Auditors followed customary auditing practice which limited audit work on inventories to examining records only

McKesson & Robbins

_____ confirmations - ask debtor to advise the auditors only if the balance shown is incorrect -- Low level of assessed risk of material misstatement -- Large number of small balances -- A low error rate is expected -- No reason to believe the respondent will ignore the request

Negative

_____ confirmations - request addressed to the debtor asking for a reply -- Ordinarily sent with balances due on them -- Blank forms - leave amount blank (used less frequently)

Positive

______ Function: -----Internal control: Segregation of purchasing, receiving, and recording ------Cycle ¡ Purchase requisition form completed by department needing the goods ¡ Purchasing prepares purchase order ú May require bids ú Item description and quantity ú Copy forwarded to accounting ú Copy forwarded to receiving should not include quantity

Purchasing

_____ Function: ¨ Shipment upon authorized sales order approved by credit department ¡ Generates a prenumbered shipping document ú One copy in ____ ú One copy to ____ ú Third copy used as ____ slip ú For goods shipped common carrier - fourth copy services as bill of lading

Shipping shipping billing packing

1. What are some inherent risks auditors face related to receivables and revenue? - A ___ in sales due to economic declines, product obsolesce, increased competition, or shifts in product or service demand - Inability to collect ___ - Improper revenue recognition - Restrictions placed on sales by laws and regulations

decline receivable

- What three types of inventories exist? 1. Goods on ___ ready for sale, whether the merchandise of a trading concern or the finished goods of a manufacturer 2. Goods in the ____ of production 3. Goods to be ____ directly or indirectly in production, such as raw materials, purchased parts and supplies

hand process consumed

- What are some inherent risks auditors face related to inventories and cost of goods sold? - Inventories constitute a ____ current asset of enterprise and susceptible to major error and fraud. - The accounting profession allows _____ alternative methods for valuation of inventories, and different methods may be used for various classes of inventories. - The determination of inventory ___ directly affects the cost of goods and has major impact on net income for the year - The determination of inventory ____, condition and value is inherently a more complex and difficult task than is the case with most other elements of financial position.

large numerous value quality

- Identify the risks associated with auditing inventories and cost of goods sold. § _____ of a supply of goods, services, and skilled labor § _____ of prices and labor rates § Generation of ____ cash flow to pay for purchases § Changes in _____ that affect manufacturing processes § Obsolescence of _____

Availability Stability sufficient technology inventory

Inventory ______ ¨ Client counts and supervises inventory ¨ Auditors observe ¡ Determine all items included ¡ Employees comply with instructions ¡ Be alert for inclusion of obsolete or damaged merchandise ¡ Record numbers of final receiving and shipping documents (data) issued before inventory taking

Observation

The Special Significance of Audit of Inventories ¨ ____ fraud has often involved the fraudulent overstatement of inventories. The valuation of goods on hand and in process often presents complex and difficult issues ¨ Determining the _____ of inventories may require specialized techniques ¨ Inventories often represent the ____ current asset of a company ¨ Misstatements of inventories ____ affect cost of goods sold and, therefore, net income

Management quantities largest directly

- Audit risk significant because o Many incidences of ____ have involved overstatement of receivables and revenue o Revenue recognition may be based on ____ accounting rules o Receivables and revenues are usually subject to ____ using significant accounting estimates

fraud complex valuation