Auditing Chapter 9

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 produce evidence for the ___________ balance assertion.

existence, completeness

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.

inventory roll-forward

Because a small misstatement in inventory can result in a much larger error in net income, auditors identify inventory as a(n) ____________ error.

pervasive

Production activities start with a(n) _________ _________ which is a marketing projection based on past performance and marketing initiatives.

sales forecast

Production Order

A document that communicates to the production personnel the specific product, product quantity, and date a product is to be produced

Materials Requisition (materials transfer ticket)

A form used to obtain raw materials and supplies from inventory custodian

Bill of Materials

A list of raw materials and supplies used to build a product that is used to develop standard costs

Raw Materials Inventory Status Report

A periodic report (usually daily or weekly) that includes a list of all raw materials and the inventoried quantity of each material

Sales Forecast

A report, usually prepared by marketing, predicting future sales of product

Production Plan

A schedule of goods to be produced for a period based on sales forecasts

Overhead Allocation

An accounting procedure used to assign indirect costs to various products

The most significant risks in the production cycle often relate to the __________ and __________ of inventory.

Existence, Valuation

True or false: GAAS requires auditors to be present to observe the client's physical inventory count regardless of the size of the inventory.

False When inventory is significant GAAS requires auditors to be present.

The acquisition cycle is linked to the revenue cycle through the ___________ cycle.

Production Cycle

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 a. sales forecaster b. production planner c. marketing manager

Production planner

Cycle Counts a. require the auditors presence at some of the counts only b. assist with maintaining accurate perpetual inventory records c. are most appropriate when a high level of control risk is present

a and b

Standard Costs

The estimates of cost to produce a product; used for transferring products between departments and to finished goods and to record cost of goods sold; compared to actual costs to obtain variances

Net Realizable Value (NRV)

The selling price less costs to sell

Valuation issues related to the inventory account include: a. GAAP accounting used b. obsolete inventory c. all included items in inventory d. accurate recording

a, b, and d. a. GAAP accounting used b. obsolete inventory d. accurate recording

The headings on an Internal Control Questionnaire for the production cycle typically include: a. completeness b. existence c. rights d. cutoff e. accuracy f. classification

a, b, d, e, and f.

Observation can be used to help determine a. separation of duties in the inventory area b. proper recording and allocation of labor and material costs c. proper inventory authorizations d. physical controls over inventory

a, c, and d.

After observation is complete, auditors should have sufficient appropriate evidence that __________ the inventory compilation. a. good in transit (purchased but not yet received) were excluded from b. goods on hand were counted and included in c. goods on hand that have been sold were excluded from d. consigned-out goods were included in

b, c, and d

The overall production authorization starts with a a. purchase order b. production plan c. sales forecast d. bill of materials

b.

Tracing a test count to the inventory compilations provides evidence for which ASB balance assertion? a. existence b. completeness c. valuation d. presentation and disclosure

b.

When the auditors were not present for the count of beginning inventory they must _________ on the income statement. a. issue an adverse opinion b. disclaim an opinion c. issue a modified opinion d. issue an unmodified opinion

b.

When performing tests of controls, auditors are interested in determining that all production that was started was recorded as part of the _____________ direction. a. occurence b. completeness c. accuracy

b. completeness

The use of scanner and computers a. improves accuracy b. improves efficiency c. reduced the required number of counts from two to one

a and b. a. improves accuracy b. improves efficiency

RFID technology a. eliminates the need for a second count b. eliminates the need for a physical inventory c. switches the major focus to sampling items

a and c a. eliminates the need for a second count c. switches the major focus to sampling items

Hiring and firing employees is a function that should be performed by a. human resources b. the employee's supervisor c. payroll accounting d. cost accounting

a.

Inventory should be recorded when a. the company has title to it b. when it is received c. when the related revenue is recognized d. when it is shipped from the vendor

a.

The production cycle a. applies to manufactures and retailers with some modification b. only applies to manufacturing companies c. is the same for both manufacturers and retailers

a.

The record where the employee's income taxes payable are recorded is the a. payroll register b. labor cost analysis c. clearing account d. personnel files

a.

The source of authorization for preparation of materials requisition is a. bill of materials b. purchase order c. production plan d. sales forecast

a.

If the risk of material misstatement is high, inventory observations and test counts should be scheduled: a. near the year-end date b. monthly c. early in the year

a. near the year-end date

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: a. must issue an adverse opinion on the income statement b. may have concerns about statement of cash flows c. must withdraw from the audit d. must issue a modified opinion on the financial statements

b

Which of the following statements are correct? a. Inventory errors are easily identified by auditors b. A small inventory cost manipulation can result in a large misstatement c. Unethical managers generally prefer to manipulate direct labor costs instead of inventory d. The manipulation of inventory has a double effect on financial statements

b and d

Auditors generally a. observe but do not actually do any inventory counting b. make test counts of inventory c. count the entire inventory

b. make test counts of inventory

The documents that authorize the inventory record keepers to update the raw material inventory files are the: a. bill of materials b. materials requisition c. production order d. raw material inventory status report

b. materials requisition c. production order

If auditors want to use a sales forecast for audit decisions: a. substantive test of details are required b. overall test for reasonable should be performed c. the risk of material misstatement must be assessed

b. overall tests for reasonable should be performed

An unexpected increase in __________ may be a red flag indicating bribes and kickbacks. a. cost of goods sold b. raw materials c. finished goods d. work in process

b. raw materials

Cost accounting generally records finished goods at _________ costs. a. actual b. standard c. estimated

b. standard

To help detect inventory fraud auditors should: a. focus test counts on high-volume items b. advise client personnel of locations to be visited as soon as possible c. sample lower-value inventory items d. look for excessive amounts of an inventory item

c and d

Client's inventory instructions should include all the following except a. names of client personnel responsible for the count b. instructions for recording accurate descpriptions c. instructions for auditors' test counts d. plans for controlling movement of goods

c.

Comparing material usage reports to raw material stores issue slips is a control to help insure which ASB transaction assertion? a. occurence b. completeness c. rights and obligations d. valuation or accuracy

c.

Person(s) who perform cost accounting functions __________ be in charge of production and inventory planning. a. should also b. may or may not c. should not

c.

Responsibility for the physical inventory count lies with the a. vendor b. auditor c. client d. inventory specialist

c.

The pricing and compilation test audit for: a. existence b. occurence c. valuation d. completeness

c.

Observing the movement of inventory from raw materials to finished goods can help the auditor ensure proper a. labor and material cost allocations b. separation of duties c. valuation of inventory d. authorization and documentation

d.

Which of the following is NOT recognized by GAAP as appropriate for determining inventory cost? a. FIFO b. LIFO c. weighted averge d. standard cost

d.

The production planner uses the ___________ to determine if there is sufficient stock to complete production. a. material requisition form b. bill of materials c. production order d. raw material inventory status report

d. raw material inventory status report

Holding supervisors accountable for production is an important component of control over ____________ inventory. a. finished goods b. all types of c. raw materials d. work in process

d. work in process

It is critically important to know which _________ _________ or count sheets were and were not used to prevent the client from adding inventory items by creating more at a later date.

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