Chapter 12

existence

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

-records showing a well planned yr end count -making of test counts -strong internal controls

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

standard...jobs

cost accounting systems may accumulate either actual cost or ___ costs according to process or____

overstatement

management is inclined to engage in fraudulent fin reporting. the fraud will likely involve ___ of inventory.

standard

many companies have established___ cost system that help identify the causes of ineffectiveness and waste through a study of variances btw actual and standard costs

-reviewing ledgers and journal for unusual entries or amounts -reviewing transactions classified by vendor and type of product

analytical procedures of inventories and COGS include:

while attending the clients physical inventory count

auditors should inspect inventory to determine its existence and condition and make tests counts:

receiving

the process of accepting goods, which includes the determination of qualities of goods accepted, the detection of damage merchandise and the preparation of a receiving report, and the prompt transmittal of goods to the stores department is known as the ___ function.

1. determination of quantities of goods received 2. detection of damaged or defective merchandise. 3. preparation of a receiving report 4 prompt transmittal of goods received to the stores department.

the receiving function is responsible for:

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

important aspects of the control environment related to inventories and COGS include:

internal control

in obtaining an understanding of ___ over inventory, the auditors should become familiar with the procedures for purchasing, receiving, storing, and issuing goods

-determine the dates of the counts -extent of the test counts need for client assistance # of auditors needed at each location -est time required

in planning for counts of physical inventory, the senior auditor in charge should:

accounting and receiving

copies of the purchase order should be forwarded to the ___ department

is

the standards related to the observation of physical inventory counts__ dependent on whether the client uses a periodic or perpetual inventory system.

cost per unit to sales prices or net realizable values

to help identify overvalued inventory items, auditors may compare:

valuation

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:

Well-kept records of perpetual inventory are maintained

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:

can issue an unqualified opinion disclosing that she did not observe year-end inventories.

McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examination, Mullins:

Bill of lading

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the:

Preparation of the shipping document

The receiving department is least likely to be responsible for the

sales

a contractual obligation to offer customers goods at a fixed price, entered into well in advance of scheduled delivery dates is an ___ commitment

the possibility of obsolete inventories

a decreasing rate of inventory turnover suggests:

- retained earnings are understated -inventory is understated

a purchase invoice was received and recorded dec 31. the actual good were not received until several days later thus were not included in the year end physical count of inventory. As of result, at dec 31:

perpetual

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

impliment

for any significant risk related to inventory and COGS, the auditor evaluate the design of controls and determine if they are:

-evaluate the design of related controls and determine that they are implemented -may not rely solely on analytical procedures to address the risk -may not rely on evidence obtained in prior periods regarding the operating effectiveness of related controls

when addressing any significant risk related to inventories, auditors:

unqualified opinion can only be issued if compensating tests are possible

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

valuation

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

Valuation

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address:

existence

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

completeness

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:

Generally Accepted Accounting Principles (GAAP)

auditors are responsible for determining that the bases and methods of pricing inventory are in accordance with:

test of controls and substantive

auditors assess the risks of material misstatement and design ___procedures

Observe marchandise and raw materials during the client's physical inventory taking

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory?

Want the client to schedule the physical count at the end of the year

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably:

Establish that the client includes only inventory on hand at year-end in inventory totals

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold?

not inform the client of the specific locations in advance

in planning for inventory counts where only some of the clients locations will be observed, the auditor should:

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

in reviewing the final inventory listings, auditors test extensions and watch for 2 sources of substantial errors including:

client employees

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

-goods on hand ready for sale -goods in the process of production -goods to be consumed directly or indirectly in productions

inventories include goods:

Management

it is the ___ responsibility to take the inventory and to control or supervise the taking of physical inventory

stores

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

pledged

the financial statements should disclose detail of any arrangements relating to ___ inventory in order to secure bank loans

replacement

the lower of cost or market rule involves comparing recorded cost of inventory items with their___ cost, subject to a celling and floor