Chapter # 12

Controlling and supervising the taking of physical inventory is the responsibility of _____________________

Management

Concern over changes in technology that affect manufacturing process is part of?

Management's Assessment of Risks (Risk Assessment)

Concern over the Obsolescence of inventory is part of?

Management's Assessment of Risks (Risk Assessment)

Concern over the availability of the supply of goods, services, and skilled labor is part of?

Management's Assessment of Risks (Risk Assessment)

Concern over the stability of the price of labor rates is part of?

Management's Assessment of Risks (Risk Assessment)

In obtaining an understanding of Internal control over inventories and cogs, the auditors should give consideration to the ____________ ___________ of inventories

Physical Protection

Evaluate financial statement presentation/disclosures relates to what assertions?

Presentation and Disclosure

A sales order approved by the credit department is an example of what?

Proper shipment authorization

Which department is responsible for creating the purchase order

Purchasing

Which department is responsible for the detection of damaged or defective merchandise?

Receiving

Which department is responsible for the determination of quantities of goods received?

Receiving

Which department is responsible for the preparation of the receiving report?

Receiving

Purchase Commitment

a contractual obligation to purchase goods at fixed prices, entered into well in advance of scheduled delivery dates.

What types of shipments should shipping routines be established for?

ALL SHIPMENTS

What departments should copies of the purchase order be sent to?

Accounting and Receiving departments

Observing the taking of the physical inventory relates to what assertions?

Completeness

Outcome of Mckesson V Robinson

Observation is required of auditors

When should the shipment of goods take place?

Only after proper authorization has been received

The use of ____________________ Inventory System allows cost control, while minimizing the risks of low stock.

Perpetual

Material Requisitions/Move Tickets

document the flow of goods and related responsibility as they progress through the production process.

a clients purchasing system may be linked to the systems of its suppliers allowing ____________________________

electronic data interchange (EDI)

Lower of Cost or Market Test.

used in US GAAP to measure any loss of utility in inventories.

____________________ inventory system shows at all times the quantity of goods on hand.

Perpetual

Fraud Related to Inventory Costs

-Intentional misstatement of production costs assigned to inventory -Intentional misstatement of inventory prices

Fraud Related to Cutoff of Inventory

-Intentional recording of purchases in the subsequent period

Fraud Related to Inventory Quantities

-Items are stolen with no journal entry reflecting the theft -Inventory quantities in locations not visited by auditors are systematically overstated

Errors Relating to Inventory Quantities

-Miscounting of inventory by personnel involved in physical inventory

Errors Related to Cutoff of Inventory

-Recording purchases of the current period in the subsequent period

Errors Related to Inventory Costs

-The assignment of direct labor costs, direct material costs, or factory overhead to inventory items is inaccurate -Erroneous Pricing of Inventory

purchase requisition

-first document in a purchase transaction. -Should include a description of the type and quantity of goods and services desired. -created by the stores department or another department needing goods or services. -A copy is sent to the purchasing department to provide a basis for preparing the purchase order.

3 Standards for large organizations to issue a purchase order:

1. Determining the need for the item 2. Obtaining competitive bids 3. Obtaining approval of the financial aspect of the commitment

The three/four copies of the shipping document are sent where?

1. Retained in the shipping department for proof of shipment 2. Sent to the billing department along with the purchase order and the sales order to be used as a basis for invoicing the customer. 3. Enclosed as a packing slip with the goods when they are shipped 4. If using a common carrier, a bill of lading is provided to the carrier (EX: UPS, FEDEX)

3 Questions to evaluate the methods of inventory pricing

1. What method of pricing does the client use? 2.Is the method of pricing the same as that used in prior years? 3. Has the method selected by the client been applied consistently and accurately in practice?

Bar codes, RFID Tags, serially numbered tags all:

1. prevent accidental omission of goods from the count 2. prevent the double counting of goods

Sales Commitment

A contractual obligation to sell goods at fixed prices, entered into well in advance of scheduled delivery dates.

The shipping department or a computer system will generate what?

A prenumbered shipping document indicating that the goods have shipped.

Auditors ____________ procedures for inventory transactions often will include a comparison of the volume of purchase transactions from period to period.

Analytical

Analyzing changes in Gross profit percentage and inventory turnover are examples of:

Analytical Procedures

Using prenumbered requisitions, purchase orders, and receiving reports and account for the sequence of documents relates to what assertions?

Completeness, Cutoff

Using perpetual records to control inventories relates to what assertions?

Completeness, Existence/Occurrence, Cutoff, Presentation/Disclosure, Valuation/Accuracy

Commitment to attain, attract, and retain competent employees is part of?

Control Environment relating to COGS/Inventory

Integrity and Ethical Values is part of?

Control Environment relating to COGS/Inventory

Organizational Structure and the assignment of authority and responsibility is part of?

Control Environment relating to COGS/Inventory

The system that comprises all the records, orders, and requisitions needed for proper accounting for the disposition of materials as they enter the flow of production and as they continue through the factory in the process of becoming finished goods is?

Cost Accounting

Functions of the Stores Department

Counting, inspecting, and receipting for goods. Notifying the accounting department of the amount of goods received and placed in stock.

Obtaining a copy of the completed physical inventory and test its accuracy relates to what assertions?

Cutoff

_______________ Inventory Records discourage inventory theft.

Perpetual

How can auditors determine that liability to suppliers has been recorded for all goods included in inventory?

Examine on a test basis the purchase invoices and receiving reports for several days before and after the inventory date.

An accurate cutoff of purchases is one of the most important factors in verifying the ___________ and ___________ of the year-end inventory.

Existence and Completeness

Evaluating the client's planning of physical inventory relates to what assertions?

Existence, Occurrence, Rights

Obtaining listings of inventory and reconcile to ledgers relates to what assertions?

Existence, Occurrence, and Rights.

Analyze and follow up on variances from standard costs relates to what assertions?

Existence/Occurrence, Complete ess, Valuation/Accuracy

Using appropriate procedures for taking physical inventory relates to what assertions?

Existence/Occurrence, Completeness, Cutoff, Valuation/Accuracy, Rights/Obligations

Segregate Duties over purchases and custody of inventories relates to what assertions?

Existence/Occurrence, Completeness, Rights and Obligations, Valuation and Accuracy

Establishing appropriate procedures for taking the physical inventory relates to what assertions?

Existence/Occurrence, Rights/Obligations

Establish procedures for authorizing purchase transactions, reconciling purchase invoices to purchase orders and receiving reports, and verifying the clerical accuracy of purchase inventories relates to what assertions?

Existence/Occurrence, Rights/Obligations, Valuation/Accuracy

Establish general ledger control of inventories of raw materials, goods in process, and finished goods, and periodically reconcile to production records relates to what assertions?

Existence/Occurrence, Rights/Obligations, Valuation/Accuracy, Presentation/Disclosure

Performing Analytical Procedures relates to what assertions?

Existence/Rights, Completeness, Valuation, Accuracy

Responsibility for all goods in production is fixed on whom?

Factory Supervisors or Superintendents

Figures produced by the cost accounting system are controlled by?

General Ledger Accounts

The ____________ can automatically generate purchase requirements and orders when inventory levels reach predetermined reorder points.

IT System

Issuing Function

Issues requisitions for all items passing out of the stores department.

Considering the ability to generate sufficient cash flows to pay for purchases is part of?

Management's Assessment of Risks (Risk Assessment)

Adjustments to achieve an accurate cutoff of purchases is made by __________________ and should be reviewed by ______________________.

Managements staff, The Auditors

Overall production is controlled with a ___________________________

Master Production Schedule

Observations by production supervisors of the performance of various activities, functions, quality and performance reviews are what type of control?

Monitoring Control (Manufacturing Cycle)

Management review of reports of purchases from suppliers, inventory on hand, and accounts payable balance are all what type of control?

Monitoring control (Purchasing Cycle)

As a general rule, inventories should not be carried in excess of ___________________________

Net Realizable Value

Excessive ____________ or ___________ on raw materials may indicate obsolescence. Such items should be segregated and written down at NRV.

Rust and Dust

_____________________ ______________ is indicated by the client's backlog of unfilled sales orders.

Sales Commitments

Determining the dates of the test counts, the extent of the counts, the need for client assistance, the number of auditors needed at each location, and the estimated time required are all responsibilities of the _____________________

Senior Auditor In-Charge

Inspecting the inventory to determine its existence and evaluate its condition and to make test counts is whos responsibility?

The Auditor

Observing compliance with management's instructions for the count is whos responsibility?

The Auditor

Observing the taking of inventory is the responsibility of ________________

The Auditor

Obtaining audit evidence about the reliability of the count procedures is whos responsibility?

The Auditor

Does Strong internal control come from having a separate departments with exclusive authority to make all purchases of goods and services.?

YES

Should purchasing, receiving, and recording be separated to different departments?

YES

Evaluate the bases and methods of inventory pricing relates to what assertions?

Valuation

Reviewing the year-end cutoff of purchase and sales transactions relates to what assertions?

Valuation

Test the pricing of inventories relates to what assertions?

Valuation, Accuracy

Determine whether any inventories have been pledged and review commitments relate to what assertions?

Valuation, Presentation/Disclosure

Establish controls for the cost accounting system that accumulate appropriate inventory costs on a job order or process cost basis, such as independent review of cost accumulations relates to what assertions?.

Valuation/Accuracy

Should scrapped materials be inventoried?

Yes, if they have substantial salvage value.

Outside inventory-taking firms

are not sufficient appropriate audit evidence by themselves.

Production orders

authorize the production of specific products

Auditors will insist physical inventory be taken at the ___________ ________ date

balance sheet

Auditors will record the serial number of the __________ shipping and receiving documents issued before taking inventory so that cutoff can be determined.

final

Job time tickets

prepared to document the labor or machine hours devoted to a particular production job. Each job time ticket should be reviewed and approved by the department supervisor before entering the cost accounting system.

Master Production Schedule

presents the gross productions needs for a particular period