Audit Chapter 12 - Inventories and COGS

Inventory turnover (as measured by cost of goods sold/ending inventory) went from 7.95 in 20X7 to 10.52 in 20X8. Which of the explanations is consistent with the change in inventory turnover?

A larger percentage of sales occurred during the last monthof 20X8, as compared to 20X7. is correct because a larger percentage of sales in the last month is likely toresult in a lower ending inventory, thus increasing the inventory turnoverratio since the denominator of the fraction becomes smaller.

_____considering information about the client and its environment, the auditors must assess the risks of material misstatement related to assertions about inventory.

After First, auditors must obtain an understanding about internal control; after this, they can assess the related risk of material misstatement.

What type of audit procedure is it? The auditor calculated the accounts receivable turnover for the year.

Analytical procedure

What type of audit procedure is it? The auditor asked the warehouse manager about whether certain inventory items were becoming obsolete.

Inquiry

When I take test counts of items, does this eliminate the need for Jilco Inc. personnel to count those items?

No, Jilco Inc. must perform the count.

Must I document all my test counts in the working papers?

No, although enough counts must be recorded to allow a reviewer to in essence determine whether a proper count has been taken, not every count need be recorded.

Net income increased in 20X8. Which of the explanations is most consistent with the changes in net income?

The percentage of tax included in the provision for incometaxes for 20X8 is less than the percentage used in 20X7. is correct because the only reason net income increased was the decreases inthe provision for income taxes.

What is the control, given the substantive procedure: Observation of inventory and collection of cut-off information that is traced to accounting records.

Use of prenumbered receiving reports and controls to insure adequate cut-off of purchases and payables.

Is it safe to assume that any inventory items present as "consigned in" should not be included in the client's inventory?

Yes, inventory "consigned in" is owned by the company that supplied the goods.

Gold Miner, Inc., has gold mines in a number of states. To hedge the price of its gold inventory, Gold Miner purchases gold futures contracts. The fair value of gold has declined significantly in the last few months (a) Inherent risk factor & (b) effect of IRF on company's net income?

a. complexity b. overstatement

Even though the auditors are unable to obtain evidence regarding the fairness of beginning inventories, they may still issue an unmodified opinion on the client's __________ .

balance sheet

Levels of authority in the manufacturing process need to be clearly __________.

communicated In order for the manufacturing process to be effective and efficient, the levels of authority and responsibility should be well defined and clearly communicated.

Inventories stored in public warehouses should be __________ with the custodians.

confirmed

Fraud or error: Intentional misstatement of inventory prices

fraud

Fraud or error: Intentional recording of purchases in the subsequent period

fraud

If purchasing employees are _______, they may negotiate bad purchases or purchase terms for the company.

incomepetent

When auditing inventory and COGS, auditors selection of the most appropriate procedures for an audit will be guided by the nature of ________ _________. However, they usually following the same general pattern of work.

internal controls

The risk of obsolescence is often considered to be a significant risk when auditing _________.

inventory

If purchasing agents accept _______, the entire purchasing cycle is compromised.

kickbacks When purchasing agents accept kickbacks from suppliers, the company's purchasing process is compromised and unfavorable.

A commitment to competence with respect to plant personnel is important to ensure that the ______ process is both effective and efficient.

manufactoring

Inventories with a high risk of ______may be warranted as a signficant risk.

obsolescence

see ch12 question #2

question#2

What is the control, given the substantive procedure: Price tests of a sample of inventory items.

Effective audit committee and internal audit department to monitor management's override of internal controls.

Serially numbered ____________ should be prepared and sent to vendors when goods are ordered.

purchase orders

Audit procedures for consignment inventory could include a comparison of the physical inventory with the client's _________.

records A good step in auditing consignment inventory is comparing the physical quantity on hand with the client's records of consigned goods.

The auditors observe the inventory taking primarily to obtain evidence of the __________ assertion and to a certain extent the client's rights to the inventories.

existence

Fraud or error: intentional misstatement of inventory production costs

fraud

Fraud or error: items are stolen and no journal entry is recorded

fraud

Purchasing and cash disbursements can provide opportunity for ______ by employees.

fraud Because they entail high volume and activity, the purchasing and cash disbursement cycles provide opportunity for fraud by employees.

Purchasing and cash disbursements can provide lots of opportunity for ______ by employees.

fraud Because of so much volume and activity, the purchasing and cash disbursement cycles provide opportunity for fraud by employees.

What are the five steps of the audit process for inventory?

1) Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to inventories and COGS. 2) Obtain an understanding of internal control over inventories and COGS. 3) Assess the risks of material misstatement and design further audit procedures. 4) Perform tests of controls 5) Perform substantive audit procedures.

What type of audit procedure is it? During a site visit to a construction site, the auditor determined that all employees were wearing proper safety equipment.

Observation

What is the control, given the substantive procedure: Observation of inventory

Development of adequate inventory taking procedures and adequate supervision of physical inventory.

The gross profit percentage (gross profit/revenue) changed from .166 in 20X7 to .154 in 20X8. Which of the explanations is consistent with the change in gross profit percentage?

Increases in costs of purchases were not completely passedon to customers through higher selling prices. is correct because inability to pass on costs will decrease theprofit percentage.

What type of audit procedure is it? The auditor obtained a copy of the company's accounting manual and read the section on inventory to prepare for the physical inventory observation.

Inspection of records or documents

What type of audit procedure is it? During the physical inventory count, the auditor asked the client to open various boxes of inventory items so she was able to assess the quality of the item.

Inspection of tangible assets

Am I correct that our observation of the counting of the inventory primarily addresses the existence of inventory, and not the completeness of the count?

No, both existence and completeness are addressed.

Should Jilco's inventory be valued at the lower of standard cost or market?

No, inventory should be valued at the lower of cost or market, not standard cost.

Jilco Inc. has inventory at many locations. Do we need to be present for the count at all locations?

No, ordinarily, locations may be sampled.

Do I need to count all items in the inventory?

No, the auditor may sample items.

At the completion of the count, should I leave Jilco Inc. personnel with a copy of all my inventory test counts to help assure inventory accuracy?

No, the client should not know every test count taken, thus reducing the possibility of manipulation of items not counted.

At the completion of the count, should I leave Jilco Inc. personnel with a copy of all my inventory test counts to help assure inventory accuracy?

No, the client should not know every test count taken, thus reducing thepossibility of manipulation of items not counted.

What type of audit procedure is it? The auditing firm's computer-assisted audit specialist obtained an electronic inventory file from the company and checked the accuracy of the extensions and footings.

Recalculation

What type of audit procedure is it? The auditor obtained a purchase order from the purchase order file and compared it to the authorized supplier list to determine that the related goods had been purchased from an approved supplier.

Reperformance

Is it correct that, because Jilco Inc. manufactures a product, direct labor and overhead ordinarily become a part of inventory costs?

Yes, raw materials are also included.

With strong internal control, may Jilco Inc.'s inventory count be performed during the year rather than at year-end?

Yes, strong internal control may create a situation in which the count may be taken prior to year end and updated as necessary.

Joe's Computers provides three-year money-back warranties on all laptops. During year 1, warranty claims decreased significantly and the company has not reduced the warranty reserve. (a) Inherent risk factor & (b) effect of IRF on company's net income?

a. estimates b. understatement

Global Co. imports most of its products from a foreign supplier. During year 1, a new technology made part of the Global Co. inventory obsolete. (a) Inherent risk factor & (b) effect of IRF on company's net income?

a. industry circumstance b. overstatement

Metal, Inc., supplies copper pipes to home builders. During year 1, copper prices doubled. At any given time, a significant amount of inventory is in transit or located at job sites. (a) Inherent risk factor & (b) effect of IRF on company's net income?

a. susceptibility of asset theft b. overstatment

Sales orders for a textbook distributor have increased 100% over the last year. Additionally, the company's inventory turnover has doubled since the previous year. (a) Inherent risk factor & (b) effect of IRF on company's net income?

a. volume b. overstatement

Tests used to help identify the _____of controls help to evaluate the client's internal control structure.

effectiveness Controls need to be effective to be valuable

Fraud or error: erroneous pricing of inventory

error

Tracing __________ for several days before and after year-end to recorded purchases is designed to test the proper cutoff of purchase transactions.

receiving documentsselected