CH 13
The observation of the physical inventory is the primary audit step used to verify the _____ assertion.
existence
The observation of physical inventory provides evidence on the ______ assertions. existence valuation cutoff accuracy
existence valuation accuracy
The document that authorizes the release of raw materials from the raw materials department is the _____ ______.
material requisition
The observation of inventory _____. may be done by the internal auditor is not required to be done by an auditor must be done by the external auditor only
may be done by the internal auditor
Inventory is often difficult to audit, and its valuation _____. may result in disagreements with the entity depends on auditor knowledge of the industry is straightforward
may result in disagreements with the entity
With respect to the valuation assertion for inventory, the auditor must consider _____. classification obsolete inventory costs or standard costs lower-of-cost-or-market perpetual inventory
obsolete inventory costs or standard costs lower-of-cost-or-market
With respect to the ______ assertion, the auditor should also be concerned that goods may be stolen. authorization occurrence completeness accuracy
occurrence
To prevent theft, the entity should maintain ______ over inventory that are consistent with the susceptibility and value of the goods. physical safeguards periodic records standard costs just-in-time policies
physical safeguards
From an auditing perspective for the manufacturing area, there must be adequate control over the _____ flow of the goods and proper accumulation of the costs attached to _____.
physical, inventory
The auditor should document the achieved level of control risk using either _____ amounts or _____ terms.
quantitative, qualitative
The most complex or troublesome area(s) of inventory auditing include _____. lower-of-cost-or-market assigning costs obsolescence quantity of inventory
lower-of-cost-or-market assigning costs obsolescence
The judgment process followed for setting control risk in the inventory management process is ______ the process used with other processes. the same as different from
the same as
Possible reasons for book-to-physical differences in inventory include _____. theft failure to adjust to fair market value cutoff errors unreported spoilage
theft cutoff errors unreported spoilage
When the auditor follows a(n) _____ strategy when auditing inventory, (s)he places no reliance on the control activities in the inventory management process and sets the level of control risk at the maximum.
substantive
Once the controls in the inventory system have been tested, the auditor sets the level of _____ risk.
control
The auditor can examine a sample of receiving documents for a few days before and after year-end for recording of inventory to test the _____ assertion. occurrence accuracy completeness cutoff
cutoff
The auditor obtains information regarding ______ by observing inventory items in the entity's warehouse and understanding and testing the entity's count procedures addressing validity, and through the auditor's test counts. accuracy completeness cutoff existence
existence
When an entity purchases inventory, _____ of the inventory can normally be accomplished by vouching the costs to vendors' invoices.
valuation
The results of inventory processing in terms of actual costs versus standard or budgeted costs is presented in a(n) _____ report.
variance
True or false: Segregation of duties is a particularly important control in the inventory management process because of the potential for product costing errors.
False
The quantity of goods needed and the time at which goods must be ready in order to meet demand is determined on the ______ _____.
production schedule
Typically, the control activities for the completeness assertion over inventory are contained within the _____ process. human resource management purchasing asset revenue
purchasing
The inventory management process is affected by the control activities previously discussed for the _____ processes. long-term liabilities long-term assets purchasing revenue human resource management
purchasing revenue human resource management
Substantive analytical procedures are useful for _____. identifying problems with overhead costs examining the reasonableness of inventory determining the physical inventory on hand identifying obsolete inventory
identifying problems with overhead costs examining the reasonableness of inventory identifying obsolete inventory
The auditor is _____. not required to observe inventory required to observe all inventory required to observe inventory that is material
required to observe inventory that is material
The auditor can examine the costs included in _____ to be sure that such costs can be appropriately assigned to the product.
overhead
The auditor needs to be sure that the raw materials store _____. records pilferage of inventory authorizes receiving reports safeguards the assets prepares materials requisitions
safeguards the assets
A copy of the _____ _____ is used to remove goods from the entity's perpetual inventory records.
shipping order
Usually, the finished goods inventory master file is updated when a receiving report is processed or when a ______ is generated. inventory status report production schedule shipping order materials requisition
shipping order
For accuracy and proper valuation, _____ costs should approximate actual costs.
standards
To ensure accuracy, inventory management personnel should periodically review inventory on hand for _____ inventory. high-value obsolete excess specialized slow-moving
obsolete excess slow-moving
True or false: In most manufacturing companies, proper valuation can be achieved by determining which manufacturing processing department has control of the inventory on the date of the physical count.
False (Proper classification, not valuation can be achieved.)
The production schedule provides the auditor _____. information on the planned level of operating activity details on the control activities in the production process knowledge of stock outs the exact level of inventory at all times
information on the planned level of operating activity
All the important information related to the entity's inventory, including the perpetual inventory records is contained in the _____ _____ file.
inventory master
In a manufacturing company, the _____ _____ file usually contains the standard costs used to value the inventory at various stages of production.
inventory master
A procedure to provide assurance over accuracy of inventory is _____. observing physical safeguards over inventory reviewing the entity's procedures for identifying excess inventory reviewing authorized production schedules observing proper segregation of duties
reviewing the entity's procedures for identifying excess inventory
The auditor must be sure that the inventory on hand belongs to the entity to satisfy the ______ assertion. valuation and allocation completeness accuracy rights and obligations
rights and obligations
Important disclosure issues related to inventory include _____. the value of stockouts the production schedule LIFO liquidation the components of inventory the cost method used for valuation
LIFO liquidation the components of inventory the cost method used for valuation
The inventory compilation is footed, and the mathematical extensions of quantity multiplied by price are verified to test the _____ assertion. accuracy cutoff occurrence completeness
accuracy
The inventory compilation is footed, and the mathematical extensions of quantity multiplied by price are verified. Additionally, test counts made by the auditor during the physical inventory and tag control information are traced into the compilation to test the ____ assertion.
accuracy
From an auditing perspective for the manufacturing area, there must be _____. shipping orders for all finished goods that are shipped receiving reports for all raw materials inventory adequate control over the physical flow of the goods proper accumulation of the costs attached to inventory
adequate control over the physical flow of the goods proper accumulation of the costs attached to inventory
Controls over the aggregation or disaggregation of transactions are important to properly _____. value ending finished goods inventory calculate the cost of inventory sold during the period allocate costs to appropriate classes of inventory
allocate costs to appropriate classes of inventory
The auditor's concern with _____ in the inventory system is that purchase or production activities could occur that may lead to excess levels of certain types of finished goods. occurrence authorization accuracy completeness
authorization
Accuracy is important assertion because inventory transactions that are not properly recorded result in misstatements that directly affect _____. both cost of goods sold and inventory all financial statement accounts inventory only cost of goods sold only
both cost of goods sold and inventory
Failure to record inventory in the proper period can result in misstatements on the _____. income statement only balance sheet and income statement statement of cash flows only balance sheet only
balance sheet and income statement
An important assertion for a manufacturer, but not for a merchandiser is _____.
classification
Determining the quantity of inventory on hand is usually _____ complex when compared to assigning costs to value inventory. More Less Equally
less
The cost accumulation report aggregates _____. direct labor direct materials production variances manufacturing overhead
direct labor direct materials manufacturing overhead
A common control to ensure inventory disclosures are complete, relevant, and understandable is a(n) _____ _____
disclosure checklist
During the observation of the physical inventory count, the auditor should _____. ensure that no production is scheduled make sure that the entity's count teams are following the inventory count instructions ensure that there is no movement of goods during the inventory count vouch a sample of inventory additions to receiving reports and purchase requisitions
ensure that no production is scheduled make sure that the entity's count teams are following the inventory count instructions ensure that there is no movement of goods during the inventory count
Ensuring that all inventory and costs of production are properly accumulated, classified, and summarized in accounts is the main objective of the _____ _____ function.
general ledger
Reconciliation of the perpetual inventory records to the inventory accounts is an important control performed by the _____ _____ function.
general ledger
If the auditor follows a substantive strategy when auditing inventory, the auditor places _____ on the control activities in the inventory management process and sets the level of control risk at the _____. reliance; minimum reliance; maximum no reliance; minimum no reliance; maximum
no reliance; maximum
Changes in technology or a drop in customer demand may result in a material misstatement in inventory due to _____.
obsolescence
During the observation of the physical inventory count, the auditor should _____. perform test counts and record a sample of counts in the working papers trace a sample of receiving reports to the inventory records ensure inventory tags are issued sequentially to departments observe the condition of the inventory
perform test counts and record a sample of counts in the working papers ensure inventory tags are issued sequentially to departments observe the condition of the inventory
The accurate processing of inventory transactions involves _____. removing the actual number of items shipped from inventory using a perpetual inventory system authorizing purchases by the purchasing department applying the correct price to the actual quantity received recording the proper cost to cost of goods sold
removing the actual number of items shipped from inventory applying the correct price to the actual quantity received recording the proper cost to cost of goods sold
For accuracy and proper valuation, standard costs should approximate _____. costs at capacity actual costs prior year costs efficient production costs
actual costs
The auditor gathers evidence regarding overhead costs by reviewing the entity's method of overhead allocation for _____. reasonableness cost driver linkages compliance with GAAP consistency ease of application
reasonableness compliance with GAAP consistency
When products are completed by the manufacturing function, they are transferred to _____ _____ stores.
finished goods
Determining the materials cost requires examining the_____ of materials included in the product. order size type price quantity
type price quantity
Engagement and operating characteristics that are important to the assessment of inherent risk for inventory include ______. type of product sold related party transactions for inventory purchases difficulty with valuation drop in customer demand for product industry competition
type of product sold related party transactions for inventory purchases difficulty with valuation
In order to set the control risk for the inventory management process, the auditor will need a thorough understanding of the process used by the entity to _____. handle inventory returns value inventory manufacture goods prepare purchase requisitions
value inventory
Audit research has shown there is a relatively ______ risk that inventory contains material misstatements. high low
high
If the entity holds inventory on _____, such inventory should not be included in the physical inventory.
consignment
True or false: In general, prior year misstatements of inventory are not indicative of potential misstatements in the current year
False
True or false: Observing that count teams have placed count tags on all inventory items provides evidence regarding the cutoff assertion.
False
If the results of tests of controls for the inventory system do not support the planned level of control risk, the auditor sets _____ risk higher and _____ risk lower, leading to increased _____ procedures
control, detection, substantive
Industry factors that may indicate the presence of material misstatements in inventory include _____. changes in technology new control system in warehouse intense competition drop in customer demand turnover of key personnel
changes in technology intense competition drop in customer demand
Control activities to ensure that inventory is recorded as raw materials, work in process or finished goods is important for the _____ assertion.
classification
In most manufacturing companies, proper _____ can be achieved by determining which manufacturing processing department has control of the inventory on the date of the physical count.
classification
The control activities for the _____ assertion relate to recording inventory that has been received.
completeness
Important disclosure issues related to inventory include _____. consigned inventory related party purchases ordinary write-downs due to damage or obsolescence long-term purchase contracts
consigned inventory related party purchases long-term purchase contracts
The tests related to the observation of the physical inventory count provide assurance that all goods on hand are included in inventory, which is the _____ assertion. cutoff completeness accuracy existence
completeness
In gathering evidence on the _____ assertion for inventory, the auditor attempts to determine whether all sales of finished goods and purchases of raw materials are recorded in the proper period.
cuttoff
The cycle for inventory begins when goods are purchased and stored and ends when the _____. finished goods are shipped to customers raw materials have been purchased and inventory finished goods are stored in the warehouse work in process is complete
finished goods are shipped to customers
When an order is placed by a customer, a shipping order is produced by the revenue process and forwarded to the _____ _____ _____ department.
finished goods stores
Individuals involved in the inventory management and inventory stores functions should not have access to _____. general ledger the warehouse cost accounting records inventory records
general ledger cost accounting records inventory records
If the entity uses IT for monitoring the flow of goods and accumulating costs, the auditor will need to evaluate both the _____ IT controls and the inventory _____ controls.
general, application
Valuable evidence on unrecorded inventory or fictitious inventory may be provided by comparing the current _____ _____ percentage to previous years or industry data.
gross profit
During the observation of the physical inventory count, the auditor should ____. obtain tag control information for testing inventory compilation ensure that bill-and-hold items are included in the inventory count inquire about goods held on consignment
obtain tag control information for testing inventory compilation inquire about goods held on consignment
With respect to _____ of inventory, the major control activity for preventing fictitious inventory transactions from being recorded is proper segregation of duties.
occurrence
Excess levels of finished goods can become obsolete, which can result in ending inventory being _____. understated overstated
overstated
If items are recorded as sold in the incorrect period, revenue, cost of goods sold and receivables will be ______ and inventory will be ______ for that period. overstated, understated correctly stated, understated overstated, correctly stated understated, overstated
overstated, understated
rue or false: Labor costs included in inventory are often tested in conjunction with payroll expense.
True
The pattern of a significant _____ in inventory coupled with a substantially _____ inventory turnover may indicate the presence of obsolete inventory. increase; slower decrease; faster decrease; slower increase; faster
increase; slower
The type and amount of product on hand is shown on the _____ _____ report.
inventory status
The inventory status report _____. summarizes the variances in terms of actual costs versus standard or budgeted costs is basically a summary of the perpetual inventory records contains all the important information related to the entity's inventory can be used to determine the status of goods in process
is basically a summary of the perpetual inventory records can be used to determine the status of goods in process
The determination of labor costs requires evidence about the type and amount of labor needed for production and the _____. union agreement labor utilization labor hours labor rate
labor rate
If the likely misstatement is _____ the tolerable misstatement, the auditor may accept the inventory account as _____. less than; fairly presented less than; not fairly presented greater than; fairly presented
less than; fairly presented
The quantity and type of materials for production are tested by reviewing _____. material lists invoices from vendors engineering specifications blueprints
material lists engineering specifications blueprints
To release raw materials from the raw materials department, personnel prepare a: materials requisition cost accumulation report shipping order receiving report
materials requisition
The intended purpose of substantive tests of transactions is to detect monetary _____ in the inventory account.
misstatements
When performed as part of audit planning, _____ can effectively identify whether the inventory and cost of goods sold accounts contain material misstatements. tests of details of transactions preliminary analytical procedures tests of details of account balances control testing
preliminary analytical procedures
Auditor's tests of controls around management's use of a chart of accounts, proper codes for recording inventory transactions and the financial reporting process should provide adequate assurance for the _____ assertion.
presentation
When goods are requested for production through the issuance of a materials requisition, the _____ _____ _____ function issues the goods to the appropriate manufacturing department.
raw materials stores
A copy of the ______ accompanies the goods to the inventory department and is used to update the entity's perpetual inventory records. materials requisition production schedule shipping order receiving report
receiving report
Because the inventory management process interacts with the _____ processes, transactions involving the receipt of goods, shipment of goods, and assignment of labor costs are normally tested as part of those processes. revenue purchasing asset acquisition human resource management
revenue purchasing human resource management