Exam 2 Chapter 12

Replacement

The lower-of-cost-or-market rule involves comparing recorded cost of inventory items with their ___________ cost, subject to a ceiling and floor

Purchases

The controls that assure the fair valuation of inventory are found in _______ and production cycles.

Standard

Many companies have established __________ cost systems that help identify the causes of ineffectiveness and waste through a study of variances between actual and standard costs.

Competence

A commitment to _________ with respect to plant personnel is important to ensure that the manufacturing process is efficient and effective and that prescribed control activities are being performed.

Purchasing

A contractual obligation to buy goods at fixed prices, entered into well in advance of scheduled delivery dates is a(n) ________ commitment.

The possibility of obsolete inventories

A decreasing rate of inventory turnover suggests:

Stores

A prenumbered requisition for all items passing out of its hands should be required by the _________ department to serve as a signed receipt from the department accepting the goods.

Purchase requisition

A purchase transaction begins with the:

Inherent

Auditors use the understanding of the client and its environment to consider ______ risks, including fraud risks, related to inventories and cost of goods sold.

Reviewing the predecessor firm's working papers

In a first-year audit, the auditors may be able to obtain evidence that the beginning inventories are fairly stated by:

Producing and disposing

Internal controls for inventories affect nearly all the functions involved in ______ of the company's product.

Management's

It is the _______ responsibility to take the inventory and to control or supervise the taking of physical inventory.

Master production

Overall production should be controlled by a ________ schedule that presents the gross production needs for a particular period.

Backlog of unfulfilled

Sales commitments are indicated by the client's ________ sales orders.

Observation of physical inventories

The McKesson & Robbins fraud case (1939) resulted in the first formal auditing standards issued by the AICPA, which affirmed the importance of the auditors':

Production order

The document that authorizes the production of specific products is the:

Management

The risk of material misstatement of the financial statements is reduced when _____________ evaluates and manages the risk related to purchasing and producing goods and services.

Perpetual

The use of a(n) ____________ inventory system allows companies to control the high cost of holding excessive inventory while minimizing the risk of running out of stock.

Internal controls

To assess the risk of material misstatement related to assertions about inventories and cost of goods sold, the auditors should consider the relationship between specific misstatements and:

Cost per unit to sales prices or net realizable values

To help identify overvalued inventory items, auditors may compare:

False

True or false: Auditors must observe physical inventories on the balance sheet date:

True

True or false: Auditors often test 100% of the transactions related to direct labor and direct materials charged to production jobs.

False. Recounts are done by client employees, not external auditors.

True or false: During a physical inventory count, test counts made by the auditors indicated discrepancies. Based on this, the external auditors should have immediately recounted the goods affected.

FALSE

True or false: an IT-based inventory system eliminates the need for normal segregation of duties in the purchasing, receiving, storing, processing, and shipping functions.

False

True or false: job time tickets are only used to accumulate the direct labor hours spent on production job.

Must determine if controls are implemented May not rely solely on analytical procedures to address the risk

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(n)

Pledging

When bank balances and indebtedness are confirmed, the ______ of inventories to secure bank loans may be brought to light.

General ledger

When performing substantive procedures, the auditors will obtain a schedule of listings of inventories that will be reconciled to the ______ ______.

Receiving

Without exception, all goods received by a company should be cleared through an independent ________ department

Consider if a specialist is needed Determine the date of the counts Estimate the time required

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

Not inform the client of the specific locations in advance.

In planning for inventory counts where only some of the client's locations will be observed, the auditors should:

Suspending production Use of inventory tags Date selection and production

In planning the physical inventory, the client should consider factors such as:

Overstatement

If management is inclined to engage in fraudulent financial reporting, the fraud will likely involve _______ of inventory.

Internal control

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

Misplaced decimal points Incorrect extension of count units by price units

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

Use the understanding of the client and its environment to consider inherent risks, including fraud risks Obtain an understanding of internal control Assess the risks of material misstatement and design further audit procedures Perform tests of controls Perform substantive procedures

Steps of auditing inventories and cost of goods sold:

Liability

The effect on the financial statements of failing to include a year-end in-transit purchase as part of physical inventory is often not a serious one, provided the related _______ is not recorded until the following period.

Change in methods

The financial statements should disclose ________ of valuing inventory, with the dollar effect and justification.

False

True or false: if a client changes methods of inventory pricing from one year to the next, the auditor will not be able to issue an unqualified opinion on the financial statements.

Factory overhead

A vital procedure in the audit of a manufacturing concern is determining that _________ cost allocations are reasonable.

Perpetual

Sampling techniques, occasional test counts and limited observations may sometimes be used to audit inventory when a client uses a(n) ________________ inventory system.

Client employees

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

Cost accounting records

Auditors will test the pricing of goods in process and finished goods by referencing:

Procedures for physical inventories include the use of pre-numbered tags with all tags accounted for A separate purchasing department is responsible for purchasing all materials Perpetual records are verified by physical inventories at least once per year

An understanding of internal controls over inventories and cost of goods sold can be determined by asking if: