Chapter 13 Review Questions – Flashcards
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Why does inventory represent one of the more complex parts of the audit?
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How does the inventory management process relate to the revenue, purchasing, and payroll process?
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Production Schedule
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Is used to determine the quantity of goods needed and the time at which they are required to meet the production scheduling.
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Materials Requisition
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Is the document that authorizes the release of raw materials from the raw materials department
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Inventory Master File
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Contains all the important information related the entity's inventory including the perpetual inventory records for raw material , work in process, and finished goods.
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Production Data Information
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Is reported about the transfer of goods and related cost accumulation at each stage of production.
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Cost Accumulation and Variance Report
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Summarizes the various cost charged to departments and products and presents the results of inventory processing in terms of actual costs versus standard or budgeted costs.
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What duties are performed within the inventory management, stores, and cost-accounting functions?
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List the key segregation of duties in the inventory management process.
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What errors or fraud can occur if such segregation of duties is not present?
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List the inherent risk factors that affect the inventory management process.
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List the major steps in setting control risk in the inventory management process.
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1-understand and document the inventory internal control system based on the planned level of control risk
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The three major steps in assessing control risk in the inventory process are:
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2-plan and perform test of controls on inventory process transactions.
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The three major steps in assessing control risk in the inventory process are:
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3-assess and document control risk for the inventory process
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What control activities can a client use to prevent unauthorized inventory production?
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-preparation and review of an authorized production schedule -use of material requirements planning and/or just in time inventory systems -review of inventory levels by the inventory management department.
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List three substantive analytical procedures that can test the fairness of inventory and related accounts.
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Describe how an auditor audits standard costs.
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List the procedures the auditor should perform during the account of the client's physical inventory.
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What are some possible causes of book-to-physical inventory differences?
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-inventory cutoff errors - unreported scrap or spoilage -pilferage or theft
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List five items for inventory and related accounts that may require disclosure.
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The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that...
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Custody of work in process and finished goods is properly maintained.
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Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions?
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Inventory manager doesn't have ability to record inventory transactions.
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Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory?
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Independent comparisons of finished goods records with counts of goods on hand.
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Independent internal verification of inventory(i.e. proper segregation of duties) occurs when employees who
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Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.
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An auditor's tests of controls over the issuance of raw materials to production would most likely include
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Examination of materials requisitions and performance of client controls designed to process and record issuances.
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Which of the following internal control activities is most likely to address the completeness assertion for inventory?
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Receiving reports are pre-numbered and periodically reconciled.
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After accounting for a sequence of inventory tags, an auditor traces a samples of tags the physical inventory listing to obtain evidence that all items
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Represented by inventory tags are included in the listing.
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When auditing merchandise inventory at year- end, the auditor performs a purchase cutoff test to obtain evidence that
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All goods owned at year-end are included in the inventory balance.
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Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management's assertion of
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Valuation
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Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates?
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Perpetual inventory records are maintained.
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An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file?
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Economic re-order quantity.
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Which of the following audit procedures would probably provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventory?
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During the physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory account.
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Audit Procedure: review loan agreements and minutes of board of director's meeting.
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Specific assertion: ensure that entity has legal title to inventory(rights and obligations).
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Audit procedure: select a sample if items during the physical inventory count and determine that they have been included on count sheets.
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Specific Assertion: ensure that recorded inventory quantities include all products on hand(completeness)
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Audit procedure: examine current vendor price lists.
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Specific Assertion:verify that inventory has been reduced, when appropriate, to replacement cost or net realizable value(valuation)
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Audit procedure:select a sample of recorded items and examine supporting vendor invoices and contracts.
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Specific Assertion: verify that the cost of inventory has been properly determined(accuracy).
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Audit procedure:review drafts of the financial statements.
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Specific Assertion: verify that the major categories of inventory and their bases of valuation are adequately reported in the financial statements(completeness and accuracy and valuation for presentation and disclosure).
