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Chapter 13 - Auditing the Inventory Management Process

Chapter 13 Auditing the Inventory Management Process
True / False Questions

1. The "cradle-to-grave" cycle for inventory egins !hen goods are purchased and stored and ends !hen the finished goods are shipped to customers. True "alse

#. A receiving report records the shipment of goods to customers. True "alse

3. $ale of finished goods is a part of the inventory management process. True "alse

%. &nce the controls in the inventory system have een tested' the auditor sets the level of control ris(. True "alse

). The ma*or control procedure for preventing fictitious inventory transactions from eing recorded is proper segregation of duties. True "alse

+. Inventory should e valued using the lo!er-of-cost-or-mar(et rule. True "alse

,. A high inventory turnover ratio normally indicates inefficient inventory policies. True "alse

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Chapter 13 - Auditing the Inventory Management Process

-. The three components that ma(e up the cost of producing a product include materials' direct la or' and indirect la or. True "alse

.. The auditor/s o servation of inventory is a generally accepted auditing procedure. True "alse

10. & solete inventory should e !ritten do!n to its current mar(et value. True "alse

11. In the audit of inventory' the client is responsi le for actually ma(ing and recording the count of physical inventory1 the auditor/s responsi ility is to evaluate and o serve the client/s procedures and dra! conclusions a out the ade2uacy of the physical inventory. True "alse

1#. An approved purchase re2uisition form authori3es shipment of goods to customers. True "alse

13. A comparison of the current year/s inventory turnover ratio !ith previous years/ may indicate the presence of o solete inventory. True "alse

1%. 4hen the client/s perpetual inventory master files are inade2uate' the auditor !ill pro a ly choose to test the physical inventory prior to the alance sheet date. True "alse

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Chapter 13 - Auditing the Inventory Management Process

1). The audit test of control "5evie! and test procedures for issuing materials to manufacturing departments" provides assurance mainly for the occurrence assertion for inventory management. True "alse

1+. Production personnel should ordinarily e responsi le for maintaining perpetual inventory records. True "alse

1,. Inherent ris( is typically assessed at a lo! to moderate level for inventory due to the nature of the asset. True "alse

Multiple Choice Questions

1-. $hipping orders are for!arded from the revenue process to A. The materials re2uisitions department 6. "inished goods stores C. 5a! materials stores 7. Inventory management

1.. 4hich of the follo!ing departments typically approves purchase re2uisitions8 A. 5a! materials stores 6. Cost accounting C. Inventory management 7. IT

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Chapter 13 - Auditing the Inventory Management Process

#0. 4hich of the follo!ing est descri es the occurrence assertion for inventory8 A. Purchase re2uisitions initiated y authori3ed personnel 6. 5ecorded inventory actually e9ists C. Inventory properly accumulated from *ournals and ledgers 7. All inventory is recorded

#1. Auditors are most li(ely to ensure that no production activity is scheduled prior to A. 7etermining standard costs 6. & serving physical inventory C. Completing the oo( to physical ad*ustment 7. 7etermining the amount of consigned inventory

##. The safeguarding of inventory most li(ely includes A. Comparison of the information contained on the purchase re2uisitions' purchase orders' receiving reports' and vendors/ invoices 6. Periodic reconciliation of detailed inventory records !ith the actual inventory on hand y ta(ing a physical count C. Analytical procedures for ra! materials' goods in process' and finished goods that identify unusual transactions' theft and o solescence 7. Application of esta lished overhead rates on the asis of direct la or hours or direct la or costs

#3. 4hich of the follo!ing is not a misstatement related to the occurrence assertion for inventory8 A. Consigned goods are included as part of inventory 6. :nauthori3ed production activity C. "ictitious inventory 7. 5ecorded inventory is not on hand ecause of theft

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Chapter 13 - Auditing the Inventory Management Process

#%. "ailure to record inventory in the proper period can affect all of the follo!ing accounts e9cept A. $ales 6. 5eceiva les C. Cost of ;oods $old 7. Prepaid <9penses

#). 4hich of the follo!ing audit procedures !ould provide the least relia le evidence that the client has legal title to inventories8 A. Confirmation of inventories at locations outside the client/s facilities 6. Analytical revie! of inventory alances compared to purchasing and sales activities C. & servation of physical inventory counts 7. <9amination of paid vendors/ invoices

#+. The audit of year-end physical inventories should include steps to verify that the client/s purchases and sales cutoffs !ere ade2uate. The audit steps should e designed to detect !hether merchandise included in the physical count at year-end !as not recorded as a A. $ale in the su se2uent period 6. Purchase in the current period C. $ale in the current period 7. Purchase return in the su se2uent period

#,. "or the purpose of determining proper cutoff for inventory' the auditor !ill select a sample from !hich of the follo!ing for a fe! days efore and after year-end8 A. Materials re2uisitions 6. Production schedules C. 5eceiving documents 7. Purchase orders

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An auditor !ill usually trace the details of the test counts made during the o servation of the physical inventory count to a final inventory schedule. The final inventory is valued at cost 6. Purchases 7. All inventory represented y an inventory tag is ona fide 7. & taining confirmation of inventories pledged under loan agreements C. All inventory represented y an inventory tag is listed on the inventory sheets C. This audit procedure is underta(en to provide evidence that items physically present and o served y the auditor at the time of the physical inventory count are A. 5evie!ing shipping and receiving cutoff activities for inventories 7. Included in the final inventory schedule 30. Physically present at the time of the preparation of the final inventory schedule 7. Purchase discounts 31. =ouching the ra! materials costs to vendors/ invoices 6. Tracing test counts to the entity/s inventory listing #. >ot o solete C. 4hich of the follo!ing auditing procedures most li(ely !ould provide assurance a out a manufacturing entity/s inventory valuation8 A. &!ned y the client 6. The purpose of this procedure is to o tain assurance that A.Auditing the Inventory Management Process #-. Inventory sheets do not include untagged inventory items 13-+ . $ales 6. An auditor has accounted for a se2uence of inventory tags and is no! going to trace information on a representative num er of tags to the physical inventory sheets.. This situation could e the result of the failure to record A.Chapter 13 . A client/s physical count of inventories !as lo!er than the inventory 2uantities sho!n in its perpetual records. $ales returns C.

Purchases 7. $ales 6. 4hile o serving a client/s annual physical inventory' an auditor recorded test counts for several items and noticed that certain test counts !ere higher than the recorded 2uantities in the client/s perpetual records. This situation could e the result of the client/s failure to record A. Purchase discounts 3%. Purchase discounts 6. <9istence 7. $ales 6. =aluation 3).Chapter 13 . Purchases 7. $ales discounts C. An auditor selected items for test counts !hile o serving a client/s physical inventory. 5ights and o ligations 6. This procedure most li(ely o tained evidence concerning management/s assertion of A. $ales discounts C. $ales returns 13-. Purchase returns 33.Auditing the Inventory Management Process 3#. Completeness C. If the perpetual inventory records sho! lo!er 2uantities of inventory than the physical count' an e9planation of the difference might e unrecorded A. . A client/s physical count of inventories !as higher than the inventory 2uantities per the perpetual records. The auditor then traced the test counts to the client/s inventory listing. $ales 7. Purchase returns C. This situation could e the result of the failure to record A.

. Theft 3-. 4hich of the follo!ing is a plausi le e9planation for a large increase in the num er of days outstanding in inventory8 A. In a manufacturing company' !hich one of the follo!ing audit procedures !ould give the least assurance a out the valuation of inventory at the audit date8 A. <9istence 7. 5ights and o ligations C. <9amining paid vendors/ invoices C.. Testing the computation of standard overhead rates 6. & taining confirmation of inventories pledged under loan agreements 3.Chapter 13 . Inventory cutoff errors 6. An auditor most li(ely !ould ma(e in2uiries of production and sales personnel concerning possi le o solete or slo!-moving inventory to support management/s financial statement assertion of A. 5evie!ing direct la or rates 7. =aluation 6.Auditing the Inventory Management Process 3+. :nreported scrap or spoilage 7. Manufacturing overhead !as not allocated to the production process 7. Completeness 3. >e! product line !here sales e9ceed production C. Misapplication of ?I"& C. & solete inventory 6. 4hich of the follo!ing is least li(ely to e a possi le cause of oo(-to-physical differences in inventory 2uantities8 A. Manufacturing salaries !ere recorded as administrative e9penses 13-- .

A client maintains perpetual inventory records in oth 2uantities and dollars. @ey segregations of duties in the inventory management process include all of the follo!ing e9cept separating A. <9amination and reconciliation C. Cost accounting from the general ledger function 7.Auditing the Inventory Management Process %0. Cost accounting from revie! of variance reports 6. 5e2uest that the client schedule the physical inventory count at the end of the year C. Inventory management from cost accounting C.Chapter 13 . Insist that the client perform physical counts of inventory items several times during the year 7. $upervision of physical inventory from inventory management %1. An auditor generally tests physical security controls over inventory y A. . Insist that the client perform physical counts of inventory items several times during the year C. In2uiry and o servation %#. 4ant the client to schedule the physical inventory count at the end of the year 6. Increase the e9tent of tests of controls for the inventory cycle 6. Test counts and cutoff procedures 6. Inspection and recomputation 7. 4hen perpetual inventory records are maintained in 2uantities and in dollars and internal control over inventory is !ea(' the auditor !ould pro a ly A. Apply gross profit tests to ascertain the reasona leness of the physical counts 13-. Increase the e9tent of tests for unrecorded lia ilities at the end of the year 7. Aave to disclaim an opinion on the income statement for that year %3. If the assessed level of control ris( is high' an auditor !ould pro a ly A.

Periodic independent reconciliation of control and su sidiary records C. $ales discounts allo!ed 7. Independent storeroom count of goods received 6. The optimum automatic reorder points 7. 5evie! the entity/s description of inventory policies and procedures 6. Perform test counts of inventory during the entity/s physical count C. Cash purchases %+. Inade2uacies in inventory pricing 6. $ales returns received C. An inventory turnover analysis is useful to the auditor ecause it may detect A. Methods of avoiding cyclical holding costs C. Contri uting to the inventory pro lem could e !ea(nesses in internal controls that led to the failure to record some A. Analy3e monthly production reports to identify variances and unusual transactions %). Analy3e inventory turnover statistics to identify slo!-moving and o solete items 7. The e9istence of o solete merchandise 13-10 .Chapter 13 . In o taining an understanding of a manufacturing entity/s internal control concerning inventory alances' an auditor most li(ely !ould A.Auditing the Inventory Management Process %%. "or several years' a client/s physical inventory count has een lo!er than !hat !as sho!n on the oo(s at the time of the count so that do!n!ard ad*ustments to the inventory account !ere re2uired. Independent matching of purchase orders' receiving reports and vendors/ invoices %. Periodic independent comparison of records !ith goods on hands 7. Purchases returned to vendors 6.. 4hich of the follo!ing control activities !ould most li(ely e used to maintain accurate perpetual inventory records8 A.

Tracing costs used to price inventory to vendors/ invoices tests !hich of the follo!ing assertions8 A. Cost ledgers 6.Auditing the Inventory Management Process %-. 4hich one of the follo!ing procedures !ould not e appropriate for an auditor in discharging his or her responsi ilities concerning the client/s physical inventories8 A. &ccurrence 6. Confirmation of goods in the hands of pu lic !arehouses 6. Aas paid for the merchandise 6. & taining !ritten representation from the client as to the e9istence' 2uality and dollar amount of the inventory 13-11 .Chapter 13 . $upervising the annual physical inventory count C. Material re2uisitions )0. Aolds legal title to the merchandise 7. 5eceiving reports 7. Accuracy 7.. Carrying out physical inventory procedures at an interim date 7. Aas physical possession of the merchandise C. Aolds the shipping documents for the merchandise issued in the company/s name )1. Classification %. Cutoff C. Perpetual inventory records C. Purchase cutoff activities should e designed to test that merchandise is included in the inventory of the client company if the company A. The auditor tests the 2uantity of materials charged to !or(-in-process y tracing these 2uantities to A.

7amaged goods and o solete items have een properly accounted for 13-1# . Inventory items had een counted ut tags placed on the items had not een ta(en off the items and added to the inventory accumulation sheets 6. An item purchased ""&6 shipping point" had not arrived at the date of the inventory count and had not een reflected in the perpetual records )). Consider the report of the outside inventory firm to e an accepta le alternative procedure to the o servation of physical inventories 6. & serve the condition of merchandise and ra! materials during the client/s physical inventory count C. 4hen outside firms of non-accountants speciali3ing in physical inventory counts are used to count' list' price and su se2uently compute the total dollar amount of inventory on hand at the date of the physical count' the auditor !ill ordinarily A. Credit memos for several items returned y customers had not een prepared C. Test overall fairness of inventory values y comparing the company/s turnover ratio !ith the industry average )%. The physical count of inventory of a retailer !as higher than sho!n y the perpetual records. Ma(e or o serve some physical counts of the inventory' recompute certain inventory calculations' and test certain inventory transactions C. 4hich of the follo!ing could e9plain the difference8 A.Chapter 13 . Compare the physical 2uantities of slo!-moving items !ith corresponding 2uantities of the prior year 6. All inventory o!ned y the client is on hand at the time of the count 6. Increase the e9tent of !or( on the physical count of inventory 7. 4hich of the follo!ing is the est audit procedure for the discovery of damaged merchandise in a client/s ending inventory8 A. Consider the reduced audit effort !ith respect to the physical count of inventory as a scope limitation )3. >o *ournal entry had een made on the retailer/s oo(s for several items returned to its suppliers 7.Auditing the Inventory Management Process )#. 5evie! the management/s inventory representation letter for accuracy 7. The client has used proper inventory pricing C. In an audit of inventories' an auditor !ould least li(ely verify that A. The financial statement presentation of inventories is appropriate 7.

<vidence to e gathered to provide a sufficient asis for the auditor/s opinion 6. Procedures to e underta(en to discover litigation' claims and assessments C. 4hen an auditor tests a client/s cost accounting system' the auditor/s tests are primarily designed to determine that A. Physical inventories are in su stantial agreement !ith oo( inventories C. Inventory tags noted during the auditor/s o servation to items listed in receiving reports and vendors/ invoices C.. Items listed in the inventory listing schedule to inventory tags and the count sheets 7.Auditing the Inventory Management Process )+. Items listed in receiving reports and vendors/ invoices to the inventory listing schedule )-. =aluation 7. The element of the audit planning process most li(ely to e agreed upon !ith the client efore implementation of the audit strategy is the determination of the A.. To gain assurance that all inventory items in a client/s inventory listing schedule are valid' an auditor most li(ely !ould trace A. The system is in accordance !ith generally accepted accounting principles and is functioning as planned 7.Chapter 13 . Buantities on hand have een computed ased on accepta le cost accounting techni2ues that reasona ly appro9imate actual 2uantities on hand 6. 5ights and o ligations ). Timing of inventory o servation procedures to e performed ). Completeness C. <9istence 6. & serving a client/s inventory held on consignment y others tests the assertion of A. Costs have een properly assigned to finished goods' !or(-in-process' and cost of goods sold 13-13 . Pending legal matters to e included in the in2uiry of the client/s attorney 7. Inventory tags noted during the auditor/s o servation to items listed in the inventory listing schedule 6.

<9istence 6. 5ights and o ligations 7. =aluation and allocation +3. This conclusion most li(ely related to the auditor/s o *ective to o tain evidence a out the financial statement assertions regarding inventory' including presentation and disclosure and A. 4hich of the follo!ing is a 2uestion that the auditor !ould e9pect to find on the production process section of an internal control 2uestionnaire8 A. 5ights and o ligations +#. Ascertaining the physical 2uantities of inventory on hand 7.Auditing the Inventory Management Process +0. Are vendors/ invoices for ra! materials approved for payment y an employee !ho is independent of the cash dis ursements function8 6. Completeness C. 4hich of the follo!ing is not one of the independent auditor/s o *ectives regarding the e9amination of inventories8 A. An auditor concluded that no e9cessive costs for idle plant !ere charged to inventory.Chapter 13 . =erifying that the client has used proper inventory pricing C. =aluation and allocation 6. Completeness C. Are signed chec(s for the purchase of ra! materials mailed directly after signing !ithout eing returned to the person !ho authori3ed the invoice processing8 C. Are details of individual dis ursements for ra! materials alanced !ith the total to e posted to the appropriate general ledger account8 13-1% . =erifying that inventory counted is o!ned y the client 6. <9istence 7. Are all releases y store(eepers of ra! materials from storage ased on approved re2uisition documents8 7. 4hich assertion for ending inventory is most li(ely violated if the gross profit percentage is much greater than last year8 A. =erifying that all inventory o!ned y the client is on hand at the time of the count +1.

5eceiving reports C. Identify the processes' other than the inventory management process' that affect the audit of inventory and e9plain ho! each affect the audit of inventory. "or each function' identify the related documents andCor records that !ould e used y a manufacturing company. $tate the si9 functions that ma(e up the inventory management process.. Coordinate cutoff tests !ith physical inventory o servation 6. =endor payments Short Ans er Questions ++.Auditing the Inventory Management Process +%. Compare vendors/ invoices !ith vendors/ statements 7. In order to efficiently esta lish the correctness of the accounts paya le cutoff' an auditor !ill e most li(ely to A.Chapter 13 . 13-1) . The audit of the inventory management process is affected y the audit results from multiple other processes. +. Purchase orders 7. Coordinate mailing of confirmations !ith cutoff tests +). Compare cutoff reports !ith purchase orders C. The accuracy of perpetual inventory records may e esta lished' in part' y comparing perpetual inventory records !ith A. Purchase re2uisitions 6.

5evie! oo(-to-physical ad*ustments for possi le misstatements. "or each of the follo!ing tests of details' state !hether it is a test of details of account alances or !hether it is a test of details of disclosures. +. In2uire of management a out issues related to ?I"& li2uidations. &n 7ecem er #%th' the person responsi le for processing receiving reports and recording the receipt of inventory ecame very ill and !as out of the office for a !ee(. 3.Chapter 13 . . The audit of inventory is often the most involved aspect of an audit. +.. Then note for !hich assertion it provides evidence.Auditing the Inventory Management Process +-. & serve the count of physical inventory. As an auditor' on !hich assertion !ould you place a high importance for this client and ho! !ould you test for it8 13-1+ . ). 1. Dou are auditing $6T' !hich has a 7ecem er 31st year-end. 7ue to the company/s small staff and the holiday season' a num er of the receiving reports !ere not processed on a timely asis. #. Inspect loan agreements under !hich an entity/s inventories are pledged. 7escri e at least three inherent ris( factors that affect the audit of inventory. Trace test counts and tag control information to the inventory compilation. %. 5evie! inventory compilation for proper classification among ra! materials' !or( in process and finished goods.0.

<9plain ho! an auditor could test each of these components for a company that manufactures pillo!s. 6elo! is information relating to the inventory management of your audit client' Buic( $ell.1. .#. :sing analytical procedures identify any concerns you have a out misstatements in the financial statements. <9plain the importance of o serving physical inventory during an audit. .3.Chapter 13 . 4e (no! from cost accounting that there are three components that ma(e up the standard costs for inventory.Auditing the Inventory Management Process . . 13-1.

Chapter 13 .Auditing the Inventory Management Process . ?ist five things an auditor should do during the o servation of the physical count of inventory.%. 13-1- .

FA$S# AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: "asy #earning $%&ecti'e: ) 3. $ale of finished goods is a part of the inventory management process. T!"# AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: "asy #earning $%&ecti'e: ( #.Auditing the Inventory Management Process Chapter 13 Auditing the Inventory Management Process Ans!er @ey True / False Questions 1.Chapter 13 . A receiving report records the shipment of goods to customers. FA$S# AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: "asy #earning $%&ecti'e: * 13-1. . The "cradle-to-grave" cycle for inventory egins !hen goods are purchased and stored and ends !hen the finished goods are shipped to customers.

&nce the controls in the inventory system have een tested' the auditor sets the level of control ris(.Chapter 13 . The ma*or control procedure for preventing fictitious inventory transactions from eing recorded is proper segregation of duties.Auditing the Inventory Management Process %. FA$S# AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Analysis Di!!iculty: Moderate #earning $%&ecti'e: . T!"# AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: - +. T!"# AACSB: Analytic AICPA BB: Industry AICPA FN: +isk Analysis Bloom's: Kno ledge Di!!iculty: "asy #earning $%&ecti'e: . Inventory should e valued using the lo!er-of-cost-or-mar(et rule.. ). A high inventory turnover ratio normally indicates inefficient inventory policies. 13-#0 . T!"# AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: "asy #earning $%&ecti'e: - .

& solete inventory should e !ritten do!n to its current mar(et value. T!"# AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: "asy #earning $%&ecti'e: () 10. FA$S# AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: "asy #earning $%&ecti'e: (( .. T!"# AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: "asy #earning $%&ecti'e: (* 11.Auditing the Inventory Management Process -. T!"# AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: (( 13-#1 . The three components that ma(e up the cost of producing a product include materials' direct la or' and indirect la or. The auditor/s o servation of inventory is a generally accepted auditing procedure. In the audit of inventory' the client is responsi le for actually ma(ing and recording the count of physical inventory1 the auditor/s responsi ility is to evaluate and o serve the client/s procedures and dra! conclusions a out the ade2uacy of the physical inventory.Chapter 13 .

Chapter 13 .Auditing the Inventory Management Process 1#. The audit test of control "5evie! and test procedures for issuing materials to manufacturing departments" provides assurance mainly for the occurrence assertion for inventory management. 1). T!"# AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: . A comparison of the current year/s inventory turnover ratio !ith previous years/ may indicate the presence of o solete inventory. An approved purchase re2uisition form authori3es shipment of goods to customers. 4hen the client/s perpetual inventory master files are inade2uate' the auditor !ill pro a ly choose to test the physical inventory prior to the alance sheet date. FA$S# AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: . T!"# AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Analysis Di!!iculty: Moderate #earning $%&ecti'e: . FA$S# AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: Moderate #earning $%&ecti'e: ) 13. 13-## . 1%.

Auditing the Inventory Management Process 1+.. FA$S# AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: 1 1. $hipping orders are for!arded from the revenue process to A. FA$S# AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: Moderate #earning $%&ecti'e: 2 Multiple Choice Questions 1-. 5a! materials stores 7. The materials re2uisitions department %& "inished goods stores C. Production personnel should ordinarily e responsi le for maintaining perpetual inventory records.Chapter 13 . Inventory management AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: "asy #earning $%&ecti'e: ( #earning $%&ecti'e: ) 13-#3 . Inherent ris( is typically assessed at a lo! to moderate level for inventory due to the nature of the asset.

7etermining the amount of consigned inventory AACSB: Communications AICPA BB: Industry AICPA FN: +isk Analysis Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: ( #earning $%&ecti'e: () 13-#% .. 4hich of the follo!ing est descri es the occurrence assertion for inventory8 A. IT AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Kno ledge Di!!iculty: "asy #earning $%&ecti'e: ( #earning $%&ecti'e: * #0.Chapter 13 . Cost accounting C& Inventory management 7. 7etermining standard costs %& & serving physical inventory C. All inventory is recorded AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Compre0ension Di!!iculty: "asy #earning $%&ecti'e: ( #earning $%&ecti'e: - #1. Auditors are most li(ely to ensure that no production activity is scheduled prior to A. Inventory properly accumulated from *ournals and ledgers 7. 4hich of the follo!ing departments typically approves purchase re2uisitions8 A.Auditing the Inventory Management Process 1. Purchase re2uisitions initiated y authori3ed personnel %& 5ecorded inventory actually e9ists C. Completing the oo( to physical ad*ustment 7. 5a! materials stores 6.

Analytical procedures for ra! materials' goods in process' and finished goods that identify unusual transactions' theft and o solescence 7. Consigned goods are included as part of inventory %& :nauthori3ed production activity C. Application of esta lished overhead rates on the asis of direct la or hours or direct la or costs AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: - #3. Comparison of the information contained on the purchase re2uisitions' purchase orders' receiving reports' and vendors/ invoices %& Periodic reconciliation of detailed inventory records !ith the actual inventory on hand y ta(ing a physical count C. 5ecorded inventory is not on hand ecause of theft AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Analysis Di!!iculty: "asy #earning $%&ecti'e: - 13-#) .Auditing the Inventory Management Process ##.Chapter 13 . "ictitious inventory 7. The safeguarding of inventory most li(ely includes A. 4hich of the follo!ing is not a misstatement related to the occurrence assertion for inventory8 A.

$ales 6. "ailure to record inventory in the proper period can affect all of the follo!ing accounts e9cept A. Cost of . 4hich of the follo!ing audit procedures !ould provide the least relia le evidence that the client has legal title to inventories8 A.Auditing the Inventory Management Process #%. 5eceiva les C.oods $old '& Prepaid <9penses AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Analysis Di!!iculty: "asy #earning $%&ecti'e: - #). <9amination of paid vendors/ invoices AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: () #earning $%&ecti'e: (* #earning $%&ecti'e: .Chapter 13 . Confirmation of inventories at locations outside the client/s facilities %& Analytical revie! of inventory alances compared to purchasing and sales activities C. & servation of physical inventory counts 7. 13-#+ .

The audit of year-end physical inventories should include steps to verify that the client/s purchases and sales cutoffs !ere ade2uate.Auditing the Inventory Management Process #+. Materials re2uisitions 6. Purchase return in the su se2uent period AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Analysis Di!!iculty: "asy #earning $%&ecti'e: (3 #earning $%&ecti'e: () #earning $%&ecti'e: (* #. "or the purpose of determining proper cutoff for inventory' the auditor !ill select a sample from !hich of the follo!ing for a fe! days efore and after year-end8 A. Purchase orders AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: (3 #earning $%&ecti'e: (* 13-#. Purchase in the current period C& $ale in the current period 7. .Chapter 13 . $ale in the su se2uent period 6.. Production schedules C& 5eceiving documents 7. The audit steps should e designed to detect !hether merchandise included in the physical count at year-end !as not recorded as a A.

& taining confirmation of inventories pledged under loan agreements C. Physically present at the time of the preparation of the final inventory schedule '& Included in the final inventory schedule AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: () #earning $%&ecti'e: (* 13-#- . An auditor !ill usually trace the details of the test counts made during the o servation of the physical inventory count to a final inventory schedule.Auditing the Inventory Management Process #-. &!ned y the client 6. 4hich of the follo!ing auditing procedures most li(ely !ould provide assurance a out a manufacturing entity/s inventory valuation8 A& =ouching the ra! materials costs to vendors/ invoices 6. This audit procedure is underta(en to provide evidence that items physically present and o served y the auditor at the time of the physical inventory count are A.Chapter 13 . >ot o solete C. Tracing test counts to the entity/s inventory listing AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: (( #earning $%&ecti'e: (* #. 5evie!ing shipping and receiving cutoff activities for inventories 7..

Purchases 7. $ales returns C. Inventory sheets do not include untagged inventory items AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: () #earning $%&ecti'e: (* 13-#. The purpose of this procedure is to o tain assurance that A.Auditing the Inventory Management Process 30. The final inventory is valued at cost %& All inventory represented y an inventory tag is listed on the inventory sheets C. This situation could e the result of the failure to record A& $ales 6. A client/s physical count of inventories !as lo!er than the inventory 2uantities sho!n in its perpetual records. All inventory represented y an inventory tag is ona fide 7.Chapter 13 . An auditor has accounted for a se2uence of inventory tags and is no! going to trace information on a representative num er of tags to the physical inventory sheets. . Purchase discounts AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Analysis Di!!iculty: "asy #earning $%&ecti'e: () #earning $%&ecti'e: (* 31.

$ales discounts C& Purchases 7. Purchase returns AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Analysis Di!!iculty: "asy #earning $%&ecti'e: () #earning $%&ecti'e: (* 33. $ales discounts C& Purchases 7. $ales 6. Purchase discounts AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Analysis Di!!iculty: "asy #earning $%&ecti'e: () #earning $%&ecti'e: (* 13-30 . This situation could e the result of the failure to record A. $ales 6. A client/s physical count of inventories !as higher than the inventory 2uantities per the perpetual records.Auditing the Inventory Management Process 3#.Chapter 13 . If the perpetual inventory records sho! lo!er 2uantities of inventory than the physical count' an e9planation of the difference might e unrecorded A.

$ales '& $ales returns AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Analysis Di!!iculty: "asy #earning $%&ecti'e: () #earning $%&ecti'e: (* 13-31 .Chapter 13 . This situation could e the result of the client/s failure to record A. This procedure most li(ely o tained evidence concerning management/s assertion of A. =aluation AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: () #earning $%&ecti'e: (* 3). <9istence 7. 4hile o serving a client/s annual physical inventory' an auditor recorded test counts for several items and noticed that certain test counts !ere higher than the recorded 2uantities in the client/s perpetual records. The auditor then traced the test counts to the client/s inventory listing.Auditing the Inventory Management Process 3%. An auditor selected items for test counts !hile o serving a client/s physical inventory. Purchase returns C. Purchase discounts 6. 5ights and o ligations %& Completeness C.

Completeness AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: (* #earning $%&ecti'e: (1 13-3# . :nreported scrap or spoilage 7. Testing the computation of standard overhead rates 6. 4hich of the follo!ing is least li(ely to e a possi le cause of oo(-to-physical differences in inventory 2uantities8 A. 5ights and o ligations C. Theft AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Analysis Di!!iculty: "asy #earning $%&ecti'e: (* 3-. <9istence 7.Auditing the Inventory Management Process 3+. An auditor most li(ely !ould ma(e in2uiries of production and sales personnel concerning possi le o solete or slo!-moving inventory to support management/s financial statement assertion of A& =aluation 6. In a manufacturing company' !hich one of the follo!ing audit procedures !ould give the least assurance a out the valuation of inventory at the audit date8 A. <9amining paid vendors/ invoices C. 5evie!ing direct la or rates '& & taining confirmation of inventories pledged under loan agreements AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Application Di!!iculty: "asy #earning $%&ecti'e: (* 3.. Inventory cutoff errors %& Misapplication of ?I"& C.Chapter 13 .

Auditing the Inventory Management Process 3. Inventory management from cost accounting C. $upervision of physical inventory from inventory management AACSB: Communications AICPA BB: Industry AICPA FN: +isk Analysis Bloom's: Kno ledge Di!!iculty: Moderate #earning $%&ecti'e: 1 %1. Inspection and recomputation '& In2uiry and o servation AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: - 13-33 . %0. Cost accounting from the general ledger function 7. Test counts and cutoff procedures 6. >e! product line !here sales e9ceed production C.Chapter 13 . Manufacturing salaries !ere recorded as administrative e9penses AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Analysis Di!!iculty: Moderate #earning $%&ecti'e: ( #earning $%&ecti'e: .. @ey segregations of duties in the inventory management process include all of the follo!ing e9cept separating A& Cost accounting from revie! of variance reports 6. 4hich of the follo!ing is a plausi le e9planation for a large increase in the num er of days outstanding in inventory8 A& & solete inventory 6. <9amination and reconciliation C. An auditor generally tests physical security controls over inventory y A. Manufacturing overhead !as not allocated to the production process 7.

Increase the e9tent of tests for unrecorded lia ilities at the end of the year 7. Apply gross profit tests to ascertain the reasona leness of the physical counts AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* #earning $%&ecti'e: #earning $%&ecti'e: 4 13-3% . Insist that the client perform physical counts of inventory items several times during the year C. A client maintains perpetual inventory records in oth 2uantities and dollars. 4hen perpetual inventory records are maintained in 2uantities and in dollars and internal control over inventory is !ea(' the auditor !ould pro a ly A& 4ant the client to schedule the physical inventory count at the end of the year 6. Aave to disclaim an opinion on the income statement for that year AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* #earning $%&ecti'e: #earning $%&ecti'e: 4 %3. Insist that the client perform physical counts of inventory items several times during the year 7. If the assessed level of control ris( is high' an auditor !ould pro a ly A.Auditing the Inventory Management Process %#. Increase the e9tent of tests of controls for the inventory cycle %& 5e2uest that the client schedule the physical inventory count at the end of the year C.Chapter 13 .

Cash purchases AACSB: Analytic AICPA BB: Industry AICPA FN: +isk Analysis Bloom's: Analysis Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* #earning $%&ecti'e: - 13-3) .Chapter 13 .Auditing the Inventory Management Process %%. $ales discounts allo!ed 7. Contri uting to the inventory pro lem could e !ea(nesses in internal controls that led to the failure to record some A& Purchases returned to vendors 6. Analy3e inventory turnover statistics to identify slo!-moving and o solete items 7. %). "or several years' a client/s physical inventory count has een lo!er than !hat !as sho!n on the oo(s at the time of the count so that do!n!ard ad*ustments to the inventory account !ere re2uired. $ales returns received C. In o taining an understanding of a manufacturing entity/s internal control concerning inventory alances' an auditor most li(ely !ould A& 5evie! the entity/s description of inventory policies and procedures 6. Analy3e monthly production reports to identify variances and unusual transactions AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: #earning $%&ecti'e: . Perform test counts of inventory during the entity/s physical count C.

%-. Tracing costs used to price inventory to vendors/ invoices tests !hich of the follo!ing assertions8 A.. Cutoff C& Accuracy 7.Auditing the Inventory Management Process %+. Independent storeroom count of goods received 6. Independent matching of purchase orders' receiving reports and vendors/ invoices AACSB: Analytic AICPA BB: Industry AICPA FN: +isk Analysis Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: - %. 4hich of the follo!ing control activities !ould most li(ely e used to maintain accurate perpetual inventory records8 A. Inade2uacies in inventory pricing 6. Classification AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: (3 13-3+ . Periodic independent reconciliation of control and su sidiary records C& Periodic independent comparison of records !ith goods on hands 7. The optimum automatic reorder points '& The e9istence of o solete merchandise AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Analysis Di!!iculty: Moderate #earning $%&ecti'e: (* #earning $%&ecti'e: . &ccurrence 6. An inventory turnover analysis is useful to the auditor ecause it may detect A. Methods of avoiding cyclical holding costs C.Chapter 13 .

5eceiving reports '& Material re2uisitions AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: (3 #earning $%&ecti'e: (* )0.Chapter 13 ..Auditing the Inventory Management Process %. Aas physical possession of the merchandise C& Aolds legal title to the merchandise 7. Purchase cutoff activities should e designed to test that merchandise is included in the inventory of the client company if the company A. The auditor tests the 2uantity of materials charged to !or(-in-process y tracing these 2uantities to A. Aolds the shipping documents for the merchandise issued in the company/s name AACSB: Analytic AICPA BB: Industry AICPA FN: +isk Analysis Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: (3 #earning $%&ecti'e: (* 13-3. Cost ledgers 6. Aas paid for the merchandise 6. Perpetual inventory records C. .

Carrying out physical inventory procedures at an interim date 7. 4hen outside firms of non-accountants speciali3ing in physical inventory counts are used to count' list' price and su se2uently compute the total dollar amount of inventory on hand at the date of the physical count' the auditor !ill ordinarily A. & taining !ritten representation from the client as to the e9istence' 2uality and dollar amount of the inventory AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* )#.Auditing the Inventory Management Process )1.Chapter 13 . Confirmation of goods in the hands of pu lic !arehouses %& $upervising the annual physical inventory count C. Consider the report of the outside inventory firm to e an accepta le alternative procedure to the o servation of physical inventories %& Ma(e or o serve some physical counts of the inventory' recompute certain inventory calculations' and test certain inventory transactions C. Consider the reduced audit effort !ith respect to the physical count of inventory as a scope limitation AACSB: Communications AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* 13-3- . Increase the e9tent of !or( on the physical count of inventory 7. 4hich one of the follo!ing procedures !ould not e appropriate for an auditor in discharging his or her responsi ilities concerning the client/s physical inventories8 A.

Compare the physical 2uantities of slo!-moving items !ith corresponding 2uantities of the prior year %& & serve the condition of merchandise and ra! materials during the client/s physical inventory count C. >o *ournal entry had een made on the retailer/s oo(s for several items returned to its suppliers 7. Inventory items had een counted ut tags placed on the items had not een ta(en off the items and added to the inventory accumulation sheets %& Credit memos for several items returned y customers had not een prepared C. 4hich of the follo!ing could e9plain the difference8 A.Chapter 13 . 4hich of the follo!ing is the est audit procedure for the discovery of damaged merchandise in a client/s ending inventory8 A. 5evie! the management/s inventory representation letter for accuracy 7. An item purchased ""&6 shipping point" had not arrived at the date of the inventory count and had not een reflected in the perpetual records AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Analysis Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* 13-3. The physical count of inventory of a retailer !as higher than sho!n y the perpetual records. .Auditing the Inventory Management Process )3. Test overall fairness of inventory values y comparing the company/s turnover ratio !ith the industry average AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* )%.

7amaged goods and o solete items have een properly accounted for AACSB: Communications AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* )+. Pending legal matters to e included in the in2uiry of the client/s attorney '& Timing of inventory o servation procedures to e performed AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* 13-%0 . Procedures to e underta(en to discover litigation' claims and assessments C. In an audit of inventories' an auditor !ould least li(ely verify that A& All inventory o!ned y the client is on hand at the time of the count 6.Chapter 13 . The financial statement presentation of inventories is appropriate 7.Auditing the Inventory Management Process )). <vidence to e gathered to provide a sufficient asis for the auditor/s opinion 6. The client has used proper inventory pricing C. The element of the audit planning process most li(ely to e agreed upon !ith the client efore implementation of the audit strategy is the determination of the A.

=aluation 7. Items listed in receiving reports and vendors/ invoices to the inventory listing schedule AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* )-.Chapter 13 .Auditing the Inventory Management Process ). 5ights and o ligations AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Analysis Di!!iculty: Moderate #earning $%&ecti'e: () #earning $%&ecti'e: (* 13-%1 . Completeness C. Inventory tags noted during the auditor/s o servation to items listed in the inventory listing schedule 6. Inventory tags noted during the auditor/s o servation to items listed in receiving reports and vendors/ invoices C& Items listed in the inventory listing schedule to inventory tags and the count sheets 7.. & serving a client/s inventory held on consignment y others tests the assertion of A& <9istence 6. To gain assurance that all inventory items in a client/s inventory listing schedule are valid' an auditor most li(ely !ould trace A.

Chapter 13 ..Auditing the Inventory Management Process ). =erifying that inventory counted is o!ned y the client 6. Ascertaining the physical 2uantities of inventory on hand '& =erifying that all inventory o!ned y the client is on hand at the time of the count AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: (* 13-%# . Physical inventories are in su stantial agreement !ith oo( inventories C. The system is in accordance !ith generally accepted accounting principles and is functioning as planned '& Costs have een properly assigned to finished goods' !or(-in-process' and cost of goods sold AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: (* +0. =erifying that the client has used proper inventory pricing C. Buantities on hand have een computed ased on accepta le cost accounting techni2ues that reasona ly appro9imate actual 2uantities on hand 6. 4hen an auditor tests a client/s cost accounting system' the auditor/s tests are primarily designed to determine that A. 4hich of the follo!ing is not one of the independent auditor/s o *ectives regarding the e9amination of inventories8 A.

4hich assertion for ending inventory is most li(ely violated if the gross profit percentage is much greater than last year8 A.Chapter 13 . <9istence 7. This conclusion most li(ely related to the auditor/s o *ective to o tain evidence a out the financial statement assertions regarding inventory' including presentation and disclosure and A& =aluation and allocation 6. 13-%3 . 5ights and o ligations AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Analysis Di!!iculty: Moderate #earning $%&ecti'e: (* #earning $%&ecti'e: (1 +#. <9istence %& Completeness C. 5ights and o ligations 7. Completeness C. =aluation and allocation AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Analysis Di!!iculty: 5ard #earning $%&ecti'e: ( #earning $%&ecti'e: 2 #earning $%&ecti'e: .Auditing the Inventory Management Process +1. An auditor concluded that no e9cessive costs for idle plant !ere charged to inventory.

In order to efficiently esta lish the correctness of the accounts paya le cutoff' an auditor !ill e most li(ely to A& Coordinate cutoff tests !ith physical inventory o servation 6.Auditing the Inventory Management Process +3. Are vendors/ invoices for ra! materials approved for payment y an employee !ho is independent of the cash dis ursements function8 6. Are signed chec(s for the purchase of ra! materials mailed directly after signing !ithout eing returned to the person !ho authori3ed the invoice processing8 C& Are all releases y store(eepers of ra! materials from storage ased on approved re2uisition documents8 7. Compare vendors/ invoices !ith vendors/ statements 7. Are details of individual dis ursements for ra! materials alanced !ith the total to e posted to the appropriate general ledger account8 AACSB: Communications AICPA BB: Industry AICPA FN: +isk Analysis Bloom's: Application Di!!iculty: 5ard #earning $%&ecti'e: * #earning $%&ecti'e: 1 #earning $%&ecti'e: - +%. Coordinate mailing of confirmations !ith cutoff tests AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: 5ard #earning $%&ecti'e: (3 #earning $%&ecti'e: (* 13-%% .Chapter 13 . Compare cutoff reports !ith purchase orders C. 4hich of the follo!ing is a 2uestion that the auditor !ould e9pect to find on the production process section of an internal control 2uestionnaire8 A.

The purchasing process controls the ac2uisition and payment for inventory. E$ee "igure 13-1 on page %+. Purchase re2uisitions %& 5eceiving reports C.Chapter 13 . Purchase orders 7. Identify the processes' other than the inventory management process' that affect the audit of inventory and e9plain ho! each affect the audit of inventory.Auditing the Inventory Management Process +). The accuracy of perpetual inventory records may e esta lished' in part' y comparing perpetual inventory records !ith A. The inventory management process is affected y the control activities in the revenue' purchasing' and payroll processes. The revenue process accounts for the sale of finished goods.F AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Kno ledge Di!!iculty: Moderate #earning $%&ecti'e: ( 13-%) . The payroll process affects the costs of direct and indirect la or that is assigned to inventory. =endor payments AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Di!!iculty: 5ard #earning $%&ecti'e: (3 #earning $%&ecti'e: (* Short Ans er Questions ++. The audit of the inventory management process is affected y the audit results from multiple other processes.of the te9t oo( for a diagram of the relationship et!een the processes.

The manufacturing function produces the product and therefore creates the production data information. Inventory management function . "or each function' identify the related documents andCor records that !ould e used y a manufacturing company. Information from the inventory master file and inventory status report is used to reconcile the perpetual inventory records to the general ledger inventory accounts. It is responsi le for producing the production schedule and issuing purchases re2uisitions.The general ledger function maintains the records for the inventory management process. AACSB: Communications AICPA BB: Critical /0inking AICPA FN: Measurement Bloom's: Kno ledge Di!!iculty: Moderate #earning $%&ecti'e: ) #earning $%&ecti'e: * 13-%+ . This information is then used to update the perpetual inventory records E!hich is used y the general ledger functionF and as input for the cost accumulation and variance reports Eused y the cost accounting functionF.The finished goods function uses the shipping order for!arded from the revenue process to ship goods to the customers. $tate the si9 functions that ma(e up the inventory management process.This function !ould typically control the issuance of ra! materials and therefore handle the materials re2uisitions forms. Cost accounting function .. Manufacturing function . "inished goods stores function .The cost accounting function ensures that costs are properly attached to inventory. It revie!s the cost accumulation and variance reports to accomplish this. 5a! materials stores function .The inventory management function maintains inventory at appropriate levels. .eneral ledger function .Auditing the Inventory Management Process +.Chapter 13 .

Auditing the Inventory Management Process +-. 7escri e at least three inherent ris( factors that affect the audit of inventory. Proper controls should e in place to prevent misappropriation of assets. A company in a competitive or highly technological industry has the ris( of having inventory that should e properly valued at lo!er-of-mar(et or that is o solete. &ne inherent ris( concerns the valuation of inventory. There is also the ris( of defalcation of inventory' especially in an industry !here the inventory is small and high-valued. The audit of inventory is often the most involved aspect of an audit. These estimates can lead to disagreements !ith clients.Chapter 13 . A third inherent ris( is the num er of estimations involved in valuing inventory. . These valuation issues can easily lead to material misstatements in the financial statements. AACSB: Communications AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Compre0ension Di!!iculty: "asy #earning $%&ecti'e: 2 13-%.

1.Accuracy' =aluation +. %.&ccurrence' 5ights and o ligations #. ). Dou are auditing $6T' !hich has a 7ecem er 31st year-end.0. "or each of the follo!ing tests of details' state !hether it is a test of details of account alances or !hether it is a test of details of disclosures. 5evie! oo(-to-physical ad*ustments for possi le misstatements. As an auditor' on !hich assertion !ould you place a high importance for this client and ho! !ould you test for it8 The cutoff assertion !ould e very important in this situation. Account alances .=aluation and allocation AACSB: Communications AICPA BB: Critical /0inking AICPA FN: Decision Making Bloom's: Application Di!!iculty: 5ard #earning $%&ecti'e: (* .Completeness' =aluation and allocation ). 5evie! inventory compilation for proper classification among ra! materials' !or( in process and finished goods. 7isclosures .Classification and understanda ility 3. & serve the count of physical inventory. In2uire of management a out issues related to ?I"& li2uidations. The ris( of inventory transactions eing recorded in the !rong period is very high. Account alances . 3. 1.<9istence %. Then note for !hich assertion it provides evidence. 7ue to the company/s small staff and the holiday season' a num er of the receiving reports !ere not processed on a timely asis..Chapter 13 . To test for misstatements' the auditor should trace a sample of receiving reports efore and after year-end to ensure that the inventory !as recorded in the proper period. +. &n 7ecem er #%th' the person responsi le for processing receiving reports and recording the receipt of inventory ecame very ill and !as out of the office for a !ee(. Account alances . 7isclosures . 7isclosures .Auditing the Inventory Management Process +. AACSB: Analytic AICPA BB: Industry AICPA FN: +isk Analysis Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: - 13-%- . Inspect loan agreements under !hich an entity/s inventories are pledged. Trace test counts and tag control information to the inventory compilation. #.

Inventory has significantly increased' especially !hen compared to the industry average. At the same time' inventory turnover is decreasing and is significantly elo! the industry average in #00.. . The auditor should e concerned a out o solescent or e9cess inventory and should do additional testing to ensure the inventory is eing valued properly y the client.Auditing the Inventory Management Process . :sing analytical procedures identify any concerns you have a out misstatements in the financial statements. 6elo! is information relating to the inventory management of your audit client' Buic( $ell.1.Chapter 13 . AACSB: Analytic AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Analysis Di!!iculty: Moderate #earning $%&ecti'e: . 13-%.

#.Chapter 13 . AACSB: Communications AICPA BB: Critical /0inking AICPA FN: +isk Analysis Bloom's: Compre0ension Di!!iculty: "asy #earning $%&ecti'e: () 13-)0 .Aistorical data regarding the amount of la or necessary to ma(e a pillo! can e o tained.The allocation of overhead should e revie!ed y the auditor for reasona leness. &verhead . Materials .The auditor could o tain a list of materials needed to manufacturer a certain type of pillo! and compare that list !ith the standard cost card. <9plain ho! an auditor could test each of these components for a company that manufactures pillo!s. 4e (no! from cost accounting that there are three components that ma(e up the standard costs for inventory.3. The prices can then e traced to the vendor/s invoices to verify that the proper cost is eing applied for materials. The auditor should also verify that the amounts included in overhead are appropriate. It can then e compared to the amount of authori3ed !ages. <9amining physical inventory primarily provides evidence that the inventory does e9ist' ut it can also provide evidence for the rights and o ligations and valuation assertions. <9plain the importance of o serving physical inventory during an audit.Auditing the Inventory Management Process . ?a or . Inventory is typically a large account on the financial statements' especially for manufacturing and retail companies. It is also a generally accepted auditing procedure. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Compre0ension Di!!iculty: Moderate #earning $%&ecti'e: (( .

?ist five things an auditor should do during the o servation of the physical count of inventory. • Ma(e sure the count teams are follo!ing the inventory count instructions.Auditing the Inventory Management Process . • Perform test counts and record a sample of counts in the !or( papers. • <nsure that no production is scheduled during the count. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Di!!iculty: Moderate #earning $%&ecti'e: () 13-)1 . • & tain cutoff information. • & tain tag control information for testing the client/s inventory compilation.Chapter 13 . • <nsure that inventory tags are issued se2uentially to individual departments.%. • & serve the condition of o solete' slo! moving' or carried in e9cess inventories. • <nsure that there is no movement of goods during the inventory count. • In2uire a out goods held on consignment.