4.10 - FIN STATEMENT ACCTS: INVENTORIES Flashcards
4.10 - FIN STATEMENT ACCTS: INVENTORIES
An auditor is unable to observe the physical count of inventory. Which of the following would not be an appropriate alternate procedure?
A) Apply procedures to transactions occurring between the count date and the date of the financial statements.
B) Evaluate internal controls related to the maintenance of perpetual inventory records.
C) Review shipping terms for all inventory in transit on the balance sheet date.
D) Perform test counts to items in inventory
C) Review shipping terms for all inventory in transit on the balance sheet date.
When an auditor cannot observe the physical count of inventory, procedures will be applied to give the auditor
reasonable assurance that quantities used to measure inventory are accurate.
Procedures may include test counts of items in inventory, comparing counted amounts to recorded amounts as of that date to determine if the recorded amounts are reliable.
The auditor may evaluate transactions occurring after the count date to verify whether or not they were properly recorded.
The auditor may also evaluate internal controls relative to the perpetual inventory records to determine if they are generally reliable.
Reviewing shipping terms will determine whether or not the entity owns the inventory reported, supporting the rights and obligations assertion.
4.10 - FIN STATEMENT ACCTS: INVENTORIES
Under which of the following conditions may an auditor’s observation procedure for inventory be performed during or after the end of the period under audit?
A) When the client maintains periodic inventory records.
B) When well-kept perpetual inventory records are checked by the client periodically by comparisons with
physical counts.
C) When the auditor finds
minimal variations in client records and test counts in prior periods.
D) When total inventory has notvaried more than 5% in the last five
years.
B) When well-kept perpetual inventory records are checked by the client periodically by comparisons with
physical counts.
When well-kept perpetual inventory records are checked by periodic comparisons to physical counts, the auditor would be able to reconcile from an observation on a date after the end of the period to the balance sheet date.
This would not be the case if periodic records are maintained.
Minimal variations in prior periods may be indicative of accurate and reliable counts but do not relieve the auditor of the obligation to observe the inventory count.
Whether or not inventory has varied by a small percentage in prior years may add a degree of predictability to an expectation for inventory amounts but will not substitute for
observing the physical count.
