Chap 14 - Audit of the Inventory and Distribution Cycle Flashcards
What is meant by “cost accounting records,”
Cost accounting records are those that are concerned with the (1)____ insofar as these activities constitute internal transfers within the (2)_____. These records include computerized files, ledgers, worksheets, and reports that (3)______.
(1): processing and storage of raw materials, work in
process, and finished goods,
recording of payroll and related labor costs and benefits,
recording of the company’s payables,
tests of the client’s unit prices,
(2): acquisition and payment cycle.
inventory and distribution cycle.
payroll and personnel cycle.
sales and collection cycle.
(3): accumulate employee time cards, overtime rates, and benefits information by employee.
accumulate material, labour, and overhead costs by job or process as the costs are incurred.
contain detailed audit plans for test of controls.
contain detailed records of invoices received and due in the period.
(1) : processing and storage of raw materials, work in process, and finished goods,
(2) : inventory and distribution cycle.
(3) : accumulate material, labour, and overhead costs by job or process as the costs are incurred.
Cost accounting records are important in conducting an audit because:
A.
they determine the value of the different inventories for financial statement purposes.
B.
they document what analytical procedures are to be performed in auditing inventory and distribution.
C.
they indicate the relative profitability of the various products for management planning and control.
D.
they show information about accounts receivable resulting from the shipment of goods to customers in exchange for cash or other assets.
A, C
Explain the relationship between the acquisition and payment cycle and the inventory and distribution cycle in the audit of a manufacturing company
A.
For most sales transactions, the actual shipment becomes the trigger for recognizing the related accounts receivable and sales in the accounting system. Thus, shipments of finished goods must be authorized by a properly approved shipping document.
B.
The acquisition and payment cycle includes the system for purchasing goods and services, excluding raw materials and purchased parts for producing finished goods.
C.
After ordering the materials, as part of the acquisition and payment cycle, the quantity ordered is booked in the perpetual inventory system using the purchase requisition.
D.
In a standard cost inventory system, the acquisition and payment cycle computes any inventory purchase variances, which then enter the inventory system.
E.
After receiving the materials ordered, as part of the acquisition and payment cycle, the materials are inspected with a copy of the receiving document used to book perpetual inventory.
F.
The acquisition and payment cycle includes the system for purchasing all goods and services, including raw materials and purchased parts for producing finished goods.
G.
Purchase requisitions are used to notify the purchasing department to place orders for inventory items. When inventory reaches a predetermined level or automatic reorder point, requisitions may be initiated by stockroom personnel or by computer. In other systems, orders may be placed for the materials required to produce a customer order, or orders may be initiated upon periodic evaluation of the situation in light of the prior experience of inventory activity.
H.
Purchase requisitions are forms used to approve the payment of invoices.
D, E, F, G
The following audit procedures in the acquisition and payment cycle illustrate the relationship between that cycle and the inventory and distribution cycle.
A.
Test the purchase cutoff at the physical inventory date and year-end to determine whether or not the physical inventory and year-end inventory cutoffs are proper from a purchase standpoint.
B.
Review large sales returns and allowances before and after the balance sheet date to determine whether they are recorded in the correct period.
C.
Examine sales invoice for supporting bill of lading and customer order.
D.
Compare the inventory cost entered into the inventory system to the supporting invoice to determine that it was properly recorded and the purchase variance (standard cost system), if any, was properly reflected.
E.
Reconcile the total cash receipts recorded in the cash receipts journal for a given period with the actual deposits made to the bank during the same period.
A, D
Give the reasons why inventory is often the most difficult and time consuming part of many audits.
A.
Inventory ratios are difficult to compare to industry standards.
B.
The consistent application of different valuation methods can be fairly complicated.
C.
The need for organizations to have the inventory in different locations makes the physical control and counting of the inventory difficult.
D.
Inventory is an asset which makes its valuation difficult.
E.
Inventory is generally a major item on the balance sheet and often the largest item making up the accounts included in working capital.
F.
Inventory that is obsolete or damaged may be set aside making it impossible to account for.
G.
Inventory takes many different forms that are difficult for the auditor to fully understand.
H.
The valuation of inventory is difficult due to such factors as a large number of different items involved, the need to allocate the manufacturing costs to inventory, and obsolescence.
B, C, E, G, H
Many auditors assert that certain audit tests can be significantly reduced for clients with adequate perpetual records that include both unit and cost data. What are the most important tests of the perpetual records that the auditor must make before he or she can reduce the assessed level of control risk? Assuming the perpetuals are determined to be accurate, which tests can be reduced?
1. Begin by selecting the most important tests of the perpetual records that the auditor must make before before he or she can reduce the assessed level of control risk.
A.
Tests to determine tolerable misstatement and assessed inherent risk for the inventory and distribution cycles.
B.
Tests of the reduction in the finished goods inventory through the sale of goods to customers.
C.
Tests of the purchases of raw materials and pricing thereof.
D.
Tests to analyze the variance between budgeted and actual amounts of inventory purchased.
E.
Tests of the cost accounting documents and records by verifying the reduction of the raw material inventory for use in production and the increase in the quantity of finished goods inventory when goods have been manufactured.
- Assuming the perpetuals are determined to be accurate, which tests can be reduced?
A.
Tests of inventory cut-off may be reduced.
B.
The audit may take longer to finalize since additional testing is not being done.
C.
Physical inventory tests may be reduced.
D.
The auditor’s understanding of internal controls affecting cost accounting records can be reduced.
E.
Analytical tests may be reduced.
F.
The physical inventory may be tested prior to the balance sheet date.
1 - B. C. E
2- A. C. F
Which of the following internal control procedures most likely would be used to maintain accurate inventory records?
1.
Periodic inventory counts are used to adjust the perpetual inventory records.
2.
Perpetual inventory records are periodically compared with the current cost of individual inventory items.
3.
Requisitions, receiving reports, and purchase orders are independently matched before payment is approved.
4.
A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
1
Which of the following sets of duties related to inventory and distribution causes the greatest concern about inadequate segregation of duties?
1.
The receiving department has access to copies of the purchase orders that exclude information about quantities ordered.
2.
Purchasing agents who arrange for shipment of raw materials from vendors are responsible for verifying actual receipt of the inventory items at the receiving dock.
3.
Accounts payable personnel have access to receiving reports and purchases orders in addition to vendor invoices for inventory purchases.
4.
Individuals in charge of approving disbursements related to inventory purchases have “read-only” ability to view the list of vendors in the preapproved vendor master file.
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