Chapter 21 Flashcards
Controls over physical inventory and the related costs from the point that raw materials are requisitioned to the point that the manufactured product is completed and transferred to storage
Cost Accounting Controls
The accounting records concerned with the manufacture and processing of the goods and storing finished goods
Cost Accounting Records
The transaction cycle that involves the physical flow of goods through the organization, as well as related costs
Inventory and Warehouse Cycle
Audit procedures used to verify whether physical counts of inventory are correctly summarized, inventory quantities and prices are correctly extended, and extended inventory is correctly footed
Inventory Compilation Tests
Audit procedures used to verify the costs used to value physical inventory
Inventory Price Tests
System of cost accounting where costs are accumulated by individual jobs when material is used and labor costs are incurred
Job Cost System
A continuously updated computerized record of inventory items purchased, used, sold, and on hand for merchandise, raw materials, and finished goods
Perpetual Inventory Master File
System of cost accounting where costs are accumulated for a process, with unit costs for each process assigned to the products passing through the process
Process Cost System
Records that indicate variances between projected material, labor, and overhead costs, and the actual costs
Standard Cost Records
Factors affecting the Complexity of the audit of inventory include:
1) Inventory is normally the largest account
2) Inventory is in many locations
3) Diversity of inventory difficult to observe and value
4) Valuation often based on estimations
5) Multiple acceptable inventory valuation methods
Two systems involved in inventory and warehouse cycle:
Physical flow of goods and pricing
6 functions of the inventory and warehouse cycle
1) Process Purchase Orders
2) Receive Raw Materials
3) Store Raw Materials
4) Process the Goods
5) Store Finished Goods
6) Ship Finished Goods
5 activities of the inventory and warehouse cycle
1) Acquire and record raw materials, labor, and overhead
2) Internally transfer assets and costs
3) Ship goods and record revenue and costs
4) Physically observe inventory
5) Price and compile inventory
Categories of Cost Accounting Controls:
1) Physical control over raw materials, work-in process, and finished goods inventory
2) Control over the related costs
Reasons of usefulness for Perpetual Inventory Master Files:
1) Provide a record of inventory on hand
2) Provide a record of the use of raw materials and the sale of finished goods
3) Provide a record to pinpoint responsibility when differences between physical counts and amounts shown on the perpetual list exist
Auditors are concerned with four aspects of cost accounting:
1) Physical controls over inventory
2) Documents and records for transferring inventory
3) Perpetual inventory master files
4) Unit cost records
The reliability of BLANK affects the timing and extent of the auditor’s physical examination of inventory
Perpetual Inventory Master File
Auditors usually test cost accounting records as part of the acquisition, payroll, and sales tests to avoid BLANK
Testing the records more than once and to increase audit efficiency
When testing acquisition transactions, auditors should BLANK
Trace the units and unit costs of raw materials to additions recorded in the perpetual inventory master files
Auditing standards require auditors to satisfy themselves about BLANK
The effectiveness of the client’s methods of counting inventory and the reliance they can place on the client’s representations about the quantities and physical condition of the inventory
To meet the requirement of satisfying auditors needs, auditors must:
1) Be present at the time the client counts their inventory
2) observe the client’s counting procedures
3) Make inquiries of client personnel about their counting procedures
4) Make their own independent tests of the physical count
While auditors observe inventory counting, they should:
1) Observe the counting of the most significant items and a representative sample of typical inventory items
2) Inquire about items that are likely to be obsolete or damaged
3) Discuss with management the reasons for excluding any material items
Balance related audit objectives for the physical inventory observation
Existence, completeness, accuracy, classification, cutoff, realizable value, and rights
Common inventory observation procedure for existence in physical inventory observation
Observe whether movement of inventory takes place during the count
