Evidence - The Purchases-Payables-Inventory Cycle - Gleim Chapter 12 Flashcards
Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
Performing cutoff procedures for shipping and receiving.
Tracing inventory items from the tag listing back to the physical inventory quantities.
Examining paid vendor invoices.
Scanning perpetual inventory, production, and purchasing records.
Performing cutoff procedures for shipping and receiving.
Testing the cutoff to consider the transfer of title of inventory in shipping and receiving is appropriate for testing the completeness assertion. The terms, FOB shipping point versus FOB destination, should be evaluated to assure that the goods were recorded in the proper period.
To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into Operating income. Gross sales. Net sales. Cost of goods sold.
Cost of goods sold.
Inventory turnover equals cost of goods sold divided by average inventory. It provides a measure of how many times inventory requires replacement.
Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company if the company
Holds legal title to the merchandise.
Has paid for the merchandise.
Has physical possession of the merchandise.
Holds the shipping documents for the merchandise issued in the company’s name.
Holds legal title to the merchandise.
In general, a cutoff ensures that transactions are recorded in the appropriate period. A proper purchase cutoff is intended to assure inclusion of the goods in inventory and the recognition of a liability in the period in which the client acquired title to the goods.
An auditor would be most likely to learn of slow-moving inventory through Review of perpetual inventory records. Physical observation of inventory. Inquiry of stores personnel. Inquiry of sales personnel.
Review of perpetual inventory records.
To identify slow-moving inventory, the auditor should review perpetual inventory records. In a perpetual system, receipts and issuances of goods are recorded as the transactions occur, both as to quantities and prices. By comparing the dates of receipt and issuance, the auditor is able to readily identify slow-moving and possibly obsolete inventory.
Unrecorded liabilities are most likely to be found during the review of which of the following documents?
Unmatched sales invoices.
Bills of lading.
Unpaid bills.
Shipping records.Unpaid bills.
The auditor examines the accounts payable vouchers prepared during the subsequent period to determine whether they were for amounts recorded as liabilities at year end. (S)he also examines unvouchered invoices (unpaid bills) because they could represent payables that should have been recorded prior to year end. This procedure should be performed through the date of the auditor’s report.
The purpose of tracing a sample of inventory tags to a client’s computerized listing of inventory items is to determine whether the inventory items
Included in the listing were properly valued.
Represented by tags were included on the listing.
Represented by tags were reduced to the lower of cost or market.
Included on the listing were properly counted.
Represented by tags were included on the listing.
The auditor should observe the counting process, determine that proper procedures are followed, and make selected test counts. Because the auditor does not make a complete count, not every misstatement will be detected. But (s)he should be able to determine that no large block of inventory has been omitted. Having accounted for a sequence of inventory tags, the auditor should trace a sample of the tags to the physical inventory listing. The purpose is to test the completeness assertion that all inventory listed on a tag is reflected in the listing.
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
Contrast the ratio of accounts payable to purchases with the prior year’s ratio.
Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
Reconcile receiving reports with related cash payments made just prior to year end.
Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
Observance of cutoff procedures helps ensure that liabilities were recorded in the appropriate period. Tracing cash disbursements made subsequent to year end to amounts recorded at year end may disclose liabilities that were unrecorded as a result of a failure to observe such procedures. Recomputation of interest, bank confirmations, and reading the minutes of directors’ meetings may also detect unrecorded liabilities.
If statistical sampling methods are used by a client in the taking of its physical inventory, the auditor must
Observe such test counts as (s)he deems necessary and be satisfied that the sampling plan has statistical validity, that it was properly applied, and that the resulting precision and reliability are reasonable in the circumstances.
Insist that the client take a complete physical inventory at least once each year and observe the inventory count if reasonable and practicable to do so.
Either observe a complete inventory count sometime during the year and be satisfied that the statistical procedures are valid or qualify or disclaim an opinion on the financial statements taken as a whole.
Either observe a statistical inventory count each year or qualify or disclaim an opinion on the financial statements taken as a whole.
Observe such test counts as (s)he deems necessary and be satisfied that the sampling plan has statistical validity, that it was properly applied, and that the resulting precision and reliability are reasonable in the circumstances.
When the client uses statistical sampling to determine inventory quantities, the auditor should become satisfied by performing alternative audit procedures. Attending a year-end inventory count is obviously impractical when the entity measures its inventory using statistical methods. The auditor is required to attend and observe at least some counts and should evaluate whether the methods applied and results are appropriate.
In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the purchase Invoices. Orders. Journal. Requisitions.
Invoices.
Vendor invoices, which state the items purchased, the amount due, and the payment terms, document inventory cost when compared with purchase orders and receiving reports.
