Production Cycle and Inventory Flashcards
Inventories with a high risk of ______may be warranted as a signficant risk.
obsolescence
Purchasing and cash disbursements can provide opportunity for ______ by employees.
fraud
_____considering information about the client and its environment, the auditors must assess the risks of material misstatement related to assertions about inventory.
After
Audit procedures for consignment inventory could include a comparison of the physical inventory with the client’s _________.
records
Tests used to help identify the _____of controls help to evaluate the client’s internal control structure.
effectiveness
Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to inventories and cost of goods sold is the ____ step of the inventory audit process
first
Obtain an understanding of internal control over inventories and cost of goods sold is the ____ step of the inventory audit process
second
Assess the risks of material misstatement and design further audit procedures is the ____ step of the inventory audit process
third
Perform tests of controls is the ____ step of the inventory audit process
fourth
Perform substantive audit procedures is the ____ step of the inventory audit process
fifth
Inventories are often a large _____ asset of a company’s balance sheet.
current
The accounting profession allows various methods for the _______ of inventory.
valuation
The determination of the value of ending inventory ____ affects net income.
directly
When testing controls around inventory, auditors are considering the ________transaction cycle.
purchasing
An important step of testing controls is comparing quantity and _______ in the invoice, purchase order, and receiving report.
price
Inventory should be recorded when
The company has title to it.
The overall production authorization starts with a
production plan
The source of authorization for preparation of materials requisitions is
bill of materials
CPA selected an invoice for a large inventory purchase and vouched the invoice to the receiving report. Which assertion is the auditor most likely testing?
occurrence
Responsibility for the physical inventory count lies with the
client
Client’s inventory instructions should include all the following except:
Names of client personnel responsible for the count.
Instructions for recording accurate descriptions.
Instructions for auditors’ test counts.
Plans for controlling movement of goods.
Instructions for auditors’ test counts.
Tracing a test count to the inventory compilations provides evidence for which ASB balance assertion?
completeness
A client maintains perpetual inventory records in both quantities and dollars. If the auditor is able to accept a high level of detection risk, the auditor would probably
Apply gross profit tests to ascertain he reasonableness of the physical inventory counts.
the production cycle links the (blank) cycle to the (blank) cycle
acquisition, revenue
Production activities start with a (blank blank)
sales forecast
A marketing projection of product sales based on past performance and marketing initiatives is a (blank blank)
sales forecast
A schedule for manufacturing is called the (blank blank)
production plan
the production planner issues a (blank blank) to appropriate production personnel
production order
inventory control will receive a (blank blank) that authorizes inventory to release raw materials to production
materials requisition (or materials transfer ticket)
the most significant assertions for the audit of inventory are
existence, valuation
inventory is affected by which relevant assertions
existence, completeness, cutoff, valuation & allocation, rights, presentation & disclosure
COGS account is affected by which relevant assertions
completeness, accuracy
GAAP requires inventory to be stated at the lower of cost or (blank blank blank)
Net realizable value
what could go wrong with the rights assertion and the inventory account
items held on consignment are included in inventory
what could go wrong with the presentation & disclosure assertion and the inventory account
inventory pledged as collateral is not disclosed, footnotes omit cost flow assumptions
what could go wrong with the completeness assertion and the COGS account
labor of material may be omitted from production costs
what could go wrong with the accuracy assertion and the COGS account
costs of direct material, labor, and overhead have not been properly calculated
Management’s review of inventory costing and cost sheets for projects and production runs is an internal control over which account addressing which assertion
inventory, valuation
tests of internal controls over inventory primarily involve these two tasks
observation and inspection of documentation (sequential order, management review, reconciliation of costing, authorizations)
when auditors sample from the population of production orders and trace cost forward to production cost and accounting, they are testing in the (blank) direction
completeness
when auditors test to determine that items composing the WIP and finished goods inventories recorded in inventory were actually produced, they are testing in the (blank) direction
occurrence
What’s a possible substantive test over inventory completeness
observe physical inventory ensuring all items were counted, trace inventory test counts to sub/control accounts
comparing average unit costs of inventory or turnover ratios with prior periods and purchase records tests what assertion over inventory
valuation
inspecting contracts/inquiring about inventory pledged as collateral tests which assertion
inventory, presentation and disclosure
Auditors must verify that items included in inventory were in inventory on the balance sheet date to address the Blank______ assertion.
existence
To help detect inventory fraud auditors should
be skeptical of client personnel making notes
focus test counts on high-value items
Sample lower-value items.
After inventory has been counted, the client summarizes the count by item number and applies a chosen costing method to determine the total inventory owned, which is compared with the amount in the general ledger. This step is normally referred to as the blank and blank procedure.
compilation, pricing
Selecting items from a perpetual inventory record and obtaining a test count can be done to produce evidence for the (blank) assertion
existence
tracing items from the inventory floor to the inventory records produces evidence for the (blank) assertion
completeness
Physical observation procedures are designed to audit for blank and blank
existence and completeness
