Exam 14: Audit of the Inventory and Distribution Cycle

You are conducting the audit of Files R Us Inc. (FRI), a family-owned business that manufactures a variety of different wooden and metal file cabinets. In business for over twenty years, FRI has a reputation for providing high-quality products on time or even ahead of schedule. FRI does not sell to the public, but only to fine furniture stores and to a variety of office supply chains. As of the current year-end, the company has a total of $6.3 million in assets. Inventory information is as follows: File cabinet production is intensely competitive, primarily due to imports from Asia and Mexico. To help manage costs, FRI uses a job-order, standard cost system. Standard costs are assessed quarterly. Each job is costed and compared to standard. Inventory is counted only at the end of the year. There is no perpetual inventory system. Due to problems with raw material quality and new staff, losses have been incurred in the last six months of the year. Your review of last year's audit file indicated that there were numerous inventory adjustments required last year. Required: Using the audit risk model, assess the risks associated with the audit of inventory.

Master files, worksheets, and reports that accumulate material, labour, and overhead as the costs are incurred are

The test of details of balance procedure that requires the auditor to review contracts with suppliers and customers and inquire of management for the possibility of the inclusion of consigned or other non-owned inventory is an attempt to satisfy the objective of

Sample size in physical observation of inventory is

A well-designed computerized system of perpetual inventory data files includes information about the

A common inventory observation procedure is to be alert for items that are damaged, rust- or dust-covered, or located in inappropriate places. The balance-related audit objective achieved by this procedure is

The existence of an adequate storeroom with a competent custodian in charge results in the orderly storage of inventory and can protect inventory from theft and misuse. How would an auditor assess these controls?

When labour is a significant part of inventory, verifying the proper accounting of these costs should be tested in the

As part of the audit of valuation, the auditor is conducting pricing tests by comparing to supplier invoices. The auditor is making sure that, for each item tested, sufficient supplier invoices are examined to cover the quantity of inventory that was on hand during the physical inventory count. What type of pricing error could this detect?

A) State seven specific balance-related audit objectives for inventory pricing and compilation and, for each objective, describe one common test of details of balances related to that objective. B) Explain why the audit of work-in-process and finished goods inventory is generally more complex than the audit of purchased inventory.

XYZ Company uses standard costs for allocating costs to work-in-process and finished goods inventory. For the last few months, there have been high variances between total standard costs and actual costs. What is one of the likely reasons for this variance?

Dishware Distribution Limited uses average costing to cost its inventory. It keeps a perpetual inventory file that is linked to its sales systems. It orders inventory in for specific customers as needed, and traditionally has a slow time just before its year-end. Accordingly, inventory at the year-end is about $2000, while materiality is about $30 000. How should the auditor approach the audit of physical inventory?

CAS for audit procedures for inventory indicate that the auditor

The test of details of balance procedure that requires the auditor to perform tests of lower-of-cost-or-market, selling price, and obsolescence is an attempt to satisfy the objective of

Describe the major risks of error or fraud in the inventory and distribution cycle using the headings of i) risks of error, ii) risks of misappropriation of assets, other fraud, or illegal acts, and iii) risks of inadequate disclosure or incorrect presentation of financial information, including fraudulent financial reporting.

What is the first step that the auditor takes when auditing the valuation of inventory?

It is frequently possible to test the physical inventory prior to the balance sheet date when

What are inventory price tests and inventory compilation tests? Provide an example of each.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that

State six specific balance-related audit objectives for physical inventory observation and, for each objective, describe one common test of details of balances related to that objective.