Exam 14: Audit of the Inventory and Distribution Cycle

A) Discuss the key control procedures relating to the client's physical count of inventory. B) State the primary determinants of the amount of time needed to perform the physical observation of inventory.

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

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.

The overall objective in the audit of the inventory and distribution cycle is to determine that

To detect an overstatement or understatement of inventory and cost of goods sold, the auditor may perform an analytical procedure such as comparing

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?

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

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?

Identify three analytical procedures commonly used when auditing accounts in the inventory and distribution cycle.

If the auditor concludes that the physical controls over inventory are so inadequate that inventory will be difficult to count, the auditor should

The bias in recording inventory would be toward

The most important part of the observation of inventory is determining whether

The auditor has determined that the perpetual inventory master files are high quality, assessing control risk related to physical observation of inventory as low. How does this affect audit testing? The auditor may

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

The audit of the inventory and distribution cycle consists of five parts. State the five parts and, for each part, identify the cycle in which that part is tested by the auditor.

State the six functions that make up the inventory and distribution cycle and, for each function, identify the related documents and/or records that would be used by a manufacturing company.

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

An auditor has determined that there is a high risk that her client has overvalued inventory. Which audit assertions would require additional testing?

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

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