Exam 13: Auditing the Inventory Management Process

The audit test of control "Review and test procedures for issuing materials to manufacturing departments" provides assurance mainly for the occurrence assertion for inventory management.

The audit of the inventory management process is affected by the audit results from multiple other processes. Identify the processes, other than the inventory management process, that affect the audit of inventory and explain how each affect the audit of inventory.

An auditor selected items for test counts while observing an entity's physical inventory. The auditor then traced the test counts to the entity's inventory listing. This procedure most likely provided evidence concerning management's assertion of:

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

You are auditing SBT, which has a December 31ˢᵗ year-end. On December 24ᵗʰ, the person responsible for processing receiving reports and recording the receipt of inventory became very ill and was out of the office for a week. Due to the company's small staff and the holiday season, a number of the receiving reports were not processed on a timely basis. As an auditor, on which assertion would you place a high importance for this entity and how would you test for it?

If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded:

Production personnel should ordinarily be responsible for maintaining perpetual inventory records.

Which assertion for ending inventory is most likely violated if the gross profit percentage is much greater than last year?

A comparison of the current year's inventory turnover ratio with previous years' may indicate the presence of obsolete inventory.

Auditors are most likely to ensure that no production activity is scheduled prior to:

When outside firms of non-accountants specializing in physical inventory counts are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily:

An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that:

Observing an entity's inventory held on consignment by others tests the assertion of:

For each of the following, state whether it is a test of details of account balances or a test of details of disclosures. Then note for which assertion the test provides evidence. 1. Inspect loan agreements under which an entity's inventories are pledged. 2. Review inventory compilation for proper classification among raw materials, work in process, and finished goods. 3. Observe the count of physical inventory. 4. Trace test counts and tag control information to the inventory compilation. 5. Inquire of management about issues related to LIFO liquidations. 6. Review book-to-physical adjustments for possible misstatements.

An auditor generally tests physical security controls over inventory by:

In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to:

The major control procedure for preventing fictitious inventory transactions from being recorded is proper segregation of duties.

In an audit of inventories, an auditor would least likely verify that:

Shipping orders are forwarded from the revenue process to:

Inventory should be valued using the lower-of-cost-or-market rule.