Exam 14: Auditing Inventory Processes: Tracking and Costing Products in the Land Development and Home Building Industry

In order for an auditor to test ownership of a client's inventories, each of the following substantive tests of details of account balances are appropriate except:

Which types of inventory transactions are not likely to create variable interest entities that would require consolidation?

Ballpark Distributors, Inc. is a large public company with a calendar year end that distributes sports memorabilia to various retailers. Ballpark conducted an inventory count on November 30 of the year being audited. Instead of conducting another inventory count at year end, the company decided to estimate the year-end inventory using a sample of the year-end inventory on hand. The company uses a perpetual inventory system and feels that sampling to estimate the year-end inventory will produce a reliable financial statement amount. Required: Assume that the auditor observed and tested Ballpark's physical inventory count on November 30, and was satisfied that the count and resulting adjustments produced an appropriate inventory account balance on November 30. (a)What roll-forward procedures between the inventory count date and year end might the auditor perform? (b)What additional tests of details of balances can the auditor perform?

Direct tracing is a cost accounting technique for tracking individual costs associated with a manufactured product or production process.

When using the percentage of completion method, the amount of revenue recognized in the current period is calculated using the proportion of total expected product costs relative to costs incurred to date.

Overhead costs are also known as:

To ensure that a client's raw materials, work-in-process, and finished goods inventories are physically protected from theft or damage, an auditor could perform a test of controls such as:

Which of the following business functions or activities is unique to the manufacturing industry with respect to the production of finished goods from raw materials?

In a manufacturing environment using a backflush system, a typical trigger for posting inventory transactions is the company's vulnerability to shrinkage losses.

In the land development and home building industry, materials costs are typically added to the inventory cost of a specific unit based on actual purchases prices except when:

Manufacturing entities using standard costing systems should avoid the use of accounting estimates in order to reduce the likelihood of audit adjustments.

The purpose of a materials requisition form is to:

Controls in the inventory cycle that support proper records of units and costs cannot be effective unless the documentation and controls for purchasing, payroll, and sales are also effective.

For planned communities, common costs can be allocated to individual residential units using the:

When ICFR and the quality of perpetual inventory records justify relying on an inventory count by the company at other than fiscal year end, the auditor's testing should include each of the following except:

When a company's cost accounting system uses process costing, work-in-process is accumulated based on:

In order to obtain audit evidence about account balances, many tests of controls may be enhanced by the added activity of tracing the sampled items from the inventory compilation report and verifying that the compilation amounts agree with the general ledger. This enhanced test would be considered a:

Management may estimate costs of material, labor, and overhead for each unit of inventory based upon experience and/or engineering specifications.

A test of controls can be modified to be performed as a dual purpose test if the modification provides evidence about the related account balances. Describe a substantive procedure that can be added to a test of controls in order make it a dual purpose test. The substantive procedure you identify must be one that could be added to most any test of controls involving a sample selection or mathematical verification.

If a client company performs its physical inventory counts on a date other than year-end, auditors must verify that: