Exam 7: Auditing the Inventory Business Process

The applicable financial reporting framework allows the audit client to determine both the cost and market value of inventory.Select the correct item(s)from the following list regarding these determinations:

Management prepares the financial statements and footnotes but the auditor prepares the discussion of the inventory.

The client may use a variety of methods to overstate inventory.These include

In the inventory process,adjustments to the ending inventory balance are always recorded against

The totals at the end of the year in the inventory process expense accounts reflect

After the auditor has completed the substantive tests of balances for the inventory process,he or she determines

Substantive audit procedures in the inventory process are

The inventory physical count gives the company

Assuming that internal controls are in place and operating effectively in the cost accounting system,how can the auditor verify direct material costs?

The auditor performs the following procedures in preparation for attending the physical inventory counting

Primal Elements,Inc is a new company that manufactures unique glycerin-blend soaps,which sell for between $7 and $9 a bar.The factory located in California in the United States has 55,000 square feet and 160 full time employees.The products are sold in 11,000 retail stores in 12 countries.2011 sales were $70 million.a.Assume you are the auditor in charge of the year-end physical inventory count for the factory.Describe what will happen during the physical inventory process;what does the client do;what does the auditor do? b.Identify the assertions that you gather evidence for during the count and describe how you gather the evidence.c.What assertions still need to be tested after the physical count? How will you gather this evidence?

The disclosures related to the financial statements are usually found in

The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm.If LIFO inventory is greater than FIFO inventory,

Management often uses internal controls in the inventory process

Automated inventory systems may be used to maintain control over inventory,but not to keep track of production quantities.

If the inventory count is done at a date other than the end of the year,the auditor does not have to observe the inventory count but should perform his own count at year end.

The balance sheet for BCS,Inc.for December 31,2012 and December 31,2011 is provided below.You are working on the audit for the 12/31/12 year-end.The 12/31/11 balance sheet numbers were audited by your CPA firm last year.Use the partial balance sheet for BCS provided below.You have been assigned to audit the ending inventory numbers. Cash Trading Investment Securities Allowance for Trading Securities Accounts Receivable Raw Materials Inventory WIP Inventory Finished Goods Inventory Land Building Accumulated Depreciation-Building Construction-in-Progress Accumulated Depreciation-CIP Held-to-Maturity Securities Available for Sale Securities Allowance for Available-for-Sale Securities 12/31/2012 12/31/2011 25,439 32,786 345,000 436,000 54,738 -23,412 120,334 143,023 275,963 345,768 34,087 32,635 348,974 438,678 2,300,000 3,444,567 2,256,876 2,345,987 -1,200,000 -1,000,000 2,345,678 2,112,473 -100,000 -75,000 1,200,765 1,100,325 2,100,000 3,145,000 -786,000 -943,000 a.Describe how the ending inventory numbers were determined.b.What audit tests did the auditor perform to determine that the ending inventory numbers were accurate? c.Describe an audit sampling test that you might use to gather evidence for the valuation assertion for inventory.d.How would the auditor determine that inventory exists? e.How would the auditor determine that the completeness assertion in regard to inventory is met? f.Can you identify any "red flags" related to the inventory balance? How would you modify your audit procedures to gather evidence in light of the red flags?

The client may use a variety of methods to overstate inventory.These include

On the balance sheet,the inventory process includes which of the following accounts?

If the auditor selects the sample of inventory items to count from the inventory listing at year-end,the auditor gathers evidence about which assertion(s)?