Required information Potential Misstatements in the Auditing of Inventory Read the overview below and complete the activities that follow. Because of its importance and typically high dollar value on the balance sheet of a manufacturing entity, the audit of inventory is important and often high risk. As such, auditors must take additional care when auditing this area due to the capacity for both errors and fraud. CONCEPT REVIEW: When identifying misstatements in testing inventory, it is important to consider the control environment to determine if the misstatements found are indicators of client error or intentional fraud 1. Inventories with a high risk of 2. Purchasing and cash disbursements can provide opportunity for by employees considering information about the client and its environment, the auditors must assess the 3 risks of material misstatement related to assertions about inventory may be warranted as a signficant risk 5 4 Audit procedures for consignment inventory could include a comparison of the physical inventory with the client's Tests used to help identify the structure of controls help to evaluate the client's internal control

Required information Potential Misstatements in the Auditing of Inventory Read the overview below and complete the activities that follow. Because of its importance and typically high dollar value on the balance sheet of a manufacturing entity, the audit of inventory is important and often high risk. As such, auditors must take additional care when auditing this area due to the capacity for both errors and fraud. CONCEPT REVIEW: When identifying misstatements in testing inventory, it is important to consider the control environment to determine if the misstatements found are indicators of client error or intentional fraud 1. Inventories with a high risk of 2. Purchasing and cash disbursements can provide opportunity for by employees considering information about the client and its environment, the auditors must assess the 3 risks of material misstatement related to assertions about inventory may be warranted as a signficant risk 5 4 Audit procedures for consignment inventory could include a comparison of the physical inventory with the client's Tests used to help identify the structure of controls help to evaluate the client's internal control

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Auditing Sales/Revenue Transactions When an auditor needs to obtain an understanding of the overall internal control of a company, the auditor first needs to consider the elements of the control environment. To assist the auditor in assessing the level of control risk, the following tests of controls were designed to allow the auditor to determine if the company’s related controls were operating effectively in the revenue cycle. Determine which of the four management assertion(s) apply to each individual sales (revenue) control being discussed. Hint: many have more than one assertion. Management Assertions: Existence & Occurrence, Rights, Completeness, Valuation 5. The computer assigns a number to every sales invoice. Which management assertions apply to this control? 6. Input validation checks (application controls) are applied to every bill to ensure the accuracy of the billing process. Which management assertions apply to this control?…
During the audit of Sunrise Enterprises, LLC, a provider of plastic utensils and other items to restaurants throughout the southeastern United States, the auditors have determined that the client's inventory represents an area of higher inherent risk. As a result, which of the following choices would most likely represent a prudent course of action by the auditor? O The auditor is most likely to simply disclaim an opinion on the client's inventory and any related accounts, as this area represents higher audit risk. The auditor may decide to audit the inventory accounts closer to the balance sheet date, and extend the extent of procedures performed on these accounts. O The auditor is likely to adopt a reliance on controls strategy, and perform less substantive procedures accordingly. O The auditor is likely to perform procedures on these accounts closer to the beginning of the audit, to allow more time to fix any problems uncovered.
Assuming that the auditor properly documents receiving reportnumbers as a part of the physical inventory observation procedures, explain how theproper cutoff of purchases, including tests for the possibility of raw materials in transit,should be verified later in the audit
Assume that the client’s internal controls over the recording and classifying of fixed asset additions are considered weak because the individual responsible for recording new acquisitions has inadequate technical training and limited experience in accounting. How will this situation affect the evidence you should accumulate in auditing fixed assets as compared with another audit in which the controls are excellent? Be as specific as possible.
Q.9.
Sales orders are written by sales people who have no access to the goods, which are released by warehouse personnel. This is example of: an analytical review establishing a system for storing and counting inventory proper documentation that is monitored properly segregation of duties
How does inventory control deficiencies affect the development of audit procedures for inventories?
As the auditor of Sample Limited you note the following matters relating to the internal control of its sales system. i) The sales department accepts order without first checking the inventory level with the warchouse, ii) Goods are dispatched to customers without recording customer's signatures as proof of receipt of goods. iii) Orders of goods placed by customers are properly recorded but they are not forwarded timely to the dispatch department for fulfilling the order. For each of the above deficiencies, identify the possible impact on the company's operation and recommend a control to address it. Explain why an auditor cannot perform only test of control in an audit.
An auditor discovered the following errors and irregularities while performing tests of controls: Inventory damaged by rain remains in inventory at full cost. Required: What control would have prevented or detected each of the aforementioned errors/irregularities? What tests should the auditor perform to test each control? To which financial statement assertion does the error or irregularity relate?
How do you assess the risk of material misstatement associated with the audit of inventories?
Audit firms may have a standardized audit programs for auditing long-lived assets but auditors must still customize the audit program based on the assement of the risk of material misstatement. Why/how?