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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A major objective of written representations is toa. Shift responsibility for financial statements from the management to auditors.b. Provide a substitute source of audit evidence for substantive procedures that auditors would otherwise perform.c. Provide management an opportunity to make assertions about the quantity and valuation of the physical inventory.d. Impress on management its ultimate responsibility for the financial statements and disclosures.
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?…
Study and Evaluation of Management Control. The study and evaluation of management risk mitigation control is not easy. First, auditors must determine the risks and the controls subject to audit. Then they must find a standard by which performance of the control can be evaluated. Next they must specify procedures to obtain the evidence on which an evaluationcan be based. Insofar as possible, the standards and related evidence must be quantified. The following description gives certain information (in italics) that internal auditors would know about or be able to determine on their own. Fulfilling the requirement thus amounts to taking some information from the scenario and figuring out other things by using accountants’ and auditors’ common sense.The ScenarioAce Corporation ships building materials to more than a thousand wholesale and retail customers in a five-state region. The company’s normal credit terms are net/30 days, and no cash discounts are offered. Fred Clark is the chief…
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.
CAATS (Computer Assisted Auditing Techniques) can be used in all of the following ways when gathering evidence except: Multiple Choice For the selection of accounts receivable, loans, or other receivables for confirmation. For matching vendor invoices with supporting purchase orders and receiving reports. For the development of expectations when performing analytical procedures. For scanning inventory quantities for negative balance.
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?
Listed below are the management assertions that are contained in financial statements, financial statement misstatements, and concepts. For each of the below misstatements and concepts, select the appropriate assertion by management that is being violated. Replies may be used more than once. Misstatements & Concepts a. The client failed to include in their financial statements inventory that was consigned to others. b. The client had a significant amount of damaged goods that were presented at cost. C The client failed to describe in the financial statements significant debt restrictions. d. The client recorded receivables that were fictitious. e. The client recorded year-end sales in the subsequent year. f. The client included in their financial statements inventory that was on consignment from vendor. g. In directional testing, vouching from ledgers to source documents most directly addresses this assertion. h. In directional testing, tracing from source documents to journals most…
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?