EBK PRINCIPLES OF AUDITING & OTHER ASSU
21st Edition
ISBN: 9781260299434
Author: WHITTINGTON
Publisher: YUZU
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Chapter 12, Problem 36P
To determine
Identify the type of misstatement (error or fraud), type of control that should be considered and the substantive procedure that the auditor should use to detect the misstatement.
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During a routine internal audit at a manufacturing company, the auditor discovers that the inventory records do not match the physical stock. What should the auditor's next step be to address this
discrepancy?
○ A. Ignore the discrepancy as it's probably a minor error.
○ B. Investigate the discrepancy further to understand its cause and recommend corrective measures.
○ C. Adjust the records to match the physical stock without investigation.
○ D. Immediately accuse the inventory manager of fraud.
During the taking of physical inventory, the controller intentionallywithheld several inventory tags from the employees responsible for the physical count.After the auditor left the client’s premises at the completion of the inventory observation,the controller recorded nonexistent inventory on the tags and thereby significantly overstated earnings. How could the auditor have uncovered the misstatement, assuming thatthere are no perpetual records?
From the auditors’ point of view, inventory counts are more acceptable prior to the year-endwhena. Internal control is weak.b. Accurate perpetual inventory records are maintained.c. Inventory is slow moving.d. Significant amounts of inventory are held on a consignment basis
Chapter 12 Solutions
EBK PRINCIPLES OF AUDITING & OTHER ASSU
Ch. 12 - Prob. 1RQCh. 12 - Explain the significance of the purchase order to...Ch. 12 - What segregation of duties would you recommend to...Ch. 12 - Prob. 4RQCh. 12 - Prob. 5RQCh. 12 - Prob. 6RQCh. 12 - Prob. 7RQCh. 12 - Prob. 8RQCh. 12 - Prob. 9RQCh. 12 - When perpetual inventory records are maintained,...
Ch. 12 - What is meant by a bill and hold scheme?Ch. 12 - What charges and credits may be disclosed in the...Ch. 12 - Prob. 13RQCh. 12 - Prob. 14RQCh. 12 - A well-prepared balance sheet usually includes a...Ch. 12 - Darnell Equipment Company uses the LIFO method of...Ch. 12 - Prob. 17RQCh. 12 - Prob. 18RQCh. 12 - Prob. 19RQCh. 12 - Prob. 20RQCh. 12 - Prob. 21QRACh. 12 - Prob. 22QRACh. 12 - Prob. 23QRACh. 12 - Prob. 24QRACh. 12 - Prob. 25QRACh. 12 - Prob. 26QRACh. 12 - Prob. 27QRACh. 12 - Grandview Manufacturing Company employs standard...Ch. 12 - Prob. 29AOQCh. 12 - Prob. 29BOQCh. 12 - The document issued by a common carrier...Ch. 12 - Which of the following should be included as a...Ch. 12 - Prob. 29EOQCh. 12 - Prob. 29FOQCh. 12 - Instead of taking a physical inventory count on...Ch. 12 - Prob. 29HOQCh. 12 - Prob. 29IOQCh. 12 - Prob. 29JOQCh. 12 - Prob. 29KOQCh. 12 - Prob. 29LOQCh. 12 - Prob. 30OQCh. 12 - Adapted AICPA Task-Based Simulation For each of...Ch. 12 - Prob. 32OQCh. 12 - Prob. 33OQCh. 12 - Prob. 34AOQCh. 12 - Prob. 34BOQCh. 12 - Prob. 34COQCh. 12 - Prob. 34DOQCh. 12 - Prob. 34EOQCh. 12 - Prob. 35OQCh. 12 - Prob. 36PCh. 12 - Prob. 37PCh. 12 - Prob. 38PCh. 12 - Prob. 39PCh. 12 - Prob. 40PCh. 12 - Prob. 41PCh. 12 - Prob. 42PCh. 12 - Prob. 43ITCCh. 12 - Prob. 44ECCh. 12 - Western Trading Company is a sole proprietorship...
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- During the taking of physical inventory, the controller intentionally withheld several inventory tags from the employees responsible for the physical count. After the auditor left the client’s premises at the completion of the inventory observation, the controller recorded nonexistent inventory on the tags and thereby significantly over-stated earnings. How could the auditor have uncovered the misstatement, assuming that there are no perpetual records?arrow_forwardAn 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?arrow_forwardBefore the physical examination, the auditor obtains a copy of theclient’s inventory instructions and reviews them with the controller. In obtaining an understanding of inventory procedures for a small manufacturing company, these deficienciesare identified: Shipping operations will not be completely halted during the physicalexamination, and there will be no independent verification of the original inventory countby a second counting team. Evaluate the importance of each of these deficiencies and stateits effect on the auditor’s observation of inventoryarrow_forward
- Detection of Errors and Fraud. For each of the following independent events, indicate the (1) effect of the error or fraud on the financial statements and (2) what auditing procedures could have detected the misstatement resulting from error or fraud.a. The physical inventory count of J. Payne Enterprises, which has a December 31 year-end, was conducted on August 31 without incident. In September, the perpetual inventory was not reduced for the cost of sales.b. Holmes Drug Stores counted its inventory on December 31, which is its fiscal year-end. The auditors observed the count at 20 of Holmes’s 86 locations. The company falsified the inventory at 20 of the locations not visited by the auditors by including fictitious goods in the counts.c. Pope Automotive inadvertently included in its inventory automobiles that it was holding on consignment for other dealers.d. Peffer Electronics Inc. overstated its inventory by pricing wiring at $200 per hundred feet instead of $200 per thousand…arrow_forwardAs 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.arrow_forwardQuestion 1: a. During an audit completion of a manufacturer of advanced electrical components, the auditor identified that the changes in the market resulted in a significant decrease in the demand for their products, which are now being sold significantly below cost. However, management refuses to write-off the products or to increase the reserve for obsolescence. Auditors consider that this decreasing of the inventory account was material and pervasive. b. Subsequent to the date of the FS as part of his post- balance sheet date audit procedures, a CPA learned that a recent fire caused heavy damage to one of a client's two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. The financial statements and appended notes as prepared by the client did not disclose the loss caused by the fire. Required: For the above situation, please identify the most appropriate "type of audit opinion" that auditor would issue. Explain and write out the…arrow_forward
- In the auditor's perspective, what is the ideal timing of the inventory count procedures? * A. Several times during the period under audit B. Before the balance sheet date C. At the balance sheet date D. After the balance sheet date E. None of the abovearrow_forwardStatistical Sampling Used to Estimate Inventory. ACE Corporation does not conduct acomplete annual physical count of purchased parts and supplies in its principal warehousebut uses statistical sampling to estimate the year-end inventory. ACE maintains a perpetualinventory record of parts and supplies. Management believes that statistical sampling ishighly effective in determining inventory values and is sufficiently reliable, making a physical count of each item of inventory unnecessary.Required:a. List at least 10 normal audit procedures that should be performed to verify physical quantities whenever a client conducts a periodic physical count of all or part of its inventory.(See Appendix Exhibit 9B.1 for procedures.)b. Identify the audit procedures you should use that change or are in addition to normalrequired audit procedures [in addition to those listed in your solution to part (a)] when aclient utilizes statistical sampling to determine inventory value and does not conduct a100…arrow_forward1. What is the primary reason we perform physical inventory observations? A. To obtain sufficient appropriate audit evidence over the existence and condition of inventory to meet the objectives of the professional auditing standards B. To obtain sufficient appropriate audit evidence that inventory is recorded at the correct cost on the financial statements C. To provide assurance over the time it takes inventory to leave the warehouse and arrive at the customer D. To verify assumptions used in management's estimates regarding inventory reserves 2. What piece of information gained during the understanding of the inventory process would be LEAST relevant to the scoping of inventory locations? A. The company hired a new count supervisor for one of their largest locations B. Book to physical adjustments were material in the prior year for 2 locations C. Cycle count accuracy rates have been greater than management's targets in the prior year and current year to date D. WIP inventory takes…arrow_forward
- An auditor is examining a nonpublic company’s inventory procurement system and has decided to perform tests of controls. Under which of the following conditions do GAAS require tests of controls be performed by an auditor?a. Significant weaknesses were found in the company’s internal control.b. The auditor hopes to reduce the amount of work to be done in assessing inherent risk.c. The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.d. Tests of controls are always performed when the auditor begins to assess control risk.arrow_forwardAn audit report contains the following observations: a. A service department's location is not well suited to allow adequate service to other units. b. Employees hired for sensitive position are not subjected to background checks, c. Managers do not have access to reports that profile overall performance in relation to other benchmarked organizations, d. Management has not taken corrective action to resolve past engagement observations related to inventory controls. Which two of the above enumerated observations are most likely to indicate the existence of control weaknesses over safeguarding of assets? Please explain why?arrow_forwardA serious exposure in the ordering process of the expenditure cycle is increased inventory costs. What is the related threat and applicable control procedure that address this exposure? A. mistakes in counting; do not inform receiving employees about quantity ordered B. paying for items not received; requiring that all supplier invoices be matched to supporting documents C. purchasing at inflated prices; review of purchase orders D. theft of inventory; periodic physical counts of inventory and reconciliation to recorded quantities E. mistakes in posting to accounts payable; reconciliation of detailed accounts payable to the general ledger control accountarrow_forward
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