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ACC 4010 - Auditing > Chapter 12 > Flashcards

Chapter 12 Flashcards

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1
Q

What is the audit objective for the Occurrence assertion for inventory transactions?

A

Purchases recorded represent inventories acquired during the period, and recorded sales transactions represent inventories sold during the period.

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2
Q

What is the audit objective for the Completeness assertion for inventory transactions?

A

All inventories received during the period have been recorded as purchases, and all inventories shipped during the period have been recorded as sales.

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3
Q

What is the audit objective for the Accuracy assertion for inventory transactions?

A

Inventory transactions are accurately recorded.

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4
Q

What is the audit objective for the Cut-off assertion for inventory transactions?

A

Inventories received and shipped before and after the period end are recorded in the correct period.

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5
Q

What is the audit objective for the Classification, Presentation, and Disclosure assertion for inventory transactions?

A

Inventories are recorded in the correct accounts and appropriately presented; all required disclosures are included in the financial statements.

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6
Q

What is the audit objective for the Existence assertion for inventory account balances?

A

Inventories represent items on hand.

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7
Q

What is the audit objective for the Rights and Obligations assertion for inventory account balances?

A

The entity has the right to the inventories included in the balance sheet.

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8
Q

What is the audit objective for the Completeness assertion for inventory account balances?

A

Inventories include all materials, products, and supplies on hand.

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9
Q

What is the audit objective for the Valuation assertion for inventory account balances?

A

Inventories are properly stated at the lower of cost and net realizable value (NRV).

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10
Q

What is the audit objective for the Classification, Presentation, and Disclosure assertion for inventory account balances?

A

Inventories are recorded in the correct accounts and appropriately presented; all required disclosures are included in the financial statements.

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11
Q

What is inventory composed of in a merchandising vs. manufacturing entity?

A

In a merchandising entity: goods available for resale.
In a manufacturing entity: raw materials, work-in-process, and finished goods.

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12
Q

How do smaller entities typically determine inventory at year-end?

A

Through a physical inventory count (they may not maintain inventory records).

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13
Q

What is a perpetual inventory system?

A

A system that records all inventory movements and maintains a running balance of quantity on hand, fully integrated with the accounting system.

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14
Q

What are key controls over inventory custody and record maintenance?

A

Segregation of duties between physical custody and recordkeeping

Periodic (cyclical/annual) physical inventory counts

Comparison of physical counts with perpetual records

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15
Q

Why is segregation of duties important in inventory control?

A

To prevent theft by ensuring no single individual can manipulate both inventory records and physical stock.

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16
Q

What is the purpose of cyclical inventory counts?

A

To count only a portion of the inventory during the period, acting as a control in perpetual inventory systems.

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17
Q

What is the auditor’s responsibility regarding inventory existence?

A

The auditor must obtain evidence of existence by attending and observing inventory counts.

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18
Q

Who should be assigned responsibility for the inventory count?

A

An independent person not responsible for custody of inventory or maintenance of inventory records.

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19
Q

Why should inventory movements be ceased during the count?

A

To avoid cut-off errors and ensure accurate quantities.

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20
Q

What is the purpose of tagging inventory items during a count?

A

To identify which items need to be counted and prevent omissions or duplications.

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21
Q

How should inventory be counted to increase reliability?

A

By using count teams working in pairs to double-check each other’s work.

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22
Q

What are best practices for count sheets?

A

Use ink, pre-printed sheets if possible, have counters initial them, cross out blanks, and ensure all sheets are accounted for.

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23
Q

Why obtain serial numbers of the last receiving/shipping documents before the count?

A

To support cut-off testing and ensure proper period classification.

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24
Q

What should be done if there are differences between the count and perpetual records?

A

Recounts should be performed for significant differences; unexplained variances must be investigated.

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25
What should be done after the count is finalized?
Adjust perpetual inventory records to match the physical count and maintain a record of adjustments.
26
Why are inventories and cost of sales usually significant in audits?
Because they often represent major components of an entity’s financial position and performance.
27
What is the primary inherent risk with inventory?
Overstatement—management may inflate quantities or overvalue inventory.
28
What are other inherent risk factors for inventory?
High volume of transactions, multi-location storage, valuation issues, theft, and obsolescence.
29
What are the key assertions related to inventory auditing?
Existence, Rights and Obligations, and Valuation.
30
When must the auditor assess controls over inventory?
When the entity relies on perpetual inventory records to determine quantities and values at or near period-end.
31
What happens if control risk is not low or if testing controls is inefficient?
The auditor adopts a substantive audit strategy.
32
When is a substantive approach usually more efficient?
For merchandise inventories.
33
When might an auditor use experts in an inventory audit?
For specialized inventories where determining quantity or value requires expertise.
34
What are the auditor’s initial procedures when auditing inventory?
Trace opening balances to prior year’s working papers, review for large/unusual transactions, and agree perpetual records to the general ledger.
35
What are typical analytical procedures for inventory?
Compare to industry trends, calculate inventory turnover and gross profit ratios, and assess inventory levels relative to purchasing, production, and sales activity.
36
What are examples of tests of details of transactions for inventory?
Test a sample of inventory transactions to supporting documentation and verify cut-off accuracy.
37
What is the purpose of observing the physical inventory count?
To verify existence (sheet to floor) and completeness (floor to sheet), and assess the count procedures.
38
What specific count procedures should the auditor perform or verify?
Observe and test count procedures Perform sample test counts Look for slow-moving, damaged, or obsolete items Account for all count sheets and tags Record cut-off info
39
How does the auditor test clerical accuracy during inventory auditing?
By verifying calculations on inventory listings and matching physical counts to perpetual records, including adjustments.
40
How is inventory costing tested?
Examine supplier invoices, costing info, and perform a lower of cost or NRV test.
41
What procedures are used for external inventory locations?
Confirm inventories held offsite.
42
What should be done if inventory is held on consignment?
Enquire and review consignment agreements.
43
What is the auditor’s responsibility regarding financial statement disclosures?
Verify that all required inventory disclosures are properly made in the financial statements.
44
What is the audit objective for the Occurrence assertion for PPE transactions?
Recorded additions represent PPE acquired during the period; recorded disposals represent PPE sold or scrapped during the period.
45
What is the audit objective for the Completeness assertion for PPE transactions?
All PPE additions and disposals that occurred during the period have been recorded.
46
What is the audit objective for the Accuracy assertion for PPE transactions?
All PPE additions and disposals are accurately recorded.
47
What is the audit objective for the Cut-off assertion for PPE transactions?
All PPE additions and disposals before and after the period-end are recorded in the correct period.
48
What is the audit objective for the Classification, Presentation, and Disclosure assertion for PPE transactions?
All PPE additions and disposals are recorded in the correct accounts and appropriately presented; all required disclosures are included in the financial statements.
49
What is the audit objective for the Existence assertion for PPE account balances?
Recorded PPE represents productive assets that are in use.
50
What is the audit objective for the Rights and Obligations assertion for PPE account balances?
The entity owns or has rights to all recorded PPE.
51
What is the audit objective for the Completeness assertion for PPE account balances?
PPE includes all applicable capital assets used in operations.
52
What is the audit objective for the Valuation assertion for PPE account balances?
PPE are properly stated at cost or at valuation less accumulated amortization.
53
What is the audit objective for the Classification, Presentation, and Disclosure assertion for PPE account balances?
PPE is recorded in the correct accounts and appropriately presented; all required disclosures are included in the financial statements.
54
Why is PPE significant in an audit?
Because PPE is often one of the largest assets on the balance sheet and has a material impact on profit or loss.
55
What are the key assertions in auditing PPE?
Existence, Rights and Obligations, and Valuation (including amortization).
56
What are the inherent risks of material misstatement for PPE?
Estimating useful lives and residual values Complexity of depreciation/valuation methods Accounting for PPE under finance leases
57
What types of controls are usually in place for PPE transactions?
Capital budgeting and specific authorization by senior management or governance bodies.
58
Why is a substantive approach often used when auditing PPE?
Because PPE transactions are infrequent but individually material, so testing controls is usually inefficient.
59
What key document does the auditor rely on when auditing PPE?
The PPE continuity schedule prepared by management, reconciling to the sub-ledger and general ledger.
60
What are the main areas of focus for auditors regarding current period PPE activity?
Additions, disposals (and gains/losses), amortization, impairment, leased assets, revaluations, repairs and maintenance, and rental expenses.
61
How does the auditor substantiate PPE additions?
Ensure additions are properly capitalized per policy Vouch recorded amounts to supporting documents Physically inspect major additions Review lease contracts to confirm proper finance lease treatment
62
What steps are involved in substantiating PPE disposals?
Examine documents for sales, trade-ins, or disposals Verify recognition of gains or losses Enquire and inspect PPE inventory count to ensure disposals are recorded
63
Why does the auditor review repairs and maintenance expenses?
To ensure high-value items near the capitalization threshold are properly expensed, not capitalized.
64
Why does the auditor review rental expenses?
To confirm they relate to operating leases (not misclassified or missing from lease disclosures).
65
What are the three aspects of amortization the auditor evaluates?
Reasonableness: based on useful life, past history, and management’s review Consistency: compare current methods to prior year Accuracy: recalculate amortization for major assets and test additions/disposals
66
How does the auditor assess PPE for impairment?
Ensure carrying value does not exceed the greater of net realizable value or value in use; verify write-downs are reasonable.
67
What must the auditor consider when PPE is revalued?
That it is reviewed or performed by an independent, competent, and objective valuator (i.e., expert).
68
What must the auditor ensure regarding PPE disclosures?
That all required disclosures are complete and accurate (PPE has extensive disclosure requirements).

ACC 4010 - Auditing (14 decks)

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