Explain the relationship between the acquisition and payment cycle and the inventory and warehousing cycle in the audit of a manufacturing company. List several audit procedures in the acquisition and payment cycle that support your explanation.
21-2 (OBJECTIVE 21-3) Many auditors assert that certain audit tests can be significantly reduced for clients with adequate perpetual records that include both unit and cost data.
What are the most important tests of the perpetual records that the auditor must make before reducing assessed control risk? Assuming the perpetuals are determined to be accurate, which tests can be reduced?
21-3 (OBJECTIVE 21-4) List the major substantive analytical procedures for testing the overall reasonableness of inventory. For each test, explain the type of misstatement that could be
identified.
21-4 (OBJECTIVES 21-4, 21-5, 21-6) In the verification of the amount of inventory, one of the
auditor’s concerns is that slow-moving and obsolete items be identified. List the auditing
procedures that can be used to determine whether slow-moving or obsolete items have
been included in inventory.
21-5 (OBJECTIVE 21-5) Before the physical examination, the auditor obtains a copy of the
client’s inventory instructions and reviews them with the controller. In obtaining an un-
derstanding of inventory procedures for a small manufacturing company, these deficien-
cies are identified: Shipping operations will not be completely halted during the physical
examination, and there will be no independent verification of the original inventory count
by a second counting team. Evaluate the importance of each of these deficiencies and state
its effect on the auditor’s observation of inventory.
21-6 (OBJECTIVE 21-5) 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 overstated earnings. How could the auditor have uncovered the misstatement, assuming that there are no perpetual records?
21-7 (OBJECTIVE 21-5) At the completion of an inventory observation, the controller requested the auditor to give him a copy of all recorded test counts to facilitate the correction of all discrepancies between the client’s and the auditor’s counts. Should the auditor comply with the request? Why?
21-8 (OBJECTIVE 21-5) What major audit procedures are involved in testing for the ownership of inventory during the observation of the physical counts and as a part of subsequent valuation tests?
21-9 (OBJECTIVE 21-5) Assuming that the auditor properly documents receiving report
numbers as a part of the physical inventory observation procedures, explain how the
proper cutoff of purchases, including tests for the possibility of raw materials in transit,
should be verified later in the audit.
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