Term
| What are the risks to having a leaner supply chain? |
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Definition
| Not having the inventory could lead to shut downs, it is much easier to distort inventories b/c its not as easy to verify. It is easier to distort income by manipulating inventories than cash or investments. Inventories are the second most misstated accounts. |
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Term
| Consignment systems/contracts |
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Definition
| the vendor retains title to inventory held by a retailer until a sale to the ultimate consumer takes place. |
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Term
| Benefit to Vendor/Retailer of consignment arrangements: |
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Definition
vendor: control over shelf space and access to consumers
retailer: lower financing costs and risk |
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Term
| Risks of consignment arrangements: |
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Definition
| incentives of vendor and retailer may differ and possible vendor concerns over existence/access. |
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Term
| Automated inventory systems |
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Definition
| electronic scanning of bar codes enables companies to track quantities on hand and order inventory when needed - RFID. Tech is imperfect though... |
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Term
| Inventory = Quantity * Price |
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Definition
Quantity - goods in transit, sheer volume/different types, multiple locations all over the globe
Price - always follow pricing methodology, incosistency can lead to inventory misstatement, obsolescence/returns/damages, manufacture costs (what costs should be included) |
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Term
| Wells article - summarizes several classic frauds and corresponding audit pointers |
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Definition
1. Falsification of inventory records
2. buy inventory buy don't reflect payables in f.s.
3. Inventory balance - includes iems that should have been expensed and are capitalize instead. |
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Term
| Perpetual inventory systems |
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Definition
| computer system keeps up with inventory on a moment by moment basis. |
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Term
| With the use of perpetual inv systems are periodic cycle counts still necessary? |
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Definition
| Yes, they are needed to verify physical existence.. ex: beg inv +purchases-end inv = cogs |
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Term
| if asked to count inventory.. |
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Definition
| be skeptical, use your head, look INSIDE boxes to account for items - do not just trust the boxes' labels. |
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Term
| if asked to count inventory.. |
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Definition
| be skeptical, use your head, look INSIDE boxes to account for items - do not just trust the boxes' labels. |
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Term
| Can companies change their cost-flow assumption (FIFO, LIFO)? |
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Definition
| NO - must stay consistent. otherwise, could lead to inv. misstatements |
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Term
| Under GAAP, inventories must be valued at what? |
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Definition
| the LOWER of Cost or Market. Market is usually the lesser of replacement cost or net realizable value |
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Term
| Red flags for value-impaired or obsolete inventory: |
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Definition
1. rapidly decreasing costs (high-tech products)
2. Slow-moving inventory
3. Returned and damaged goods
Be attuned in areas of high innovation, if tech is evolving pay attention! |
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Term
How to fix an Inventory Error 1
inventory costing 130k was sold in 2005 but was not charged to cost of sales until 2006 (not reflected until 2006). Fix 2005: |
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Definition
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Term
How to fix inventory error 2
inventory costing 130k was sold in 05, but not reflected until 2006. It is too late to fix 05, fix 06: |
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Definition
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Term
| if two years past the inventory error - what do you do? |
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Definition
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Term
| You discover that this year's ending inventory is overstated by 130k, while BEG inventory was overstated by 100k. The client did not record any adjusting entry in the prior year. Fix this year: |
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Definition
COGS 30K
R/E 100K
inventory 130k |
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Term
| Auditing accts payable for purchases presents a fundamentally different challenge that auditing accts rec for sales. Why? |
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Definition
| In accounts payables, you are looking for the accounts to be understated, while in accounts rec. you are looking for accounts to be OVER stated. |
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Term
| Would it generally make more sense to trace payables to invoices, or to trace invoices to payables? |
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Definition
| Start with invoices, find things that could be included in balance. Trace invoices to payables. Make sure everything is in the balance. |
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Term
| What kind of contract are purchase commitments? |
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Definition
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Term
| Under GAAP, when do purchases need to be recorded |
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Definition
| Not until goods are received or services are rendered; however, sig purchase commitments ust be disclosed in the notes to the f.s. |
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