Shared Flashcard Set

Details

Inventory Observations
Flash cards for beginning staff training on inventory observations
5
Accounting
Professional
10/04/2011
Click here to study/print these flashcards.

Create your own flash cards! Sign up here.

Additional Accounting Flashcards

 

 

Cards

Term
When you must perform an inventory observation for an audit client?
 Definition
Professional standards require attendance at the physical inventory carried out by the client whenever inventory is material (quantitatively or qualitatively) to the financial statements.
Term
What is the auditor’s objective when an inventory observation is required?
 Definition
The auditor’s objective in observing the inventory count activities is to determine that the client’s counting procedures are complete, reliable, and accurate.
Term
What information must an auditor obtain and understand prior to performing an inventory observation?
 Definition
To plan an appropriate and effective inventory observation, it is important for the engagement team to have an understanding of the client's business, its products, its computer processing applications, and relevant controls before the physical count occurs, including knowledge of the physical inventory or cycle count procedures and the inventory summarization, pricing, and cut-off procedures.  The auditor in charge should contact the relevant client contact to discuss specific counting procedures, inventory balances, location and timing to ensure appropriate staff are scheduled and proper planning is performed.  The auditor should discuss the control of count sheets and determine an approximate amount of test counts to perform.
Term
What instances should an auditor consider when identifying factors which indicate a risk of material misstatement due to fraud?
 Definition

a. Empty boxes or "hollow squares" in stacked goods.

b. Mislabeled boxes containing scrap, obsolete items, or lower value materials.

c. Consigned inventory, inventory that is rented, or traded-in items for which credits have not been issued.

d. Diluted inventory so it is less valuable (e.g., adding water to liquid substances).

e. Increasing or otherwise altering the inventory counts for those items the auditor did not test count.

f. Programming the computer to produce fraudulent physical quantity tabulations or priced inventory listings.

g. Manipulating the inventory counts/compilations for locations not visited by the auditor.

h. Double counting inventory in transit between locations.

i. Physically moving inventory and counting it at two locations.

j. Including in inventory merchandise recorded as sold but not yet shipped to a customer ("bill and hold sales").

k. Arranging for false confirmations of inventory held by others.

l. Including inventory receipts for which corresponding payables had not been recorded. m. Overstating the stage of completion of work-in-process.

n. Reconciling physical inventory amounts to falsified amounts in the general ledger.

o. Manipulating the "roll-forward" of an inventory taken before the financial statement date.
Term
What are some additional procedures an auditor can perform when factors are identified which indicate a risk of material misstatement due to fraud?
 Definition
a. Request the client to conduct the physical count at year-end (when not already done so)
b. Request that the client make a complete wall-to-wall count in place of cycle counts or reliance on perpetual inventory records.
c. Observing inventory at more locations when an entity has inventory at multiple locations.
d. Increasing the extent of observation procedures such as being present for the entire inventory count; opening more sealed cartons or recording more test counts.
Supporting users have an ad free experience!