Auditing and Assurance Services (16th Edition)
16th Edition
ISBN: 9780134065823
Author: Alvin A. Arens, Randal J. Elder, Mark S. Beasley, Chris E. Hogan
Publisher: PEARSON
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Chapter 21, Problem 3RQ
To determine
Explain the major substantive analytical procedure for testing the overall reasonableness of inventory and identify the misstatement for each test.
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Analyze some common internal controls over inventories. Explain the significant inherent risks associated with inventory. Explain the process of physical inventory counts and the auditor’s observation of this process.
Explain whether or not analytical review procedures wouldbe sufficient for the audit of the inventory.
When evaluating inventory controls, an auditor would be least likely toa. Inspect documents.b. Make inquiries.c. Observe procedures.d. Consider policy and procedure manuals
Chapter 21 Solutions
Auditing and Assurance Services (16th Edition)
Ch. 21 - Prob. 1RQCh. 21 - Prob. 2RQCh. 21 - Prob. 3RQCh. 21 - Prob. 4RQCh. 21 - Prob. 5RQCh. 21 - Prob. 6RQCh. 21 - Prob. 7RQCh. 21 - Prob. 8RQCh. 21 - Prob. 9RQCh. 21 - Prob. 10RQ
Ch. 21 - Prob. 11RQCh. 21 - Each employee of the Gedding Manufacturing Co., a...Ch. 21 - Prob. 13.1MCQCh. 21 - Prob. 13.2MCQCh. 21 - Prob. 13.3MCQCh. 21 - Prob. 14.1MCQCh. 21 - Prob. 14.2MCQCh. 21 - Prob. 14.3MCQCh. 21 - Prob. 15.1MCQCh. 21 - Prob. 15.2MCQCh. 21 - Prob. 15.3MCQCh. 21 - Prob. 16DQPCh. 21 - Prob. 17DQPCh. 21 - Prob. 18DQPCh. 21 - Prob. 19DQPCh. 21 - Prob. 20DQPCh. 21 - Prob. 22DQPCh. 21 - Your client, Ridgewood Heating and Cooling,...Ch. 21 - Prob. 24DQPCh. 21 - Prob. 25DQPCh. 21 - Prob. 26DQPCh. 21 - Prob. 27DQPCh. 21 - Prob. 28DQPCh. 21 - Prob. 29DQP
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- How does inventory control deficiencies affect the development of audit procedures for inventories?arrow_forwardAs part of your audit of a client's inventory balance, you created an expectation of what should be the inventory balance by using the gross profit method. The difference between your expectation using the gross profit method of estimating inventory as against the client reported balance is above audit materiality level for audit of inventory. What should you do next? a. Discuss with the management the implication of the significant difference and propose an adjusting journal entry accordingly.b. Extend audit procedures by doing further analytical procedures on the inventory balance.c. Extend audit procedures by doing test of details of the account balance.d. Issue a qualified opinion on the basis of a material misstatement in the client's inventory.e. None of the abovearrow_forwardChoose the one correct answer. As part of your audit of a client's inventory balance, you created an expectation of what should be the inventory balance by using the gross profit method. The difference between your expectation using the gross profit method of estimating inventory as against the client reported balance is above audit materiality level for audit of inventory. What should you do next? a. Discuss with the management the implication of the significant difference and propose an adjusting journal entry accordingly.b. Extend audit procedures by doing further analytical procedures on the inventory balance.c. Extend audit procedures by doing test of details of the account balance.d. Issue a qualified opinion on the basis of a material misstatement in the client's inventory.e. None of the abovearrow_forward
- An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning management’s balance assertion ofa. Rights and obligations.b. Completeness.c. Existence.d. Valuation and allocationarrow_forwardAssuming that the auditor properly documents receiving reportnumbers as a part of the physical inventory observation procedures, explain how theproper cutoff of purchases, including tests for the possibility of raw materials in transit,should be verified later in the auditarrow_forwardAn auditor usually traces the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of thephysical inventory count area. Owned by the client.b. Not obsolete.c. Physically present at the time of the preparation of the final inventory schedule.d. Included in the final inventory schedule.arrow_forward
- Why is inherent risk for the existence of inventory an issue in the expenditure cycle audit?arrow_forwardAn auditor selected items for test counts from the client’s warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that agreed to the financial statements. This procedure most likely provided evidence concerning management’s assertion ofa. Rights and obligations.b. Completeness.c. Existence.d. Valuation.arrow_forwardWhat is the primary purpose of analytical procedures performed during the planning stages of the audit? Please identify the warning signs that were revealed about the inventory balance during analytical procedures that were ignored by the auditors.arrow_forward
- An auditor often tries to acquire background knowledge of theclient’s industry as an aid to audit work. How does the acquisition of this knowledge aidthe auditor in distinguishing between obsolete and current inventory?arrow_forwardHow could the auditors have determined that the inventory balance was materially misstated? What changes to the audit plan would have been necessary to validate the existence and valuation of inventory?arrow_forwardAn auditor selected items for test counts while observing a client’s physical inventory.The auditor traced the test counts to the client’s inventory listing. This procedurelikely obtained evidence about which balance-related audit objective for inventory?(1) Existence (3) Completeness(2) Rights and obligations (4) Realizable valuearrow_forward
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