Explain Potential Misstatements- Inventory/ Cost of Goods Sold and the description of misstatements and their examples. The misstatements of inventory cost, misstatements of inventory quantities and Early(Late) recognition of purchases - “cutoff problems” Internal Control Affecting Assets 257Early (late) recognition ofpurchases "cutoff problems".Intentional recording of● Ineffective board ofpurchases in thesubsequent period.directors, audit committee,or internal audit function;"tone at the top" notconducive to ethicalconduct; undue pressure tomeet earnings targets.Recording purchases of thecurrent period in thesubsequent period.Ineffective accountingprocedures that do not tierecorded purchases toreceiving data.INTERNAL CONTROL OVER PROPERTY, PLANT AND EQUIPMENTThe term properly, plant and equipment includes all tangible assets with aservice life of more than one year that are used in the operation of the businessand are not acquired for the purpose of resale. Three major subgroups of suchassets are generally recognized:1. Land, such as properly used in the operation of the business, has thesignificant characteristic of not being subject to depreciation.2. Buildings, machinery, equipment and land improvements, such as fencesand parking lots, have limited service lives and are subject todepreciation.3. Natural resources (wasting assets), such as oil wells, coal mines, andtracts of timber, are subject to depletion as the natural resources areextracted or removed.Acquisitions and disposals of property, plant and equipment are usually large indollar amount, but concentrated in only a few transactions. Individual items ofplant and equipment may remain unchanged in the accounts for many years.Fraud:Error:●● 256 Chapter 16Potential Misstatements - Inventory / Cost of Goods SoldDescription of MisstatementExamplesMisstatement of inventory costsFraud:●Intentional misstatement ofproduction costs assignedto inventory.Intentional misstatement ofinventory prices.The assignment of directlabor costs, direct materialcosts, or factory overheadto inventory items isinaccurate.Erroneous pricing ofinventory.Misstatement of inventoryquantitiesItems are stolen with nojournal entry reflecting thetheft.Inventory quantities inlocations not visited byauditors are systematicallyoverstated.Miscounting of inventory bypersonnel involvedinphysical inventory.Errors:●Fraud:Errors:Internal Control Weakness orFactors that Increase the Risk ofthe MisstatementIneffective board ofdirectors, audit committee,or internal audit function;"tone at the top" notconductive to ethicalconduct; undue pressure tomeet earnings targets.Ineffective cost accountingsystem; failure to updatestandard costs on a timelybasis.Ineffective input validationcontrols on the database ofinventory costs; ineffectivesupervision of thepersonnel that enter thecosts on the final inventoryschedule.Ineffective physicalcontrols over inventories.Ineffective board ofdirectors, audit committee,or internal audit function;"tone at the top" notconducive to ethicalconduct; undue pressure tomeet earnings targets.Ineffective controls orsupervision of physicalinventory.●

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Description: Explain Potential Misstatements- Inventory/ Cost of Goods Sold and the description of misstatements and their examples. The misstatements of inventory cost, misstatements of inventory quantities and Early(Late) recognition of purchases - “cutoff prob

Internal control is a procedure for insuring that an organization's objectives in operational…

Business

Accounting

Explain Potential Misstatements- Inventory/ Cost of Goods Sold and the description of misstatements and their examples. The misstatements of inventory cost, misstatements of inventory quantities and Early(Late) recognition of purchases - “cutoff problems”

Explain Potential Misstatements- Inventory/ Cost of Goods Sold and the description of misstatements and their examples. The misstatements of inventory cost, misstatements of inventory quantities and Early(Late) recognition of purchases - “cutoff problems”

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter6: Cost Of Goods Sold And Inventory

Section: Chapter Questions

Problem 78.2C

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Which of the following statements related to the application of the lower of cost and net realizable value is true? * A. If the replacement cost of a raw material is less than its cost, the said raw material shall always be presented at its replacement cost B. If the net realizable value of an inventory is lower than its cost, a loss on inventory write-down should be recognized C. The gain on reversal of inventory write-down should not exceed the balance of allowance, and such gain can be netted against cost of goods sold D. The net realizable value of a work-in-process inventory is its selling price, less the normal profit margin and estimated cost to complete E. None of the above