Inventory Cycles

The objectives of internal control for an inventory management process are to provide assurance that transactions are properly executed and recorded and that

• Independent internal verification of activity reports is established.

• Transfers to the finished goods department are documented by a

  completed production report and a quality control report.

• Production orders are prenumbered and signed by a supervisor.

• Custody of work in process and finished goods is properly maintained.

Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of manufacturing transactions?

• Perpetual inventory records are independently compared with goods

  on hand.

• Forms used for direct materials requisitions are prenumbered and

  accounted for.

• Finished goods are stored in locked limited-access warehouses.

• Subsidiary ledgers are periodically reconciled with inventory control

  accounts.

Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory?

• Periodic reconciliation of work in process with job cost sheets.

• Segregation of functions between general accounting and cost

  accounting.

• Independent comparisons of finished goods records with counts of

  goods on hand.

• Approval of inventory journal entries by the storekeeper.

Independent internal verification of inventory occurs when employees who

• Issue raw materials obtain materials requisitions for each issue and

  prepare daily totals of materials issued.

• Compare records of goods on hand with physical quantities do not

  maintain the records or have custody of the inventory.

• Obtain receipts for the transfer of completed work to finished goods

  prepare a completed production report.

• Are independent of issuing production orders update records from

  completed job cost sheets and production cost reports on a timely

  basis.

An auditor’s tests of controls over the issuance of raw materials to production would most likely include

• Reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances.

• Inquiry of the custodian about the procedures followed when defective materials are received from vendors.

• Observation that raw materials are stored in secure areas and that

  storeroom security is supervised by a responsible individual.

• Examination of materials requisitions and reperformance of client

  controls designed to process and record issuances.

Which of the following internal control activities is most likely to address the completeness assertion for inventory?

• The work-in-process account is periodically reconciled with subsidiary records.

• Employees responsible for custody of finished goods do not perform

  the receiving function.

• Receiving reports are prenumbered and periodically reconciled.

• There is a separation of duties between payroll department and inventory accounting personnel.

A client maintains perpetual inventory records in both quantities and ringgit. If the level of control risk were set at high, an auditor would probably

• Insist that the client perform physical counts of inventory items several times during the year.

• Apply gross profit tests to ascertain the reasonableness of the physical counts.

• Increase the extent of tests of controls of the inventory system.

• Request that the client schedule the physical inventory count at the

  end of the year.

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items

• Included in the listing have been counted.

• Represented by inventory tags are included in the listing.

• Included in the listing are represented by inventory tags.

• Represented by inventory tags are bona fide.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that

• All goods purchased before year-end are received before the physical inventory count.

• No goods held on consignment for customers are included in the

  inventory balance.

• Goods observed during the physical count are pledged or sold.

• All goods owned at year-end are included in the inventory balance.

Inquiries of warehouse personnel concerning possibly obsolete or slowmoving inventory items provide assurance about management’s assertion of

• Completeness.

• Existence.

• Presentation.

• Valuation.