Millie and Oliver are beginning the audit of Seagroves LLC, a regional purveyor of fine chocolates and other confectionary products. Millie approaches Oliver and mentions that she has noticed that inventory represents a relatively large amount of the client's total assets. Based on this finding, which of the following is true? Because inventory is immaterial to the financial statements, the auditors should plan to spend less time auditing this area. • Because inventory is material to the financial statements, the auditors will spend more time on this area. Because the client maintains a large store of inventory, there is less risk of obsolescence. O The risk of material misstatement is likely to be assessed as low by the auditor because the client maintains such a large inventory store.

Millie and Oliver are beginning the audit of Seagroves LLC, a regional purveyor of fine chocolates and other confectionary products. Millie approaches Oliver and mentions that she has noticed that inventory represents a relatively large amount of the client's total assets. Based on this finding, which of the following is true? Because inventory is immaterial to the financial statements, the auditors should plan to spend less time auditing this area. • Because inventory is material to the financial statements, the auditors will spend more time on this area. Because the client maintains a large store of inventory, there is less risk of obsolescence. O The risk of material misstatement is likely to be assessed as low by the auditor because the client maintains such a large inventory store.

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter11: Auditing Inventory, Goods And Services, And Accounts Payable: The Acquisition And Payment Cycle

Section: Chapter Questions

Problem 32CYBK

See similar textbooks

Similar questions

As the lead accountant for a small company, you notice that inventory purchases from a certain vendor have increased dramatically over the past few months, whereas purchases from all other vendors have decreased. You suspect that something may not be right and that there may be a fraudulent relationship between someone in your company and the vendor that is getting increased business. question: Which theft act investigative method would you use to investigate your suspicions? state evidences that you to support suspicions.
You are a fraud examiner and have been hired by Blackman Company to carry out an investigation. Blackman is a beverage company that has experienced increased shipments of beverages but no increase in revenue. Management suspects that inventory is being shipped to unknown places or is being stolen.How would you use invigilation to help you determine whether inventory is being stolen or shipped to unknown locations? Briefly explain how you would carry out this investigative procedure.
You are a financial auditor from a CPA Firm. One day when You audit your client, you found that your client has a weak security system for physical inventory. The client is an automotive parts company with a lot of valuable part inventory. The lack of procedures for securing inventory is shown from the evidence such as employees unrelated to inventory can enter the inventory warehouse. The company also has inventory in subcontractors. Some parts are sent to the subcontractor company, so there are many warehouses outside the main plant. Besides that, the absence of a computerized system in recording incoming and outgoing inventory flows in a subcontractor. Under these conditions, inventory theft is particularly vulnerable. According to your understanding as a financial auditor, can these conditions lead to material misstatements in the client’s financial statements? Explain your answer!
So, owner of a trading company engaged your services as auditor. There is a discrepancy between the company’s income and the sales volume. The owner suspects that the staff is committing theft. You are to determine whether or not this is true. Your investigation revealed the following: The physical taken on December 31, 2018 under your observation showed that cost was P26,500. The inventory on January 1, 2018 showed cost of P39,000. The accounts receivable as of January 1, 2018 were P13,500. During 2018, accounts receivable written off amounted to P1,000. Accounts receivable as of December 31, 2018 were P37,500. Outstanding purchase invoices amounted to P30,000 at the end of 2018. At the beginning of 2018, they were P37,500. Receipts from customers during 2018 amounted to P300,000. Disbursement to merchandise creditors amounted to P200,000. The average gross profit rate was 40% of net sales. Required: Total Sales Total Purchases Inventory Shortage
During the audit of Sunrise Enterprises, LLC, a provider of plastic utensils and other items to restaurants throughout the southeastern United States, the auditors have determined that the client's inventory represents an area of higher inherent risk. As a result, which of the following choices would most likely represent a prudent course of action by the auditor? O The auditor is most likely to simply disclaim an opinion on the client's inventory and any related accounts, as this area represents higher audit risk. The auditor may decide to audit the inventory accounts closer to the balance sheet date, and extend the extent of procedures performed on these accounts. O The auditor is likely to adopt a reliance on controls strategy, and perform less substantive procedures accordingly. O The auditor is likely to perform procedures on these accounts closer to the beginning of the audit, to allow more time to fix any problems uncovered.
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 only concern was the difference between your expectation and the client’s financial statements which come in the form of using the gross profit method of estimating inventory as against the client reported balance which is below audit materiality level for audit of inventory. What is the best choice to 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 an unqualified opinion
In conducting year-end inventory counts, your audit team is debating the impact of the client's right of return policy both on inventory valuation and revenue recognition. The assistant controller argues that there is no need to worry about the return policies since they have not changed in a while. The audit senior wants a more authoritative answer, given the recently issued standard on revenue recognition. You have been asked to conduct some research of the authoritative literature before she presses the point with the client. Instructions If your school has a subscription to the FASB Codification, log in and prepare responses to the following. Provide Codification references for your responses. a. What is the authoritative guidance for revenue recognition when right of return exists? b. When is this guidance important for a company? That is, for which of steps in the five-step revenue recognition model does right of return come into play? c. Does the FASB literature provide…
You are in your second year as an auditor with Dantly and Regis, a regional CPA firm. One of the firm’s long-time clients is Mayberry-Cleaver Industries, a national company involved in the manufacturing, marketing, and sales of hydraulic devices used in specialized manufacturing applications. Early in this year’s audit, you discover that Mayberry-Cleaver has changed its method of determining inventory from LIFO to FIFO. Your client’s expectations is that FIFO is consistent with the method used by some other companies in the industry. Upon further investigation, you discover an executive stock option plan whose term calls for a significant increase in the shares available to executives if net income this year exceeds $44 million. Some quick calculations convince you that without the change in inventory methods, the target will not be reached; with the change, it will. Do you perceive an ethical dilemma? What would be the likely impact of following the controller’s suggestions? Who…
You are working as a summer intern for AAA Auditing, Inc. You have been asked to help resolve discrepancies noted in the audit for Dolfin Corporation, a retailer of specialty aquarium supplies.As a retail company, Dolfin Corporation uses the perpetual inventory system. To prepare for this assignment, you have been asked to review your knowledge of salesand purchase transactions by completing the following table.Consider the effect of each transaction on the three accounts listed, and identify which accounts are debited or credited. If not affected by the transaction, select "No Effect". Inventory Estimated Returns Inventory Cost of Goods Sold Purchase of merchandise for resale Debit Cash sale of merchandise Credit Customer returns Debit Yearly estimate for customer returns Freight paid for merchandise purchased FOB shipping point Debit Return of merchandise purchased for resale Credit Freight paid for sales with FOB destination No Effect Sale on…
You are working as a summer intern for AAA Auditing. You have been asked to help resolve discrepancies noted in the audit for Dolfin Company, a retailer of specialty aquarium supplies. As a merchandising company, Dolfin Company uses the perpetual inventory system. To prepare for this assignment, you have been asked to review your knowledge of sales and purchase transactions by completing the following table. Consider the effect of each transaction on the three accounts listed, then use checkmarks to identify which accounts are debited or credited. If none of these accounts is affected by the transaction, check the “No Effect” box. Merchandise Inventory Estimated Returns Inventory Cost of Merchandise Sold No Effect Debit Credit Debit Credit Debit Credit Purchase of merchandise for resale Customer returns Customer payment on account Payment of service…
You are in your second year as an auditor with Dantly and Regis, a regional CPA firm. One of the firm's long-time clients is Mayberry- Cleaver Industries, a national company involved in the manufacturing, marketing, and sales of hydraulic devices used in specialized manufacturing applications. Early in this year's audit, you discover that Mayberry-Cleaver has changed its method of determining inventory from LIFO to FIFO. Your client's explanation is that FIFO is consistent with the method used by some other companies in the industry. Upon further investigation, you discover an executive stock option plan whose terms call for a significant increase in the shares available to executives if net income this year exceeds $44 million. Some quick calculations convince you that without the change in inventory methods, the target will not be reached; with the change, it will. Do you perceive an ethical dilemma? What would be the likely impact of following the controller's suggestions? Who would…
When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cutof the company’s precious jewel inventory. To address this shortcoming, Costanza hiredBenes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes’s work in the audit report?a. Yes, the auditors’ report should mention the fact that an audit specialist was used.b. The auditors’ report should mention the use of the audit specialist only when the auditspecialist’s findings affect the auditors’ conclusions.c. The use of an audit specialist need not be mentioned if the auditors decide not to takeresponsibility for the audit specialist’s findings.d. The auditors’ report should mention the audit specialist only if Vandalay agrees with theaudit specialist’s findings.