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Determining Audit Tests Over Inventory and PP&E

Question Description
1. Nolan Manufacturing Company retains you on April 1 to perform an audit for the fiscal year ending June 30. During the month of May, you make extensive studies of internal control over inventories.

All goods purchased pass through a receiving department under the direction of the chief purchasing agent. The duties of the receiving department are to unpack, count and inspect the goods. The quantity received is compared with the quantity shown on the receiving department’s copy of the purchase order. If there is no discrepancy, the purchase order is stamped ‘OK______ Receiving Dept. and forward to the accounts payable section of the accounting department. Any discrepancies in quantity or variations from specifications are called to the attention of the buyer by returning the purchase order to him with an explanation of the circumstances. No records are maintained in the receiving department, and no reports originate there.

As soon as good have been inspected and counted in the receiving department, they are sent to the factory production area and stored alongside the machines in which they are to be processed. Finished goods are moved from the assembly line to a storeroom in the custody of a stock clerk, who maintains a perpetual inventory records in terms of physical units but not in dollars.

What weaknesses, if any, do you see in the internal control over inventories?

2. Described below are potential financial statement misstatements that are encountered by auditors in the audit of inventory and cost of good sold.

Management of a chain of discount department stores systematically overstates inventory quantities at selected locations.
Accounting personnel of a manufacturing company make computational errors that understate the production costs of certain inventory items.
Management of a computer reseller overstates inventory value by failing to recognize the loss in the value of certain inventory items that are obsolete.
Production personnel for a high-tech manufacturing company include in inventory items that failed to meet essential quality standards.
For each misstatement, describe the substantive auditing procedures that may used by auditors to detect the misstatement. Organize your answer as shown below.

Misstatements Audit Procedures


3. Multiple question. Select the best answer for each of the question below and explain fully the reason for your selection.

To assure accountability for fixed assets retirements, managements should implements an internal control that includes.
The auditors may conclude that the depreciation charges are insufficient by noting:
Which of the following is an internal control weakness related to factory equipment?
Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated?
The auditors are most likely to seek information from the plant manager with respect to the.
To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic.
Which of the following statements is not typical of property, plant and equipment as compared to most current assets accounts?
For the audit of a continuing nonpublic client, the emphasis of the testing fro property accounts in on.
Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment.
An effective procedure for identifying unrecorded retirements of equipment is to:
Continues analysis of miscellaneous revenue to locate any cash proceed from the sale plants assets.
Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired.
Utilization of serially numbered retirement work orders.
Periodic observation of plants assets by the internal auditors.
Insured values greatly in excess of book values.
Large amounts of fully depreciated assets.
Continuous trade-ins of relatively new assets
Excessive recurring losses on assets retired.
Checks issued in payment of purchases of equipment are not signed by the controller.
All purchases of factory equipment are required to be made by the department in need of the equipment.
Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired.
Proceeds from sales of fully depreciated equipment are credited to other income.
Accounts Payable
Adequacy of the provision for uncollectible accounts.
Appropriateness of physical inventory observation procedures.
Existence of obsolete machinery
Deferral of procurement of certainnecessary insurance coverage.
Increase insurance coverage.
Inspection of equipment and reconciliation with accounting records.
Verification of liens, pledges and collateralizations.
Accounting for work orders.
A property, plant and equipment cutoff error near end has a more significant effect on net income.
Relatively few transactions occur in property, plants and equipment during the year.
The assets involved with property, plant, and equipment ordinarily have relatively longer lives.
Property, plant and equipment accounts typically have a higher dollar value.
All transactions resulting in the ending balance.
Test of controls over disposals.
Transactions that occurred during the year.
Performing analytical procedures on beginning balances of the accounts.
Accumulated depreciation.
Cost of good sold.
Purchase returns and allowances
Purchases discounts.
Foot related property records,
Recalculate depreciation on the related equipment.
Select items of equipment in the accounting records and then locate them in the plant.
Select items of equipment and then locate them in the accounting records.
K . Which of the following is not an overall test of the annual provision for depreciation expense?

Compare rates used in the current year with those used in prior years.
Test computation of depreciation provisions for a representative number of units.
Test deductions from accumulated depreciation fro assets purchased during the year.
Perform analytical procedures.
The audit of intangibles assets typically involves.
Vouching the Cost of Assets Testing Allocation Methods

Yes Yes
Yes No
NO Yes
4. The following are typical questions that might appear on an internal control questionnaire relating to plant and equipment.

Has a dollar minimum been established for expenditures to be capitalized?
Are subsidiary ledgers for plant and equipment regularly reconciled with general ledger controlling accounts.?
State the purpose of each of the above controls.
Describe the manner in which each of the above procedures might be tested.
Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of risks of material misstatements.

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