Review questions chapter 12:

1. Many auditors consider the substantiation of the figure for inventory to be a more
difficult and challenging task than the verification of most other items on the balance
sheet. List several specific factors that support this view.
 They often represent a very substantial portion of current assets
 Numerous valuation methods are used for inventories
 The valuation of inventories directly affects cost of goods sold
 The determination of inventory quality, condition and value is inherently
complex.
2. Explain the significance of the purchase order to adequate internal control over
purchase transactions. (Jelaskan pentingnya pesanan pembelian untuk pengendalian
internal yang memadai atas transaksi pembelian)
 Determining the need for an item
 Obtaining competitive bids
 Obtaining approval of the financial aspect of the commitment.
3. What segregation of duties would you recommend to attain maximum internal control
over purchasing activities in a manufacturing concern?
 Purchasing, receiving, storing, issuing, processing, and shipping physical
functions.
 the recording of purchase transactions should be assigned to an accounts
payable section within the accounting department.
 A cost accounting system and a perpetual inventory records for the recording
functions.
4. Do you believe that the normal review of purchase transactions by the auditors should
include examination of receiving reports? Explain.
 Yes, it should, because an employee could fraudulently authorize a purchase
transaction without receiving the goods supposedly purchased. The receiving
reports also show the price and amount of the order.
5. The client’s cost accounting system is often an important part of the CPAs’ audit of
the financial statements of a manufacturing company. For what purposes do the
auditors consider the cost accounting system?
 To determine that costs are properly allocated to current and future periods
and hence that cost figures used in arriving at balance sheet and income
statement amounts are supported by internal records.
 To obtain assurance that the cost system, as an integral part of the system of
internal control, provides proper control over costs incurred and related
inventories.
 To ascertain, as a service to management, that the cost system is economical
and effectively provides information for reducing or controlling costs and for
determining the cost and profitability of products, and other related data
necessary for informed managerial decisions
6. What part, if any, do the independent auditors play in the planning for a client’s
physical inventory?
 The independent auditors are key participants in the planning for a client's
physical inventory. Although the auditors do not actually do the planning for
the client, they offer advice on such matters as the assignment of a key client
employee to assume responsibility for the inventory; selection of the most
advantageous dates for the inventory taking; scheduling operations to
 minimize goods-inprocess; and so on. Most important is the auditors'
determination that the client's inventory instructions are adequate
7. What are the purposes of the auditors’ observation of the taking of the physical
inventory?
 To verify the existence of inventory
 Information relevant to valuation of and rights to inventory is obtained
 The auditors are seeking sufficient competent evidence as to the effectiveness
of the methods of inventory taking
 To evaluate its condition
 To observe compliance with management's instructions for the count
 To obtain audit evidence about the reliability of the count procedures
8. For what purposes do the auditors make and record test counts of inventory quantities
during their observation of the taking of the physical inventory? Discuss.
 to ascertain that the individuals taking the inventory are making an accurate
count
 Test counts are made for comparison with the completed inventory listing.
They are compared to the inventory tags. They can be used to determine that
the % or stage of completion indicated on the inventory tag is appropriate.
9. Once the auditors have completed their test counts of the physical inventory, will they
have any reason to make later reference to the inventory tags used by the client’s
employees in the counting process? Explain.
 The test counts and tag numbers listed by the auditors in their working papers
will be traced later to the client's inventory summary sheets. By this
procedure, the auditors obtain evidence that the quantities on the tags
have been accurately transcribed to the summary sheets by the client
employees in developing the total valuation for inventory. If a significant
number of differences are found, the auditors may need to reexamine the
original tags or request that the client recompile the inventory.
10. When perpetual inventory records are maintained, is it necessary for a physical
inventory to be taken at the balance sheet date? Explain.
 No it is not necessary for a physical inventory to be taken at the balance sheet
as long as controlling accounts and subsidiary ledgers are maintained to
record receipts and issuances of goods both in quantities and in dollar
amounts. The accuracy of perpetual inventory records is tested periodically
by physical inventories throughout the year.
11. What is meant by a “bill and hold” scheme?
 Transactions in which sales of merchandise are billed to customers prior to
delivery, with the goods being held by the seller. These transactions may
overstate revenues and net income if they do not meet specific requirements
for recognition as sales.
12. What charges and credits may be disclosed in the auditors’ analysis of the Cost of
Goods Sold account of a manufacturing concern?
 The auditors' analysis of the Cost of Goods Sold account of a manufacturing
concern might disclose charges and credits for amounts transferred from
the goods-in-process or finished goods inventory accounts, proceeds from
sales of scrap, charges for idle plant and equipment, under absorbed or
over absorbed factory overhead, variances from standard costs, write
downs for inventory shortages and obsolescence, and losses on firm fixed-
price contracts.
13. A client company wishes to conduct its physical inventory on a sampling basis. Many
items will not be counted. Under what general conditions will this method of taking
inventory be acceptable to the auditors?
 Sampling plan must have statistical validity
 Allowance for sampling risk (precision) level and the sampling risk
(confidence) level must provide an estimate that allows a materially accurate
valuation of the inventory
14. Hana Ranch Company, which has never been audited, is asked on October 1 by its
bank to arrange for a year-end audit. The company retains you to make this audit and
asks what measures, if any, it should take to ensure a satisfactory year-end physical
inventory. Perpetual inventories are not maintained. How would you answer this
inquiry?
 Client should be asked to designate an employee to assume responsibility for
the physical inventory. (Klien harus diminta untuk menunjuk seorang
karyawan untuk memikul tanggung jawab atas persediaan fisik)
 Written plan should be developed covering such points as exact dates of the
count, possible closing of the plant, etc. (Rencana tertulis harus dikembangkan
yang mencakup poin-poin seperti tanggal pasti penghitungan, kemungkinan
penutupan pabrik, dll).
15. “A well-prepared balance sheet usually includes a statement that the inventories are
valued at cost.” Evaluate this quotation.
Neraca yang dipersiapkan dengan baik biasanya mencakup pernyataan bahwa
persediaan dinilai dengan biaya perolehan.
 Inventories are to be reported at the lower of cost or market (net realizable
value)
 Method of determining cost should also be indicated (Metode penentuan biaya
juga harus ditunjukkan)
16. Darnell Equipment Company uses the LIFO method of valuation for part of its
inventories and weighted-average cost for another portion. Would you be willing to
issue an unqualified opinion under these circumstances? Explain.
 Generally accepted accounting principles allow the use of different valuation
methods for different components of a company's inventory and would not
prevent the issuance of an unqualified audit report
17. “If the auditors can determine that all goods in the physical inventory have been
accurately counted and properly priced, they will have discharged fully their
responsibility with respect to inventory.” Evaluate this statement.
 Incorrect
 The auditors' responsibilities with respect to inventories include not only
quantities and pricing, but also the quality or condition of the goods,
consideration of internal control, etc.
18. How do the independent auditors use the client’s backlog of unfilled sales orders in
the examination of inventories? P.558
 Assist in determination of the net realizable value of finished goods and
goods-in-process, and in the determination of losses
19. The controller of a new client company informs you that most of the inventories are
stored in bonded public warehouses. He presents warehouse receipts to account for
the inventories. Will careful examination of these warehouse receipts constitute
adequate verification of these inventories? Explain.
 Pengendali perusahaan klien baru memberi tahu Anda bahwa sebagian besar
inventaris disimpan di gudang umum berikat. Dia menyajikan resi gudang untuk
memperhitungkan persediaan. Apakah pemeriksaan yang cermat terhadap resi
gudang ini merupakan verifikasi yang memadai atas inventaris ini?
 No
 Inventories should be confirmed in writing directly to the auditors by the
custodians of the stored goods
 If inventories in these warehouses are substantial, auditors should further
review client and warehouse records (Jika persediaan di gudang ini besar,
auditor harus meninjau lebih lanjut catatan klien dan gudang).
20. Enumerate specific steps to be taken by the auditors to ascertain that a client’s
inventories have not been pledged or subjected to a lien of any kind.
Sebutkan langkah-langkah spesifik yang harus diambil oleh auditor untuk
memastikan bahwa inventaris klien belum dijaminkan atau dikenakan hak gadai
dalam bentuk apa pun.
 Bank confirms may disclose a lien on inventory (Konfirmasi bank dapat
mengungkapkan hak gadai atas persediaan)
 Examining insurance policies on inventory, the auditors may find inventories
that have been pledged (Meneliti polis asuransi atas persediaan, auditor dapat
menemukan persediaan yang telah dijaminkan)
 Client officials should be asked to disclose any lien on inventory as part of the
written representations furnished to the auditors (Pejabat klien harus diminta
untuk mengungkapkan hak gadai apa pun pada inventaris sebagai bagian dari
representasi tertulis yang diberikan kepada auditor)