ACC 406 Questions and Answers|2025 Revised
Update | 100% Correct Complete Solutions
Observing physical inventory assertions
1) existence
2) accuracy
3) rights & obligations
4) valuation
--> performed at year end
- auditor is required to observe inventory that is material
During physical inventory count, client must:
1) freeze all receipts, shipments, movements
2) client counts inventory and attaches a tag
3) records counted amount on master inventory list called count sheet (has amount in system and
you write how much you counted)
4) identify discrepancies and makes an adjustment on the books (quantity of inventory in books
should match what was counted)
Auditor steps for inventory count
1) gather info about last receipt and last shipment (test cut off later)
2) auditor performs test counts (does not propose adjustments at this stage, not until year end)
3) gets copy of count sheets for testing at year end
4) observes condition of inventory and identifies any that may be obsolete, damaged,
overstocked, or slow-moving
,5) inquires of inventory on consignment for others (should not be included in their count)
6) inquires of inventory held on consignment by others and should be included in the physical
count (confirms or physically observes this inventory)
Test counts
a) tags to count sheet (select a sample of tags on the inventory and match it to the count sheet)
(completeness)
b) count sheet to tags (different sample of inventory items on count sheet and matches it to
physical inventory tags (existence)
c) test counts for accuracy in recording physical counts on tags and count sheet, that they match
(accuracy)
After inventory count
- after year end
- auditor comes on site to perform other audit testing
After inventory count, client:
1) has compiled inventory quantities and and prices
2) any adjustments found in the physical inventory
3) recorded them in the inventory subledger (accumulates to general ledger)
After inventor count, auditor:
1) tests compilation to make sure client added up inventory correctly in subledger and it is agreed
to the general ledger (accuracy)
2) examines sample of shipping document a few days before and after year end for recording in
, proper period (cutoff)
3) ensures inventory is recorded at lower of cost or market by examining vendor invoices and
identifying obsolete inventory or large adjustments (valuation)
4) if inventory is written off after year end but before audit, auditor should ensure adjustment is
made retroactively at year end
5) test for completeness and existence b/t count sheet and subledger or final inventory listing to
ensure correct adjustments
6) proposes adjustments to client adjustments according to physical inventory count
How does inventory interact with other processes?
Inventory t account
DR Inventory purchases (purchasing cycle)
CR COGS (sales cycle)
type of fraud that is usually less material
theft
Assertions for auditing the inventory cycle
occurrence of transactions
existence of inventory
evidence to collect for each account/assertion inventory cycle
- valuation/accuracy: recalculations or analytical procedures
- existence: physical exam (count sheets to warehouse)
- completeness: sample from warehouse to inventory records, inquiry, confirmation
Update | 100% Correct Complete Solutions
Observing physical inventory assertions
1) existence
2) accuracy
3) rights & obligations
4) valuation
--> performed at year end
- auditor is required to observe inventory that is material
During physical inventory count, client must:
1) freeze all receipts, shipments, movements
2) client counts inventory and attaches a tag
3) records counted amount on master inventory list called count sheet (has amount in system and
you write how much you counted)
4) identify discrepancies and makes an adjustment on the books (quantity of inventory in books
should match what was counted)
Auditor steps for inventory count
1) gather info about last receipt and last shipment (test cut off later)
2) auditor performs test counts (does not propose adjustments at this stage, not until year end)
3) gets copy of count sheets for testing at year end
4) observes condition of inventory and identifies any that may be obsolete, damaged,
overstocked, or slow-moving
,5) inquires of inventory on consignment for others (should not be included in their count)
6) inquires of inventory held on consignment by others and should be included in the physical
count (confirms or physically observes this inventory)
Test counts
a) tags to count sheet (select a sample of tags on the inventory and match it to the count sheet)
(completeness)
b) count sheet to tags (different sample of inventory items on count sheet and matches it to
physical inventory tags (existence)
c) test counts for accuracy in recording physical counts on tags and count sheet, that they match
(accuracy)
After inventory count
- after year end
- auditor comes on site to perform other audit testing
After inventory count, client:
1) has compiled inventory quantities and and prices
2) any adjustments found in the physical inventory
3) recorded them in the inventory subledger (accumulates to general ledger)
After inventor count, auditor:
1) tests compilation to make sure client added up inventory correctly in subledger and it is agreed
to the general ledger (accuracy)
2) examines sample of shipping document a few days before and after year end for recording in
, proper period (cutoff)
3) ensures inventory is recorded at lower of cost or market by examining vendor invoices and
identifying obsolete inventory or large adjustments (valuation)
4) if inventory is written off after year end but before audit, auditor should ensure adjustment is
made retroactively at year end
5) test for completeness and existence b/t count sheet and subledger or final inventory listing to
ensure correct adjustments
6) proposes adjustments to client adjustments according to physical inventory count
How does inventory interact with other processes?
Inventory t account
DR Inventory purchases (purchasing cycle)
CR COGS (sales cycle)
type of fraud that is usually less material
theft
Assertions for auditing the inventory cycle
occurrence of transactions
existence of inventory
evidence to collect for each account/assertion inventory cycle
- valuation/accuracy: recalculations or analytical procedures
- existence: physical exam (count sheets to warehouse)
- completeness: sample from warehouse to inventory records, inquiry, confirmation
