ACC 406 ACTUAL EXAM 100% CORRECT
QUESTIONS WITH SOLUTIONS GRADED A+
⩥ Industry-related factors (specific to the inventory cycle). Answer: -
High industry competition → risk of inventory overvaluation
(especially for lower-of-cost-or-market issues)
-Rapid technological change or declining customer demand → risk of
obsolete inventory
⩥ Engagement and operating characteristics. Answer: -type of product
(i.e., small, high-value items are more susceptible to theft)
-auditing difficulty: inventory valuation can be complex and
subjective
-related-party transactions: watch for non-arm's-length transactions
that could inflate inventory value or misappropriate cash
⩥ Fraud risk. Answer: Inventory is considered a high-risk area for
material misstatements and fraud.
⩥ Prior-year misstatements. Answer: -past issues with inventory are
strong indicators of potential current-year misstatements
-auditors should review prior audit findings carefully, adjust audit
plans and procedures accordingly
,⩥ Control Risk Assessment (overview for reliance strategy). Answer:
-Understand and document internal control (i.e., the auditor needs to
understand how the company values its inventory)
-Plan and perform tests of controls (identify and test relevant control
activities within the inventory process; are they effective at
preventing, detecting, or correcting misstatements?)
-Assess and document control risk (auditor assesses the achieved level
of control risk)
⩥ TESTS OF CONTROLS FOR ASSERTIONS. Answer:
⩥ Occurrence. Answer: -Goal: ensure all recorded inventory
transactions actually occurred (no fictitious inventory)
-Key controls: segregation of duties, prenumbered documents
-Observation: watch employees perform duties to check segregation
-Review: test procedures for moving inventory between departments
⩥ Completeness. Answer: -Goal: ensure all inventory received is
properly recorded
-Watch for consignment goods!
⩥ Consignment -> goods held by others for the entity. Answer: Must
be included in inventory
⩥ Consignment -> goods held for others by the entity. Answer: Must
be excluded from inventory
, ⩥ Authorization. Answer: -Goal: ensure only authorized purchases or
production occur
-Risk: unauthorized production/purchases may lead to excess or
obsolete inventory, overstating ending inventory
-Main controls: authorized purchase schedules, inventory-planning
systems
⩥ Accuracy/valuation. Answer: -Goal: ensure all inventory
transactions are recorded at the correct quantities and costs
-Management must review for obsolete, slow-moving, or excess
inventory
-Items should be written down to NRV
⩥ Cutoff. Answer: -Goal: ensure inventory transactions are recorded
in the correct accounting period
-Key risk: misstated beginning/ending inventory, COGS, and
revenues if cutoff is wrong
-Compare key documents for timing
⩥ Classification. Answer: -Goal: ensure inventory is properly
classified by type
-Manufacturing companies must distinguish between raw materials,
WIP, and finished goods
QUESTIONS WITH SOLUTIONS GRADED A+
⩥ Industry-related factors (specific to the inventory cycle). Answer: -
High industry competition → risk of inventory overvaluation
(especially for lower-of-cost-or-market issues)
-Rapid technological change or declining customer demand → risk of
obsolete inventory
⩥ Engagement and operating characteristics. Answer: -type of product
(i.e., small, high-value items are more susceptible to theft)
-auditing difficulty: inventory valuation can be complex and
subjective
-related-party transactions: watch for non-arm's-length transactions
that could inflate inventory value or misappropriate cash
⩥ Fraud risk. Answer: Inventory is considered a high-risk area for
material misstatements and fraud.
⩥ Prior-year misstatements. Answer: -past issues with inventory are
strong indicators of potential current-year misstatements
-auditors should review prior audit findings carefully, adjust audit
plans and procedures accordingly
,⩥ Control Risk Assessment (overview for reliance strategy). Answer:
-Understand and document internal control (i.e., the auditor needs to
understand how the company values its inventory)
-Plan and perform tests of controls (identify and test relevant control
activities within the inventory process; are they effective at
preventing, detecting, or correcting misstatements?)
-Assess and document control risk (auditor assesses the achieved level
of control risk)
⩥ TESTS OF CONTROLS FOR ASSERTIONS. Answer:
⩥ Occurrence. Answer: -Goal: ensure all recorded inventory
transactions actually occurred (no fictitious inventory)
-Key controls: segregation of duties, prenumbered documents
-Observation: watch employees perform duties to check segregation
-Review: test procedures for moving inventory between departments
⩥ Completeness. Answer: -Goal: ensure all inventory received is
properly recorded
-Watch for consignment goods!
⩥ Consignment -> goods held by others for the entity. Answer: Must
be included in inventory
⩥ Consignment -> goods held for others by the entity. Answer: Must
be excluded from inventory
, ⩥ Authorization. Answer: -Goal: ensure only authorized purchases or
production occur
-Risk: unauthorized production/purchases may lead to excess or
obsolete inventory, overstating ending inventory
-Main controls: authorized purchase schedules, inventory-planning
systems
⩥ Accuracy/valuation. Answer: -Goal: ensure all inventory
transactions are recorded at the correct quantities and costs
-Management must review for obsolete, slow-moving, or excess
inventory
-Items should be written down to NRV
⩥ Cutoff. Answer: -Goal: ensure inventory transactions are recorded
in the correct accounting period
-Key risk: misstated beginning/ending inventory, COGS, and
revenues if cutoff is wrong
-Compare key documents for timing
⩥ Classification. Answer: -Goal: ensure inventory is properly
classified by type
-Manufacturing companies must distinguish between raw materials,
WIP, and finished goods
