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Unformatted text preview: Auditing Chapter 12 Homework 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. There are many variations of acceptable methods of valuation which can make it very challenging for auditors. The inventories can contain many varieties of products, materials, parts and segments that can had levels of difficulty in review and analysis of the inventory. Along with the fact that obsolete products will require a level of skill and understanding to determine if products are still viable and the levels of inventory being kept at an acceptable level as a standard in the industry. Many inventories are very large by nature and this in itself can present challenges in time and accuracy to determine the real net worth and prevent misstatements of inventory value and levels. 12-2 Explain the significance of the purchase order to adequate internal control over purchase transactions . Purchase order controls are put in place to require signatures and authorization before issuance of a purchase order can occur. This prevent purchasing of items that are not needed, and allows for competitive pricing strategies to occur allowing the company to get the best price possible. Purchase orders are a liability to the company and therefore internal controls to monitor and gauge the purchasing functions are essential. 12-3 What segregation of duties would you recommend to attain maximum internal control over purchasing activities in a manufacturing concern? Maximum internal control would include procedures set in place that would only allow specific authorization of issuances of purchase orders and for them to be signed off to ensure that what was required was in fact purchased. Also making sure that there is segregation of duty to make sure that another department is responsible for issuance of purchase order numbers and another department for purchasing of goods and materials, and the recording and record keeping of the purchase orders should be a function of the accounting department. 12-7 What are the purposes of the auditors observation of the taking of the physical inventory? (Do not discuss the procedures or techniques involved in making the observation). The auditors need to physical observe the taking of physical inventory to make certain that it is being done and to obtain written evidence that it does exist. This is important to help in the valuation of the inventory and to make a determination that ownership does in fact exist. This is essential to allowing the auditor to gather the...
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