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Chapter09 - answer - CHAPTER 9 SUBSTANTIVE TESTS OF...

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9-1. Substantiation of the figure for inventories is an especially challenging task because of the variety of acceptable methods of valuation. In addition, the variety of materials found in inventories calls for considerable experience and skill to do an efficient job of identifying and test-counting goods on hand. The possibilities of obsolescence and of excessive stocks also create problems. Finally, the relatively large size of inventories and their significance in the determination of net income make purposeful misstatement by the client a possibility which the auditors must guard against. 9-2. During an audit of a manufacturing company, the auditors review the cost system for the following purposes: (1) 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. (2) To obtain assurance that the cost system, as an integral part of the system of internal control, provides proper accounting control over costs incurred and related inventories. (3) 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. 9-3. The auditors make test counts of inventory quantities during their observation of the taking of the physical inventory to ascertain that an accurate count is being made by the individuals taking the inventory. The extent of test counting will be determined by the inventory-taking procedures; for example, the number of the auditors’ test counts would be reduced if there were two teams, one verifying the other, taking the inventory. On the other hand, the auditors’ test counts would be expended if they found errors in the inventory counts. 9-4. The statement is not true. The auditors’ responsibilities with respect to inventories include not only quantities and pricing, but also the quality or condition of the goods, the accuracy of extensions, footing, and summaries, and the evaluation of internal control. Weakness in internal control may cause large losses from CHAPTER 9 SUBSTANTIVE TESTS OF INVENTORIES AND COST OF GOODS SOLD
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9-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition excessive stockpiling, obsolescence, inaccurate cost data, and many other sources, even though the ending inventory is properly counted and priced. 9-5. The independent auditors utilize the client’s backlog of unfilled sales orders in the determination of net realizable value of finished goods and goods-in-process, and in the determination of losses, if any, on firm sales commitments for which no production has yet been undertaken.
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