ch14 - Chapter 14 Multiple Choice 1. C 2. D 3. D 4. A 5. B...

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Chapter 14 Multiple Choice 1. C 2. D 3. D 4. A 5. B 6. C 7. C 8. A 9. D 10. B 11. A 12. D 13. B 14. A 15. A 16. D 17. A 18. C Discussion Questions 14-19 Briefly explain why an auditor of clients in the Land Development and Home Building industry needs a thorough understanding of the following accounting standards and methods. How do they impact the audit of inventory? [LO 1] a. Allocation methods The auditor will be required to evaluate the application of SFAS 66 and SFAS 67 which describe GAAP methods of allocating inventory values. These allocated values form the basis of what the reported inventory on the balance sheet should be, and guides the audit steps required to audit that balance. b. Asset impairment As the value of real estate assets are not fixed, those assets must necessarily be evaluated for impairment by the auditor. c. Variable interest entities This complex accounting area may significantly impact the financial statements being audited. A thorough understanding of variable interest entity accounting is necessary for an auditor to test and evaluate implementation by the management of the client organization. d. Percentage of completion revenue recognition As the completed contract method and the percentage of completion method are both used in this industry, the responsibility to confirm which method is most appropriate for the business transaction facts will rest with the auditor when
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rendering an opinion on the financial statements as a whole. Revenue recognition principles and their application necessarily vary between transaction types in every industry, and the auditor must be well versed in the authoritative guidance that establishes when it is appropriate to use which method of revenue recognition for GAAP purposes. 14-20 Why are controls in the purchasing, payroll and sales cycles important to the audit of inventory? [LO 2] The purchasing, payroll and sales cycles all interface directly with inventory. For example, the purchasing cycle generally serves to increase inventory balances, the sales cycle generally serves to decrease inventory, and in many business environments payroll is a component of costs capitalized into a product’s inventory value. As a result, the controls governing purchasing, payroll and sales cycles can significantly affect the audit of inventory, especially if the result of tests of controls in the other processes reveals they are not operating effectively. 14-21 Exhibit 14-13 presents various ways inventory accounts have been used to perpetrate financial statement fraud. Explain how the following inventory misstatements would cause the financial statements to also be misstated, and what audit procedures might be used to catch these misstatements. [LO 4] a. Overstate ending inventory This misstatement has the potential to understate cost of goods sold, or shrinkage related expenses reported on the income statement. Audit procedures regarding the observation of year end inventory counts should include tie outs to the general ledger of the observed
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This note was uploaded on 02/02/2012 for the course BUSINESS 101 taught by Professor - during the Spring '11 term at Mississippi Valley State University.

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ch14 - Chapter 14 Multiple Choice 1. C 2. D 3. D 4. A 5. B...

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