Reference no: EM132578009

Question 1: FIFO Inventory Pricing. You are auditing Martha's Prison Clothes Inc. as of December 31, 2014. The inventory for orange jumpsuits shows 1,263 suits at $782 for a total of $987,666. When you look at the invoices for the jumpsuits, you see the following:

Required:
a. Determine the adjusting entry, if any. for the cost of inventory at December 31, 2014.
b. Would your answer to part (a) be different if you saw an invoice dated January 9, 2015, for 500 suits at $750?

Instructions for Problems 9.61, 9.62, and 9.63
The cases in Problems 9.61, 9.62, and 9.63 are similar to the one in the chapter. They give the problem and the amount. Your assignment is to write the audit approach portion of the case organized around these sections:

Objective. Express the objective in terms of the facts supposedly asserted in the financial records, accounts, and statements.
Control Write a brief explanation of desirable controls. missing controls, and especially the types of deviations that might arise from the situation described in the case.

Tests of controls. Write some procedures for obtaining evidence about controls. especially procedures that could discover control deviations. If there are no controls to test there are no procedures to perform: go to the next section. A procedure should instruct someone about the sources) of evidence to tap and the work to do.

Audit of balance. Write some procedures for obtaining evidence about the balance assertions of existence, rights and obligations, completeness, valuation, and accuracy identified in your objective section.

Discovery summary. Write a short statement about the discovery you expect to accomplish with your procedures.

Inventory and deferred cost overstatement. Follow the preceding instructions. Write the audit approach section following the eases in the chapter.

Question 2: Toying around with the Numbers. Mattel Inc.. a manufacturer of toys, failed to write off obsolete inventory. thereby overstating inventory and improperly deferred tooling casts, both of which understated cost of goods sold and overstated income.

Excess" inventory was identified by comparing types of toys (wheels, general toys. dolts. and games). parts, and raw materials with the forecasted sales or usage: lower-of -cost¬or-market (LCM) determinations then were made to calculate the obsolescence write-off. Obsolescence was expected and the target lot the year was $700.000. the first comparison Computer run showed $21 million "excess" inventory!. The corn any "adjusted" the forecast

Question 3: Detection of Errors and Fraud. For each of the following independent events. indicate the (1) effect of the error or fraud on the financial statements and (2) what auditing procedures could have detected the misstatement resulting from error or fraud.

a. The physical inventory count of J. Payne Enterprises, which has a December 31 year-end. was conducted on August 31 without incident. In September. the perpetual inventory was not reduced for the cost of sales.

b. Holmes Drug Stores counted its inventory on December 31, which is its fiscal year-end. The auditors observed the count at 20 of Holmes's 86 locations. The company falsified the inventory at 20 of the locations not visited by the auditors by including fictitious goods in the counts.

c. Pope Automotive inadvertently included in its inventory automobiles that it was holding on consignment for other dealers.

d. Peffer Electronics Inc. overstated its inventory by pricing wiring at $200 per hundred feet instead of $200 per thousand feet.

e. Goldman Sporting Goods counted boxes of baseballs as having one dozen baseballs per box when they had only six per box.

Question 4: Identifying Obsolete Inventory and Proposing Provisions

For this exercise, your client. BrightIDEAs Inc., has provided you with a listing of inventory on hand as of the end of the year. You have been assigned the task of performing procedures to identify unusual or potentially obsolete inventory items and propose a valuation allowance.

Required:

a. Import the client's database of inventory and reconcile it to the general ledger (pp. 193¬202 of the IDEA Workbook).

b. Use data extraction techniques to identify client-identified obsolete inventory items in the clients inventory listing or items showing negative amounts or quantities (pp. 203¬206 of the IDEA Workbook).

c. Calculate inventory usage ratios to identify inventory items not flagged by the client that may nonetheless be obsolete. (pp. 206-213 of the IDEA Workbook).

d. Use your calculations from the above steps to estimate a provision for obsolete inventory. (pp. 214-2111 of the IDEA Workbook).

e. do you consider the difference between what the client proposed and your proposed pro¬vision to be a material difference?