Question

31. Name the stages of the production cycle ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

32. The risk (choose high, moderate or low) associated with the existence assertion for inventory is_______________ because _____________________________________________________________________________.

33. The risk associated with the completeness assertion for inventory is (choose high, moderate, low) because ______________________________________________________________________.

34. The risk associated with the valuation assertion for cost of goods sold is (choose high, moderate, low) ______________because_____________________________________________________________________.

35. What inventory-related item lends itself to audit testing using substantive analytical review? ____________________________________________________________________

36. If ‘what could go wrong” with production is that recorded events have not occurred, and management’s control to mitigate that risk is that material usage reports are reconciled, the auditor would test that control by ____________________________________________________________________________.

Answer 1

31)Just as Humans have a lifecycle namely, Birth, Adolescent, Maturity, Death, similarly businesses/Production also have a Lifecycle namely ,

1) INTRODUCTION STAGE :- This is the stage when the product is introduced to the people like launch of a new Product. In this stage, the growth is slower (increasing gradually) as the public at large gets introduced to the product.

However, the cost is high as the company is yet to establish its distribution channels, work on its marketing and selling techniques, cost of R&D is also very high.

2) GROWTH STAGE :- In this stage the growth starts to improve due to word of mouth publicity and cost also starts declining as company tries to achieve economies of scale. With revenue coming in, the company is also able to spend more money in promotional activities etc

3) MATURITY STAGE :- In this stage the product has established itself in the market and grabbed the market share. In this stage the product is well established and is most probably competing with the other alternatives available in the market. In this stage the company needs to spend more money in Research and product improvement to stand out from the rest of the product.

4) DECLINING STAGE :- In this stage, the growth starts to decline because it may be possible that either the Market has saturated or may be customers are moving to other alternative products available in the market.

These are the 4 stages of production cycle . Understanding this cycle helps businesses to understand at what stage they need to invest more in RnD and at what stage the decline in sales is normal etc.

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2) The Risk associated with existence assertion is low to moderate as the auditor can physically verify the inventory and also audit the ownership documents to check if the inventory infact, belongs to and in the name of the Company.

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33) The Risk associated with completion assertion is High because the Company buys the product but if it isn't recorded in the books, then it will result in understatement of inventory. Poor Inventory controls may result in high risk.

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34) The risk associated with Valuation Assertion of Cost of Goods Sold Is High because there may be a likelihood of inventory getting obsolete or incorrect valuation of inventory, valuation methods being used etc.

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35) Substantive Analytical Review means Manual Testing. They are performed by the auditor to look for the material misstatements at the Assertion Level. For Inventory the Assertions are 1) Existence 2) Completeness 3) Accuracy 4) Valuation 5) Cut off and Classification.

An example of substantive analytical procedure being performed by an auditor would be auditor going to the warehouse and physically checking the Existence of the Inventory or Inspecting sale and purchase invoices with supporting documentation to vouch that a sale did occur etc

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36) The auditor can test that control by

1) obtaining an understanding of the purpose of information and the criteria the management used to prepare the reconciliation reports.

2) The methods used to prepare and reconcile the reports and their effectiveness.

3) How wastage of Material has been accounted for and how it has been reconciled with the material .

4) The calculations used and comparison of actual vs standard and variance and reasons for those variance.

5) performing procedures to test the accuracy and completeness of those reports.

6) Evaluation of supporting documents, records, forms etc.