Consider the following misstatements relative to inventory. For each one identif
ID: 2462323 • Letter: C
Question
Consider the following misstatements relative to inventory. For each one identify whether the error would likely have resulted from error or fraud, the controls that would have prevented or detected the misstatement, and the substantive procedures the auditors could use that would detect the misstatement. Explain how the substantive procedure would detect the misstatement.
1. Goods in transit to customers are included in inventory.
2. Goods were shipped to fictitious customers and sales are recorded.
3. Inventory is overstated by using an inappropriate price index in the dollar-value lifo calculation.
4. In taking inventory, warehouse personnel failed to include a section of the warehouse in the count.
5. In taking inventory, warehouse personnel counted a section of the warehouse twice.
Explanation / Answer
1 Goods in Transit to customers are included in inventoy This is an error. There should be mechanism of verifying the inventory recoreded in the books of accounts with that of the physical inventories. The auditor should verify the physical inventories and rectify the mistake. 2 Goods were shipped to fictitious customers and sales are recorded. This is a fraud as it has been done intensionally. The pay,ment for that sale should be checked and if the amount is outstandind the confirmation from the debtor should be obtained. 3 Inventory is overstated by using an inappropriate price index in the dollar-value lifo calculation. This is a fraud as it is being done to increase the profit of the organisation. The valuation of the inventory should be checked.