Business Accounting - MAN00020C

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Business Accounting - MAN00020C

31. 11. The production budget must be prepared before the direct materials, direct labor and...

11. The production budget must be prepared before the direct materials, direct labor and overhead budgets can be prepared. 

12. Estimates for direct labor costs are obtained from the engineering and production management, as well as from the Personnel Department. 

13. Bottlenecks in the production process can be discovered by the budgeting process before they occur. 

14. In effect, the cash budget simply restates the budgeted income statement to the cash basis. 

15. The cash budget is normally prepared before the budgeted income statement. 

16. The sales budget drives the rest of the budgeting process for both manufacturers and merchandisers. 

17. The production budget is not needed for a service organization. 

18. Ethical conflicts can occur in the budgeting process because managers supply information for the budgets that are then used to evaluate their performance. 

19. The use of sensitivity analysis techniques allows managers to ask "what-if" questions regarding budget assumptions and estimates. 

20. Sensitivity analysis is more likely to be used for sales forecasts than for fixed overhead costs. 

Multiple Choice Questions

 32. Is my answer correct? Dorothy (an audit manager) has been assigned to the audit of Tandem Electric,

answer correct?

Dorothy (an audit manager) has been assigned to the audit of Tandem Electric, Inc. Dorothy is concerned that Joanne, a friend from her college days, is on the internal audit staff of Tandem Electric. Dorothy believes she could provide services to this client in an objective manner. Which statement best describes how Dorothy should apply the AICPA conceptual framework approach in this situation? Dorothy should refuse to provide services to Tandem Electric because no safeguards would be effective in mitigating the threat(s) to her independence. Dorothy should not participate in the audit of Tandem Electric before obtaining a written waiver from her firm’s general counsel. O Dorothy should consider the threats to her independence and whether safeguards may be applied that reduce the threat(s) to an acceptable level. Dorothy should document her assessment of independence, which should include a sworn statement from Joanne.

33. Chavez company most recently reconciled its bank statement and book balances of cash on August re...

Show transcribed image text Chavez company most recently reconciled its bank statement and book balances of cash on August reported two checks outstanding, No. 5888 for $1,028.05 and No. 5893 for $494.25. The following information is available for its September 30, 2017 reconciliation. From the September 30 Bank Statement PREVIOUS BALANCE TOTAL CHECKS AND DEBITs TOTAL DEPOSITS BALANCE AND CREDITS CURRENT 16,800.45 9,620.05 11,272.85 18,453.25 CHECKS AND DEBIT DEPOSITS AND CREDITS Amount Date Amount 09/03 5888 1,028.05 09/05 1,103.75 09/04 5902 719.90 09/12 2,226.90 09/07 5901 1,824.25 09/21 4,093.00 600 .25NSF 09/25 2,351.70 09/20 5905 937.00 09/30 12.50IN 09/22 5903 399.10 09/30 1,485.00CM 09/22 5904 2,090.00 09/28 5907 213.85 09/29 5909 1,807.65 From Chavez Company's Accounting Records Cash Receipts Deposited Debit Date 1,103.75 Sept. 2,226.90 4,093.00 25 2,351.70 30 1,682.75 11,458.10

34. Erie Company manufactures a small CD player called the Jogging

Erie Company manufactures a small CD player called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for one Jogging Mate CD player are as follows:



During August, 5,750 hours of direct labor time were needed to make 20,000 units of the Jogging Mate. The direct labor cost totaled $73,600 for the month.

Required:

I. What direct labor cost should have been incurred to make 20,000 units of the Jogging Mate? By how much does this differ from the cost that was incurred?

2. Break down the difference in cost from (1) above into a labor rate variance and a labor efficiency variance.

3. The budgeted variable manufacturing overhead rate is $4 per direct labor-hour. During August, the company incurred $21,850 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances for themonth.

35. QUESTION 1 Which of the following statements about the balanced scorecard approach is NOT true? The

QUESTION 1

1. Which of the following statements about the balanced scorecard approach is NOT true?

1. For the current year, Winston Inc. reported sales of $800 000 and an asset turnover of 1.25 . The rate of return on average invested assets was 20 per cent. The company’s margin for the year was:

1. A company has computed that their ‘margin’ is 0.18. Which of the following statements is the best interpretation of these results?

1. Which of the following is an example of an appraisal cost?

36. Olaf Distributing Company completed the following merchandising transactions in the month of April....

Olaf Distributing Company completed the following merchandising transactions in the month of April. At the beginning of April, the ledger of Olaf showed Cash of $9,000 and M. Olaf, Capital of $9,000.

Olaf Company’s chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable,No. 120 Merchandise Inventory,No. 201 Accounts Payable,No. 301 M. Olaf, Capital, No. 401 Sales, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold, and No. 644 Freight-out.

Instructions

(a) Journalize the transactions using a perpetual inventory system.

(b) Enter the beginning cash and capital balances, and post the transactions. (Use J1 for the journal reference.)

(c) Prepare the income statement through gross profit for the month of April 2010.

37. Pet Kingdom made estimated tax payments of $107,000 each quarter to the IRS. Prepare a Form 1120...

1. On November 1, 2005, Janet Morton and Kim Wong formed Pet Kingdom, Inc., to sell pets and pet supplies. Pertinent information regarding Pet Kingdom is summarized as follows:

• Pet Kingdom's business address is 1010 Northwest Parkway, Dallas, TX 75225; its telephone number is (214) 555-2211; and its e-mail address is petkingdom@pki.com.


• The employer identification number is 11–1111111, and the principal business activity code is 453910.


• Janet and Kim each own 50% of the common stock; Janet is president and Kim is vice president of the company. No other class of stock is authorized.


• Both Janet and Kim are full-time employees of Pet Kingdom. Janet's Social Security number is 123–45–6789, and Kim's Social Security number is 987–65–4321.


• Pet Kingdom is an accrual method, calendar year taxpayer. Inventories are determined using FIFO and the lower of cost or market method. Pet Kingdom uses the straight-line method of depreciation for book purposes and accelerated depreciation (MACRS) for tax purposes.


• During 2011, the corporation distributed cash dividends of $300,000.

Pet Kingdom's financial statements for 2011 are shown below.

During 2011, Pet Kingdom made estimated tax payments of $107,000 each quarter to the IRS. Prepare a Form 1120 for Pet Kingdom for tax year 2011. Suggested software: H&R BLOCK At Home.

38. It is now January 1, 2009, and you are considering

It is now January 1, 2009, and you are considering the purchase of an outstanding bond that was issued on January 1, 2007. It has a 9.5% annual coupon and had a 30-year original maturity. (It matures on December 31, 2036.) There is 5 years of call protection (until December 31, 2011), after which time it can be called at 109—that is, at 109% of par, or $1,090. Interest rates have declined since it was issued; and it is now selling at 116.575% of par, or $1,165.75.

a. What is the yield to maturity? What is the yield to call?

b. If you bought this bond, which return would you actually earn? Explain your reasoning.

c. Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely?

39. Moates Corporation has provided the following data concerning an investment project that it is co...

Moates Corporation has provided the following data concerning an investment project that it is considering: Initial investment Annual cash flow Expected life of the project Discount rate $190,000 $120,000 per year 4 years 9% Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided The net present value of the project is closest to: (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

40. The information below relates to the Cash account in the ledger of Minton Company. Balance September

The information below relates to the Cash account in the ledger of Minton Company. Balance September 1—$17,150; Balance September 30—$17,404; Cash deposited—$64,000. Checks written—$63,746. The September bank statement shows a balance of $16,422 on September 30 and the following memoranda.  Instructions (a) Prepare the bank reconciliation at September 30. (b) Prepare the adjusting entries at September 30, assuming (1) the NSF check was from a customer on account, and (2) no interest had been accrued on thenote.

41.  4.43 A team is being formed that includes four different people. There are four different positions.

4.43 A team is being formed that includes four different people. There are four different positions on the teams. How many different ways are there to assign the four people to the four positions?? 4.44 In Major League Baseball, there are five teams in the Eastern Division of the National League: Atlanta, Florida, If you compare this rule to counting rule 4, you see that it differs only in the inclusion of a term x! in the denominator. When permutations were used, all of the arrangements of the x objects are distinguishable. With combinations, the x! possible arrangements of objects are irrelevant. 4.5 Ethical Issues and Probability 171 New York, Philadelphia, and Washington. How many different orders of finish are there for these five teams? (Assume that there are no ties in the standings.) Do you believe that all these orders are equally likely? Discuss.

42. Ravsten Company uses a job-order costing system. On January 1,

Ravsten Company uses a job-order costing system. On January 1, the beginning of the current year, the company’s inventory balances were as follows:

Raw materials . . . . . . . . . $16,000

Work in process . . . . . . . . $10,000

Finished goods . . . . . . . . $30,000

The company applies overhead cost to jobs on the basis of machine-hours. For the current year, the company estimated that it would work 36,000 machine-hours and incur $153,000 in manufacturing overhead cost. The following transactions were recorded for the year:

a. Raw materials purchased on account, $200,000.

b. Raw materials requisitioned for use in production, $190,000 (80% direct and 20% indirect).

c. The following costs were incurred for employee services:

Direct labor . . . . . . . . . . . . . . . . $160,000

Indirect labor . . . . . . . . . . . . . . . $27,000

Sales commissions . . . . . . . . . . $36,000

Administrative salaries . . . . . . . $80,000

d. Heat, power, and water costs incurred in the factory, $42,000.

e. Prepaid insurance expired during the year, $10,000 (90% relates to factory operations, and 10% relates to selling and administrative activities).

f. Advertising costs incurred, $50,000.

g. Depreciation recorded for the year, $60,000 (85% relates to factory operations, and 15% relates to selling and administrative activities).

h. Manufacturing overhead cost was applied to production. The company recorded 40,000 machine-hours for the year.

i. Goods that cost $480,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse.

j. Sales for the year totaled $700,000 and were all on account. The total cost to manufacture these goods according to their job cost sheets was $475,000.



Required:

1. Prepare journal entries to record the transactions given above.

2. Prepare T-accounts for inventories, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don’t forget to enter the opening balances in your inventory accounts). Compute an ending balance in each account.

3. Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured; all of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.)

43. (Objectives 9-6, 9-8) The following questions concern audit risk. Choose the best response. a....

(Objectives 9-6, 9-8) The following questions concern audit risk. Choose the best response.

a. Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as

(1) audit risk.

(2) detection risk.

(3) sampling risk.

(4) inherent risk.

b. Inherent risk and control risk differ from planned detection risk in that they

(1) arise from the misapplication of auditing procedures.

(2) may be assessed in either quantitative or nonquantitative terms.

(3) exist independently of the financial statement audit.

(4) can be changed at the auditor’s discretion.

c. Which of the following best describes the element of inherent risk that underlies the application of auditing standards?

(1) Cash audit work may have to be carried out in a more conclusive manner than inventory audit work. (2) Intercompany transactions are usually subject to less detailed scrutiny than arm’slength transactions with outside parties.

(3) Inventories may require more attention by the auditor on an engagement for a merchandising enterprise than on an engagement for a public utility.

(4) The scope of the audit need not be expanded if misstatements that arouse suspicion of fraud are of relatively insignificant amounts.

(Objective 9-6)

AUDIT RISK MODEL COMPONENTS

Each of the four risks in the audit risk model is sufficiently important to merit detailed discussion. This section briefly discusses all four to provide an overview of the risks. Acceptable audit risk and inherent risk are discussed in greater detail later in this chapter. Control risk is examined in Chapter 10. Planned detection risk is the risk that audit evidence for a segment will fail to detect misstatements exceeding tolerable misstatement. There are two key points to know about planned detection risk. Planned detection risk is dependent on the other three factors in the model. It will change only if the auditor changes one of the other risk model factors. Planned detection risk determines the amount of substantive evidence that the auditor plans to accumulate, inversely with the size of planned detection risk. If planned detection risk is reduced, the auditor needs to accumulate more evidence to achieve the reduced planned risk. For example, in Table 9-2, planned detection risk (D) is low for inventory and warehousing, which causes planned evidence to be high. The opposite is true for payroll and personnel. In the preceding numerical example, the planned detection risk (PDR) of .05 means the auditor plans to accumulate evidence until the risk of misstatements exceeding tolerable misstatement is reduced to 5 percent. If control risk (CR) were .50 instead of 1.0, planned detection risk (PDR) would be .10, and planned evidence could therefore be reduced. Inherent risk measures the auditor’s assessment of the likelihood that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal control. If the auditor concludes that a high likelihood of misstatement exists, the auditor will conclude that inherent risk is high. Internal con trols are ignored in setting inherent risk because they are considered separately in the audit risk model as control risk. In Table 9-2, inherent risk (A) was assessed high for acquisi tions and payments and inventory and warehousing and lower for payroll and personnel and capital acquisition and repayment. Such assessments are typically based on discus sions with management, knowledge of the company, and results in audits of previous years. Inherent risk is inversely related to planned detection risk and directly related to evidence. Inherent risk for inventory and warehousing in Table 9-2 is high, which results in a lower planned detection risk and more planned evidence than if inherent risk were lower. We’ll examine this in greater detail later in the chapter. In addition to increasing audit evidence for a higher inherent risk in a given audit area, auditors commonly assign more experienced staff to that area and review the completed audit tests more thoroughly. For example, if inherent risk for inventory obsolescence is extremely high, it makes sense for the CPA firm to assign an experienced staff person to perform more extensive tests for inventory obsolescence and to more carefully review the audit results. Control risk measures the auditor’s assessment of whether misstatements exceeding a tolerable amount in a segment will be prevented or detected on a timely basis by the client’s internal controls. Assume that the auditor concludes that internal controls are completely ineffective to prevent or detect misstatements. That is the likely conclusion for inventory and warehousing (B) in Table 9-2 (p. 260). The auditor will therefore assign a high, perhaps 100 percent, risk factor to control risk. The more effective the internal controls, the lower the risk factor that can be assigned to control risk. The audit risk model shows the close relationship between inherent and control risks. For example, an inherent risk of 40 percent and a control risk of 60 percent affect planned detection risk and planned evidence the same as an inherent risk of 60 percent and a control risk of 40 percent. In both cases, multiplying IR by CR results in a de - nominator in the audit risk model of 24 percent. The combination of inherent risk and control risk is referred to in auditing standards as the risk of material misstatement. The auditor may make a combined assessment of the risk of material misstatement or the auditor can separately assess inherent risk and control risk. (Remember, inherent risk is the expectation of misstatements before considering the effect of internal control.) As with inherent risk, the relationship between control risk and planned detection risk is inverse, whereas the relationship between control risk and substantive evidence is direct. If the auditor concludes that internal controls are effective, planned detection risk can be increased and evidence therefore decreased. The auditor can increase planned detection risk when controls are effective because effective internal controls reduce the likelihood of misstatements in the financial statements. Before auditors can set control risk less than 100 percent, they must obtain an understanding of internal control, evaluate how well it should function based on the understanding, and test the internal controls for effectiveness. Obtaining an under - standing of internal control is required for all audits. The latter two are assessment of control risk steps that are required only when the auditor assesses control risk below maximum. Auditors of larger public companies choose to rely extensively on controls because they must test the effectiveness of internal control over financial reporting to satisfy Sarbanes–Oxley Act requirements. Auditors of other companies and other types of entities are also likely to rely on controls that are effective, especially when day-to-day trans action processing involves highly automated procedures. When controls are likely to be ineffective and inherent risk is high, the use of the audit risk model causes the auditor to decrease planned detection risk and thereby increase planned evidence. We devote the entire next chapter to understanding internal control, assessing control risk, and evaluating their impact on evidence requirements. Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. When auditors decide on a lower acceptable audit risk, they want to be more certain that the financial statements are not materially mis - stated. Zero risk is certainty, and a 100 percent risk is complete uncertainty. Complete assurance (zero risk) of the accuracy of the financial statements is not economically practical. Moreover, as we discussed in Chapter 6, the auditor cannot guarantee the complete absence of material misstatements. Often, auditors refer to the term audit assurance (also called overall assurance or level of assurance) instead of acceptable audit risk. Audit assurance or any of the equiva - lent terms is the complement of acceptable audit risk, that is, one minus acceptable audit risk. In other words, acceptable audit risk of 2 percent is the same as audit assurance of 98 percent. The concept of acceptable audit risk can be more easily understood by thinking in terms of a large number of audits, say, 10,000. What portion of these audits can include material misstatements without having an adverse effect on society? Certainly, the portion is below 10 percent. It is probably much closer to 1 percent or less. If an auditor believes that the appropriate percentage is 1 percent, then acceptable audit risk should be set at 1 percent, or perhaps lower, based on the specific circumstances. When employing the audit risk model, there is a direct relationship between acceptable audit risk and planned detection risk, and an inverse relationship between acceptable audit risk and planned evidence. If the auditor decides to reduce acceptable audit risk, planned detection risk is thereby reduced, and planned evidence must be increased. For a client with lower acceptable audit risk, auditors also often assign more experienced staff or review the audit files more extensively. There are important distinctions in how the auditor assesses the four risk factors in the audit risk model. For acceptable audit risk, the auditor decides the risk the CPA firm is willing to take that the financial statements are misstated after the audit is completed, based on certain client related factors. An example of a client where the auditor will accept very little risk (low acceptable audit risk) is for an initial public offering. We will discuss factors affecting acceptable audit risk shortly. Inherent risk and control risk are based on auditors’ expectations or predictions of client conditions. An example of a high inherent risk is inventory that has not been sold for two years. An example of a low control risk is adequate separation of duties between asset custody and accounting. The auditor cannot change these client conditions, but can only make a likelihood assessment. Inherent risk factors are discussed later in the chapter and control risk is covered in Chapter 10. Detection risk is dependent completely on the other three risks. It can be determined only after the auditor assesses the other three risks.

(Objective 9-8)

ASSESSING INHERENT RISK

The inclusion of inherent risk in the audit risk model is one of the most important concepts in auditing. It implies that auditors should attempt to predict where misstatements are most and least likely in the financial statement segments. This information affects the amount of evidence that the auditor needs to accumulate, the assignment of staff and the review of audit documentation. The auditor must assess the factors that make up the risk and modify audit evidence to take them into consideration. The auditor should consider several major factors when assessing inherent risk:

• Nature of the client’s business

• Results of previous audits

• Initial versus repeat engagement

• Related parties

• Nonroutine transactions

• Judgment required to correctly record account balances and transactions

• Makeup of the population

• Factors related to fraudulent financial reporting

• Factors related to misappropriation of assets

Nature of the Client’s Business Inherent risk for certain accounts is affected by the nature of the client’s business. For example, an electronics manufacturer faces a greater likelihood of obsolete inventory than a steel fabricator does. Inherent risk is most likely to vary from business to business for accounts such as inventory, accounts and loans receivable, and property, plant, and equipment. The nature of the client’s business should have little or no effect on inherent risk for accounts such as cash, notes, and mortgages payable. Information gained while obtaining knowledge about the client’s business and industry and assessing client business risk, as discussed in Chapter 8, is useful for assessing this factor. Results of Previous Audits Misstatements found in the previous year’s audit have a high likelihood of occurring again in the current year’s audit, because many types of misstatements are systemic in nature, and organizations are often slow in making changes to eliminate them. Therefore, an auditor is negligent if the results of the preceding year’s audit are ignored during the development of the current year’s audit program. For example, if the auditor found a significant number of misstatements in pricing inventory in last year’s audit, the auditor will likely assess inherent risk as high in the current year’s audit, and extensive testing will have to be done as a means of determining whether the deficiency in the client’s system has been corrected. If, however, the auditor found no misstatements for the past several years in conducting tests of an audit area, the auditor is justified in reducing inherent risk, provided that changes in relevant circumstances have not occurred. Initial Versus Repeat Engagement Auditors gain experience and knowledge about the likelihood of misstatements after auditing a client for several years. The lack of previous years’ audit results causes most auditors to assess a higher inherent risk for initial audits than for repeat engagements in which no material misstatements were previously found. Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the client. Related Parties Transactions between parent and subsidiary companies, and those between management and the corporate entity, are examples of related-party trans - actions as defined by accounting standards. Because these transactions do not occur between two independent parties dealing at “arm’s length,” a greater likelihood exists

that they might be misstated, causing an increase in inherent risk. We discussed related parties transactions in Chapter 8. Nonroutine Transactions Transactions that are unusual for a client are more likely to be incorrectly recorded than routine transactions because the client often lacks experience recording them. Examples include fire losses, major property acquisitions, and restructuring charges resulting from discontinued operations. By knowing the client’s business and reviewing minutes of meetings, the auditor can assess the con - sequences of nonroutine transactions. Judgment Required to Correctly Record Account Balances and Transactions Many account balances such as certain investments recorded at fair value, allowances for uncollectible accounts receivable, obsolete inventory, liability for warranty payments, major repairs versus partial replacement of assets, and bank loan loss reserves require estimates and a great deal of management judgment. Because they require considerable judgment, the likelihood of misstatements increases, and as a result the auditor should increase inherent risk. Makeup of the Population Often, individual items making up the total population also affect the auditor’s expectation of material misstatement. Most auditors use a higher inherent risk for accounts receivable where most accounts are significantly overdue than where most accounts are current. Examples of items requiring a higher inherent risk include transactions with affiliated companies (see vignette below), amounts due from officers, cash disbursements made payable to cash, and accounts receivable outstanding for several months. These situations require greater investigation because of a greater likelihood of misstatement than occurs with more typical transactions. Factors Related to Fraudulent Financial Reporting and Misappropriation of Assets In Chapter 6, we discussed the auditor’s responsibilities to assess the risk of fraudulent financial reporting and misappropriation of assets. It is difficult in concept and practice to separate fraud risk factors into acceptable audit risk, inherent risk, or control risk. For example, management that lacks integrity and is motivated to misstate financial statements is one of the factors in acceptable audit risk, but it may also affect control risk. Similarly, several of the other risk factors influencing manage - ment characteristics are a part of the control environment, as we’ll discuss in Chapter 10. These include the attitude, actions, and policies that reflect the overall attitudes of top management about integrity, ethical values, and commitment to competence.

To satisfy the requirements of auditing standards, it is more important for the auditor to assess the risks and to respond to them than it is to categorize them into a risk type. For this reason, many audit firms assess fraud risk separately from the assessment of the audit risk model components. The risk of fraud can be assessed for the entire audit or by cycle, account, and objective. For example, a strong incentive for management to meet unduly aggressive earnings expectations may affect the entire audit, while the susceptibility of inventory to theft may affect only the inventory account. For both the risk of fraudulent financial reporting and the risk of misappropriation of assets, auditors focus on specific areas of increased fraud risk and designing audit procedures or changing the overall conduct of the audit to respond to those risks. The specific response to an identified risk of fraud can include revising assessments of acceptable audit risk, inherent risk, and control risk. Assessing fraud risk will be the focus of Chapter 11. The auditor must evaluate the information affecting inherent risk and decide on an appropriate inherent risk level for each cycle, account, and, many times, for each audit objective. Some factors, such as an initial versus repeat engagement, will affect many or perhaps all cycles, whereas others, such as nonroutine transactions, will affect only specific accounts or audit objectives. Although the profession has not established standards or guidelines for setting inherent risk, we believe that auditors are generally conservative in making such assessments. Assume that in the audit of inventory the auditor notes that (1) a large number of misstatements were found in the previous year and (2) inventory turnover has slowed in the current year. Auditors will likely set inherent risk at a relatively high level (some will use 100 percent) for each audit objective for inventory in this situation. Auditors begin their assessments of inherent risk during the planning phase and update the assessments throughout the audit. Chapter 8 discussed how auditors gather information relevant to inherent risk assessment during the planning phase. For example, to obtain knowledge of the client’s business and industry, auditors may tour the client’s plant and offices and identify related parties. This and other information about the entity and its environment discussed in Chapter 8 pertain directly to assessing inherent risk. Also, several of the items discussed earlier under factors affecting inherent risk, such as the results of previous audits and nonroutine trans - actions are evaluated separately to help assess inherent risk. As audit tests are performed during an audit, the auditor may obtain additional information that affects the original assessment.