stored alongside the machines in which they are to be processed . Finished goods are moved from the assembly line to a storeroom in the custody of a stock clerk , who maintains a perpetual inventory record in terms of physical units , but not in dollars . What weaknesses , if any , do you see in the internal control over inventories ? Problem 12-35 Described below are potential financial statement misstatements that are encountered by auditors . Inventory is understated because warehouse personnel overlooked several racks of parts in taking the physical inventory . Inventory is overstated because warehouse personnel included inventory items received subsequent to year-end while recording the purchase in the subsequent year to hide inventory shortages . Inventory is overstated because management instructed computer personnel to make changes in the file used to price inventories . Questions Requiring Analysis 13-31 You are part of the audit team that is auditing Happy Chicken , Inc ., a company that franchises Happy Chicken family restaurants . During the current year , management of Happy Chicken purchased for $ 2 million one of its franchised locations , a store that was having financial difficulties . In performing its analysis for impairment of assets at year-end , management of Happy Chicken determined that the carrying value of the asset may not be recoverable . As a result , management developed an estimate of the fair value of the location using a discounted cash flow model . The estimated fair value of the location was determined to be $ 1.5 million , which resulted in an impairment loss of about $ 500,000 . The undiscounted future cash flows are equal to $ 1.7 million . Problem 13-34 The following are typical questions that might appear on an internal control questionnaire relating to plant and equipment : Are subsidiary ledgers for plant and equipment regularly reconciled with general ledger controlling accounts ? State the purpose of each of the above controls . Describe the manner in which each of the above procedures might be tested .