* Understanding Net Income Overstatement:
* Net Income (NI) = Revenue - Expenses
* If net income is overstated, then expenses must be understated or revenue must be overstated
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* Cost of Goods Sold (COGS) is an expense that directly affects net income.
* Why Understated COGS Causes Overstated Net Income:
* COGS = Beginning Inventory + Purchases - Ending Inventory
* If COGS is understated, expenses are lower than they should be, resulting in a higher net income.
* Why Other Options Are Incorrect:
* A. Beginning inventory overstated: This would increase COGS (not decrease it), leading to a lower net income.
* C. Ending inventory understated: This would increase COGS, reducing net income.
* D. COGS overstated: This would result in a lower net income, not an overstatement.
* IIA Standards and References:
* IIA Standard 2120 - Risk Management: Internal auditors must assess financial misstatements and risks.
* IIA Practice Guide: Auditing Financial Statement Close Processes (2018): Emphasizes accuracy in inventory and expense reporting.
* COSO Internal Control - Integrated Framework: Supports accuracy in financial reporting and controls over misstated financial data.
Thus, the correct answer is B: Cost of goods sold was understated for the year.