Deck 16: Auditing Inventories and Property, Plant and Equipment

Question 1

The audit strategy that would be most appropriate when an auditor has assessed a predominantly substantive approach is necessary to determine inventory quantity is:

A) inventory quantities determined by physical count at or within a few days of balance date.
B) inventory quantities determined by physical count near balance date, adjusted by reference to perpetual records.
C) inventory quantities determined by reference to perpetual records, without a physical count at or near balance date.
D) none of the above.

Answer 1

A

Question 2

Which of the following is not an income statement account related to property, plant and equipment?

A) depreciation.
B) accumulated depreciation
C) loss on disposal of plant.
D) rent on operating leases.

Answer 2

B

Question 3

The auditor's strategy in performing test counts during the inventory observation is to:

A) test all large-dollar items.
B) randomly select all test items.
C) concentrate tests on high dollar items with random selection of other items.
D) concentrate tests in areas where employees seem to be disregarding the inventory instructions.

Answer 3

C

Question 4

Confirmation of inventories in public warehouses cannot provide evidence concerning the:

A) existence assertion.
B) completeness assertion.
C) valuation and allocation assertion.
D) it cannot provide evidence concerning any of the listed assertions

Question 5

Ensuring inventories include all materials, products and supplies on hand at the end of the reporting period derives from the audit assertion of:

A) completeness
B) valuation and allocation.
C) existence
D) rights and obligations.

Question 6

When the client engages an inventory specialist to take the inventory, the impact on the audit in this area is:

A) to eliminate the need to perform test counts.
B) to eliminate the need to observe the inventory.
C) minimal because the specialists are considered independent auditors.
D) minimal because the specialists are considered audit employees.

Question 7

Observation of inventory counts is a required audit procedure whenever:

A) inventories are material.
B) it is practicable to do so.
C) inventories are material and it is practicable to do so.
D) inventories are material and the auditor considers it to be necessary.

Question 8

Entities frequently maintain a plant register as a subsidiary ledger detailing individual items of PPE. Which of the following would an auditor not expect to find in a plant register?

A) cost and accumulated depreciation.
B) the date of previous audit inspections.
C) serial number and supplier.
D) insurance cover.

Question 9

An important procedure for the conduct of a physical inventory count is to maintain control over the count systems. Which of the following is not a common count system?

A) use of pre-printed inventory count sheets.
B) use of blank inventory tags.
C) use of blank, pre-numbered inventory count sheets.
D) use of pre-numbered three-part inventory tags.

Question 10

During the observation of the inventory count, the auditor has no responsibility to:

A) watch for damaged and obsolete inventory items.
B) make some test counts of inventory quantities.
C) supervise the taking of the inventory.
D) the auditor has responsibility for all of the above

Question 11

In companies where inventories are at multiple locations, the auditor's observations ordinarily should include:

A) all inventory locations.
B) a variation of locations attended each year.
C) a five minute visit to each location
D) all significant inventory locations.

Question 12

The statement about inherent risk assessments for property, plant and equipment that is inaccurate is:

A) Inherent risk is normally low for the presentation and disclosure assertion for PPE assets acquired under finance leases.
B) Inherent risk is normally low for the existence assertion in a merchandising entity because PPE assets are not generally vulnerable to theft.
C) Inherent risk is normally moderate to high for the existence assertion in a manufacturing entity because scrapped or retired PPE assets may not be written off the books.
D) Inherent risk is normally low for the valuation and allocation assertion when PPE assets are purchased for cash.

Question 13

The statement about audit strategy for property, plant and equipment that is inaccurate is:

A) for depreciation and accumulated depreciation inherent risk is affected by the difficulty in estimating both useful lives and residual value
B) although material, verification of PPE typically involves significantly less time and cost than verification of current assets.
C) unlike current asset accounts, control risk assessments for PPE asset balances are less dependent on controls over major transaction classes.
D) none of the above statements is inaccurate

Question 14

Which of these is not true regarding substantive procedures for property, plant and equipment in an initial audit:

A) the auditor concentrates on the current year's transactions only
B) evidence must be obtained as to the fairness of the opening balances.
C) evidence must be obtained as to the ownership of the assets.
D) all of the above are untrue.

Question 15

If the auditor was testing inventory pricing the audit objective being fulfilled would be:

A) completeness.
B) rights and obligations.
C) existence.
D) valuation and allocation.

Question 16

When costing manufactured inventory all of the following procedures are necessary except:

A) determining the cost of materials entered into raw materials.
B) determining the cost of raw materials transferred to work in process.
C) recording costs of direct labour applied to work in process.
D) determine the cost of purchases.

Question 17

Which of the following is not a function of maintaining inventory records?

A) physically comparing inventory with inventory records.
B) recording the movement of goods into inventory.
C) ordering goods.
D) recording the movement of goods from inventory.

Question 18

The auditor identifies the specific audit objective: "determine that property, plant and equipment (PPE) assets represent productive assets that are in use at balance date". This objective is derived from the:

A) existence assertion.
B) completeness assertion.
C) presentation and disclosure assertion.
D) rights and obligations assertion.

Question 19

Reviewing data pertaining to inventory quality relates primarily to the:

A) occurrence assertion.
B) completeness assertion.
C) rights and obligations assertion.
D) valuation and allocation

Question 20

Which of these factors contributes least to the risk of misstatement of inventories?

A) the volume of transactions.
B) location at a large single site.
C) vulnerability to spoilage or damage.
D) all of the factors listed contribute equally to the risk of misstatement of inventories

Question 21

There are numerous factors that contribute to the risk of misstatement in the assertions for inventories and cost of sales. List four of these factors.

Question 22

When reviewing accumulated depreciation, the auditor seeks evidence as to the reasonableness, consistency and accuracy of depreciation charges. The substantive procedures performed seek to provide evidence for which assertion?

A) valuation.
B) completeness.
C) rights and obligations.
D) presentation and disclosure.

Question 23

What are the three audit strategy options that an auditor has for verifying the existence (and completeness) of inventories and what is the implication of each strategy for control risk?

Question 24

The auditor is least likely to discover unrecorded retirements of property, plant and equipment assets by:

A) analysing the miscellaneous revenue account.
B) investigating the disposition of facilities associated with discontinued product lines.
C) selecting retirement work orders from the accounting records and verifying their accuracy.
D) reviewing insurance policies for termination or reductions of coverage.

Question 25

Substantiating asset disposals with supporting documentation is a test of details of transactions. Which assertion is most likely satisfied?

A) existence.
B) completeness.
C) valuation and allocation
D) all of the above.

Question 26

When the auditor receives the client-prepared schedules for property, plant and equipment assets, in order to determine that they booked the adjustments proposed by the auditor at the conclusion of the prior audit, the auditor should:

A) inquire of management.
B) examine the general journal for the first month of the current year.
C) inquire of accounting personnel.
D) compare beginning balances with prior year's working papers.

Question 27

List the procedures that should be adopted in a physical inventory count.

Question 28

The application of analytical procedures to the audit of inventories is often:

A) not very useful.
B) the only procedure necessary.
C) a requirement of the standards.
D) used extensively.

Question 29

Cyclical inventory counts differ from full inventory counts in which way?

A) cyclical inventory counts are performed at balance date.
B) cyclical inventory counts are only performed by internal audit.
C) cyclical inventory counts may involve counting only a portion of inventory items
D) they differ in all of the above ways

Question 30

1. What procedures might be useful to the auditor in determining if all disposals of property, plant and equipment have been recorded?
2.What procedures would be adopted by the auditor to gather evidence on the reasonableness, consistency and accuracy of depreciation charges (expense)?

Question 31

The auditor is concerned that the client has committed a number of errors in the capital/repair expenditures distinction. In selecting items from the repairs expense account for investigation, the most appropriate audit procedure would involve:

A) random selection.
B) systematic selection.
C) tracing.
D) scanning.

Question 32

When substantiating disposals of property, plant and equipment, the auditor should be able to find evidence using all of the following except:

A) cash remittance advices.
B) written authorisations.
C) supplier invoices.
D) sales agreements.

Question 33

In a typical audit, verification of the ownership of plant and equipment is least likely to involve examination of:

A) the physical characteristics of the items
B) "paid invoices".
C) registration certificates.
D) property tax bills.

Question 34

Identify the appropriate account balance audit objectives applicable to inventories for the assertion categories of:
-existence
-completeness
-rights and obligations
-valuation and allocation
-presentation and disclosure.

Question 35

When an asset is shown on the financial report other than at cost, which of the following is not required to be disclosed?

A) the evidence gathered to support the valuation.
B) the year and basis of valuation.
C) whether it is an internal or independent valuation.
D) the name of the valuer.

Question 36

ABC Ltd is a retailer who is planning to undertake a full inventory count at year-end. Control risk over inventory records for this entity is deemed to be:

A) important due to the timing of the inventory count.
B) important due to the nature of the business.
C) unimportant due to the timing of the inventory count.
D) none of the above.

Question 37

Evidence concerning the pledging of property, plant and equipment assets is likely to be obtained through:

A) review of the board minutes.
B) confirmation of debt agreements.
C) inquiries of management.
D) all of the above.

Question 38

List the four separate functions of maintaining inventory records
Identify the documentation used in each function to prevent inventory records from being manipulated.

Question 39

Matters that should be considered by the auditor before reaching a conclusion about the reliability of an inventory count include all of the following except:

A) the type of accounting package used by the firm.
B) the general condition of the inventory.
C) departures from the entity's inventory count.
D) all of the above should be considered

Question 40

Analytical procedures are not widely used in the audit of property, plant and equipment. Which of the following is not a valid comment about the use of analytical procedures in the audit of PPE?

A) compare the annual depreciation charge with the cost of an asset to approximate the depreciation rate.
B) a substantial asset balance variation can be caused by one or a few transactions of which the auditor is likely to already be aware.
C) comparison of repairs expense with prior years may indicate capitalisation in error.
D) none of the above is invalid

Question 41

For each of the following potential misstatements for inventories, identify a necessary control:
1.Failure to record goods received
2.Unreliable count procedures during a physical stocktake
3.Inappropriate basis for determining inventory costs
4.Unauthorised removal of goods from inventory
5.Insufficient extent of comparison between stocktake count and inventory records
6.Inadequate investigation and correction of differences between inventory count and inventory records

Question 42

When performing tests of details of balances for property, plant and equipment, it is necessary for the auditor to review accumulated depreciation. Discuss what this review entails.

Question 43

1. Generally, what is the assessment of control risk for transactions relating to property, plant and equipment?
2.Generally, what is the assessment of materiality in relation to property, plant and equipment?
3.Briefly discuss the assessment of inherent risk in relation to property, plant and equipment.

Question 44

When conducting tests of details of transactions for property, plant and equipment, there are three types of transactions that need to be substantiated. These transactions are additions, disposals and repairs and maintenance. Briefly describe what is involved with substantiating each of these types of transactions.