Question 1

The inventory observation is performed for the purpose of determining the accuracy of client counting procedures.

Accepted Answer

The statement is true. Inventory observation involves physically counting the inventory of a client and comparing it with the inventory records to determine the accuracy of client counting procedures.

Question 2

Testing cash disbursements subsequent to the year under audit allows the auditor to determine certain payables that may not have been recorded previously.

Accepted Answer

By testing cash disbursements subsequent to the year under audit, the auditor can identify any payables that were not recorded in the correct accounting period. This helps ensure that the financial statements are accurate and complete.

Question 3

Many frauds are committed by overstating inventory accounts.

Accepted Answer

Overstating inventory accounts is a common method used by fraudsters to manipulate financial statements and present a stronger financial position of the company than what it actually is. This is done by recording fake inventory assets, inflating the value of existing inventory assets, or delaying the recognition of inventory write-downs or losses. Such fraudulent activities can lead to serious legal and financial consequences for the company and the individuals involved.

Question 4

Sources of information regarding a client's inventory obsolescence can be partially noted during the inventory observation.

Accepted Answer

During an inventory observation, the auditor can observe the condition and age of inventory items, and can potentially identify items that may be outdated, damaged, or otherwise obsolete. This can provide some insight into the possibility of inventory obsolescence, but additional information may be necessary to fully assess and quantify the extent of obsolescence.

Question 5

When auditing accounts payable,the auditor would most likely review a sample of cash disbursements throughout the year end to determine whether disbursements for goods and services are applicable to the subsequent year.

Accepted Answer

The auditor would review a sample of cash disbursements throughout the year to ensure that the transactions are properly recorded in the correct period, but not specifically to determine whether they are applicable to the subsequent year.

Question 6

Valuation is the most complex assertion related to inventory.

Accepted Answer

Valuation of inventory involves various assumptions, such as cost flow methods, overhead allocation, write-downs, etc. Hence, it is considered a complex assertion.

Question 7

Legal expenses are reviewed by auditors for possible litigation and related FAS 5 treatment.

Accepted Answer

Legal expenses are reviewed by auditors to assess their likelihood of resulting in litigation and to determine the appropriate accounting treatment under FAS 5 (Statement of Financial Accounting Standards No. 5). This involves evaluating the potential liabilities and assessing the need for accruals or disclosures in the financial statements.

Question 8

The cash account is not part of the acquisitions and payment cycle.

Accepted Answer

The cash account is actually a critical part of the acquisitions and payment cycle, as cash disbursements are made from this account to pay for purchases and expenses.

Question 9

Prenumbered receiving documents establish the completeness of the population and are useful in determining that all goods are recorded in the correct period.

Accepted Answer

Prenumbered receiving documents provide a systematic way of keeping track of incoming goods and ensure that all goods are recorded in the correct period. They also help in establishing the completeness of the population by allowing a comparison between the number of documents received and the number of items recorded in the inventory system.

Question 10

The acquisition cycle begins with the receipt of goods and services and ends with their payment as reflected in cash disbursements.

Accepted Answer

The acquisition cycle begins with the identification of a need and ends with the receipt and acceptance of goods or services. Payment as reflected in cash disbursements occurs after the acquisition cycle is complete.

Question 11

In order to gain an understanding of internal controls,an auditor will use walkthrough of the process,inquiry,observation,and review of the client's documentation.

Accepted Answer

These are the typical methods used by an auditor to gain an understanding of a client's internal controls.

Question 12

During the counting process of inventory,the client arranges not to ship or receive goods or segregates all goods received during the process to be labeled and counted as "after inventory."

Accepted Answer

This is true. By segregating goods received during the inventory process, they can be labeled and counted separately as "after inventory" to ensure accuracy in counting.

Question 13

The auditor may test a manufacturing client's cost system to substantiate the valuation of inventory.

Accepted Answer

The auditor may test a manufacturing client's cost system to substantiate the valuation of inventory as part of their auditing procedures.

Question 14

Inventory may become obsolete because of technological advances even though there are no signs of physical wear.

Accepted Answer

Technological advances can often render certain inventory items obsolete, regardless of their physical condition. For example, a new software program may make an older model of a computer no longer useful for certain tasks, even if the computer is in excellent physical condition.

Question 15

The auditor tests significant repairs and maintenance expenses to ensure that an item that should be capitalized has not been expensed.

Accepted Answer

This is true because significant repairs and maintenance expenses may actually be capital expenditures that should be recognized as assets rather than expenses. Therefore, the auditor tests such expenses to ensure they have not been improperly expensed.

Question 16

Test counts are performed by the auditor to give the impression of control and they are not used for substantive testing.

Accepted Answer

This statement is not true. Test counts may be used for both control testing and substantive testing, depending on the specific situation and audit objectives. For example, if the auditor is testing the effectiveness of a client's inventory counting procedures, they may perform test counts as a control test to determine if the client is accurately counting and recording inventory. Alternatively, the auditor could also use test counts as substantive evidence to support the valuation and existence assertions related to inventory.

Question 17

The lower of cost or market assumption is not important to valuation of inventory.

Accepted Answer

The lower of cost or market assumption is important to valuation of inventory as it requires companies to value their inventory at either its historical cost or its replacement cost, whichever is lower. This ensures that inventory is not overstated and reflects a more conservative estimate of its value.

Question 18

Proper internal control over the inventory account would require that inventory items should be reviewed for obsolescence and proper accounting treatment.

Accepted Answer

Proper internal control over the inventory account includes reviewing inventory items for obsolescence and making sure they are being accounted for properly. This helps ensure accurate financial reporting and prevents the overstatement or understatement of inventory values.

Question 19

The auditor is required by generally accepted accounting principles (GAAP)to observe the taking of physical inventory.

Accepted Answer

The answer of The auditor is required by generally accepted...

Question 20

Generally accepted auditing standards (GAAS)require the auditor to observe the taking of the physical inventory at year-end.

Accepted Answer

This is a requirement under GAAS. Auditors must observe the taking of the physical inventory to ensure that the inventory is accurately recorded and reported in the financial statements.

Quiz 11: Auditing Inventory, goods and Services, and Accounts Payable: the Acquisition and Payment Cycle