Question 1

The controls over purchase requisitions and the related purchase orders are evaluated and tested as part of the
A) inventory and distribution cycle.
B) acquisitions and payments cycle.
C) human resources and payroll cycle.
D) capital acquisitions cycle.

Accepted Answer

Purchase requisitions and purchase orders are part of the acquisitions and payments cycle, which involves the purchase of goods and services from vendors and the subsequent payment for those goods and services. Therefore, the controls related to purchase requisitions and purchase orders are evaluated and tested as part of the acquisitions and payments cycle audit.

Question 2

Shipping of finished goods is an integral part of the
A) acquisitions and payments cycle.
B) inventory and distribution cycle.
C) sales and collections cycle.
D) human resources and payroll cycle.

Accepted Answer

C

Question 3

What are inventory price tests and inventory compilation tests? Provide an example of each.

Accepted Answer

Audit procedures used to verify inventory costs are referred to as inventory price tests. An example would be tracing inventory costs to supplier invoices for particular inventory items purchased.
In addition, the auditor must verify whether the physical counts were correctly summarized, the inventory quantities and prices were correctly extended, and the extended inventory was correctly footed. These tests are called inventory compilation tests.

Question 4

The costs used to value the physical inventory must be tested to determine whether the client has correctly followed an inventory method that is in accordance with an acceptable financial reporting framework and is consistent with previous years. The audit procedures used to verify these costs are referred to as inventory
A) price tests.
B) compilation tests.
C) cost allocation tests.
D) consistency tests.

Accepted Answer

The audit procedures used to verify the costs used to value physical inventory are referred to as inventory price tests. These tests are used to ensure that the client has correctly followed an inventory method that is in accordance with an acceptable financial reporting framework and is consistent with previous years.

Question 5

Segregation of duties between production, inventory control, and accounting are important controls in the inventory and distribution cycle. How would the auditor test these controls?
A) using inquiry and reperformance
B) using observation and inquiry
C) using observation and reperformance
D) using discussion with management

Accepted Answer

The answer of Segregation of duties between production, inventory control,...

Question 6

The auditor evaluates the internal transfer of assets and related costs during the
A) acquisition and payments cycle.
B) human resources and payroll cycle.
C) sales and collection cycle.
D) inventory and distribution cycle.

Accepted Answer

The internal transfer of assets and related costs would fall under the inventory and distribution cycle, as this cycle involves the movement of goods and includes activities such as inventory management, shipping, and receiving. The acquisition and payments cycle deals with purchasing goods or services, the human resources and payroll cycle deals with employee-related activities, and the sales and collection cycle deals with revenue generation and collection.

Question 7

An auditor has determined that there is a high risk that her client has overvalued inventory. Which audit assertions would require additional testing?
A) accuracy and existence
B) allocation and accuracy
C) accuracy and valuation
D) valuation and classification

Accepted Answer

When an auditor suspects overvaluation of inventory, the assertions of accuracy and valuation require additional testing to ensure that the inventory is fairly valued on the balance sheet. Accuracy would ensure that the information is correct, and valuation would ensure that the cost of the inventory is correctly represented on the balance sheet. While the other assertions (existence, allocation, and classification) are also important, they are not directly related to the risk of overvaluation.

Question 8

Master files, worksheets, and reports that accumulate material, labour, and overhead as the costs are incurred are
A) accounting system controls.
B) storeroom documents.
C) finished goods inventory records.
D) cost accounting records.

Accepted Answer

Master files, worksheets, and reports that accumulate material, labour, and overhead as the costs are incurred are commonly referred to as cost accounting records.

Question 9

The overall objective in the audit of the inventory and distribution cycle is to determine that
A) costs of goods sold and gross profit are correctly stated on the income statement.
B) inventory items on the balance sheet are neither fraudulent nor materially in error.
C) gross profit and inventory are fairly presented on the financial statements.
D) inventory and cost of goods sold are fairly stated on the financial statements.

Accepted Answer

The inventory and distribution cycle audit's overall goal is to ensure that inventory and cost of goods sold figures on the financial statements are reasonably stated. This implies that option D is the most acceptable since it specifically targets both inventory and cost of goods sold figures, which are critical to the financial statements' overall presentation. The other options, A, B, and C, are simply components of the greater objective of ensuring that the inventory and cost of goods sold figures are fairly present.

Question 10

The audit of the inventory and distribution cycle consists of five parts. State the five parts and, for each part, identify the cycle in which that part is tested by the auditor.

Accepted Answer

The answer of The audit of the inventory and distribution...

Question 11

The form used to request the purchasing department to place orders for inventory items is the
A) purchase order.
B) purchase requisition.
C) materials requisition.
D) bill of lading.

Accepted Answer

A purchase requisition is a document used by employees to request a purchase of inventory items from the purchasing department. The purchasing department will then use the information on the purchase requisition to create a purchase order to order the requested items from the supplier. A materials requisition is a document used to request materials from inventory for use in production, and a bill of lading is a document used in shipping to provide details about the shipment to carriers and the recipient.

Question 12

State the six functions that make up the inventory and distribution cycle and, for each function, identify the related documents and/or records that would be used by a manufacturing company.

Accepted Answer

The answer of State the six functions that make up...

Question 13

The inventory and distribution cycle can be thought of as comprising two separate but closely related systems, one involving the actual physical flow of goods, and the other the
A) internal control over those goods.
B) related costs.
C) storing of the goods.
D) prevention of waste, obsolescence, and theft.

Accepted Answer

The answer of The inventory and distribution cycle can be...

Question 14

When labour is a significant part of inventory, verifying the proper accounting of these costs should be tested in the
A) inventory and distribution cycle.
B) human resources and payroll cycle.
C) acquisitions and payments cycle.
D) cash cycle.

Accepted Answer

Labour costs are related to human resources and payroll cycle, as this cycle deals with the personnel expenses such as wages and salaries, payroll taxes, and benefits. Therefore, the proper accounting of these costs should be tested in the human resources and payroll cycle.

Question 15

The bias in recording inventory would be toward
A) overstatement.
B) understatement.
C) increasing share price.
D) income smoothing.

Accepted Answer

There is a bias towards overstatement because a higher inventory value leads to higher reported assets, which leads to higher net income on the income statement. This can inflate the company's financial health and make it appear more profitable than it actually is.

Question 16

Obtaining an adequate understanding of the client's business is important in physical observation of inventory because
A) it is required by GAAP.
B) it will help the auditor in assessing the risk of theft of inventory.
C) inventory is normally a significant item.
D) inventory varies significantly for different companies.

Accepted Answer

The answer of Obtaining an adequate understanding of the client's...

Question 17

Receipt of ordered materials by the receiving department will generate the completion of a form called the
A) receiving report.
B) materials requisition.
C) bill of lading.
D) inventory acquisition summary.

Accepted Answer

The receiving department completes a receiving report when materials are received. This report documents the materials received, their quantity, quality, and other relevant details. It is an essential part of inventory control and helps in ensuring that all ordered materials have been received as per the purchase order.

Question 18

The auditor must verify whether the physical counts were correctly summarized, the inventory quantities and prices were correctly extended, and the extended inventory was correctly footed. These tests are called
A) price tests.
B) compilation tests.
C) cost tests.
D) mechanical tests.

Accepted Answer

These tests are referred to as compilation tests because they verify the correctness of the inventory summary, extension, and footing. Price and cost tests refer to verifying the accuracy of inventory prices and costs, respectively. There is no such thing as mechanical tests in auditing.

Question 19

Describe the major risks of error or fraud in the inventory and distribution cycle using the headings of i) risks of error, ii) risks of misappropriation of assets, other fraud, or illegal acts, and iii) risks of inadequate disclosure or incorrect presentation of financial information, including fraudulent financial reporting.

Accepted Answer

The answer of Describe the major risks of error or...

Question 20

Discuss the methodology for designing tests of details of balances for inventory.

Accepted Answer

The answer of Discuss the methodology for designing tests of...

Quiz 14: Audit of the Inventory and Distribution Cycle

The controls over purchase requisitions and the related purchase orders are evaluated and tested as part of the

Shipping of finished goods is an integral part of the

What are inventory price tests and inventory compilation tests? Provide an example of each.

Segregation of duties between production, inventory control, and accounting are important controls in the inventory and distribution cycle. How would the auditor test these controls?

The auditor evaluates the internal transfer of assets and related costs during the

An auditor has determined that there is a high risk that her client has overvalued inventory. Which audit assertions would require additional testing?

Master files, worksheets, and reports that accumulate material, labour, and overhead as the costs are incurred are

The overall objective in the audit of the inventory and distribution cycle is to determine that

The audit of the inventory and distribution cycle consists of five parts. State the five parts and, for each part, identify the cycle in which that part is tested by the auditor.

The form used to request the purchasing department to place orders for inventory items is the

State the six functions that make up the inventory and distribution cycle and, for each function, identify the related documents and/or records that would be used by a manufacturing company.

The inventory and distribution cycle can be thought of as comprising two separate but closely related systems, one involving the actual physical flow of goods, and the other the

When labour is a significant part of inventory, verifying the proper accounting of these costs should be tested in the

The bias in recording inventory would be toward

Obtaining an adequate understanding of the client's business is important in physical observation of inventory because

Receipt of ordered materials by the receiving department will generate the completion of a form called the

The auditor must verify whether the physical counts were correctly summarized, the inventory quantities and prices were correctly extended, and the extended inventory was correctly footed. These tests are called

Discuss the methodology for designing tests of details of balances for inventory.