Question 1

The auditor traces inventory tags identified as non-owned during the physical observation to the inventory listing schedule to make sure these have not been included. This test satisfies the balance-related audit objective of

Accepted Answer

The auditor is ensuring that inventory items not owned by the company are not included in the company's inventory records, which relates to the rights and obligations assertion. This assertion concerns whether the entity has rights to the asset or is obligated for the liability.

Question 2

A major source of cutoff information for sales and purchases of inventory is

Accepted Answer

Physical observation is a major source of cutoff information for sales and purchases of inventory as it allows auditors to verify the actual inventory on hand at a specific point in time, ensuring that transactions are recorded in the correct accounting period.

Question 3

If an auditor were concerned with obtaining evidence about the appropriateness of the value of inventory, which of the following tests would be most appropriate?

Accepted Answer

Price tests are most appropriate for obtaining evidence about the appropriateness of the value of inventory, as they directly assess whether the inventory is valued correctly in terms of its cost and net realizable value.

Question 4

When performing price tests for purchased inventory, the auditor would not be concerned with the most recent vendors' invoices if the client uses the FIFO valuation method.

Accepted Answer

When performing price tests for purchased inventory, the auditor should be concerned with the most recent vendors' invoices regardless of the valuation method used by the client. This is because the most recent purchases are most likely to reflect the current market price for the inventory. However, if the client uses the FIFO valuation method, the auditor may need to adjust the unit cost of the inventory based on the price of the most recent purchases, even if those purchases are not reflected in the inventory cost calculation.

Question 5

The audit procedure "Perform tests of lower-of-cost-or-market, selling price, and obsolescence" provides assurance mainly for the realizable value objective for inventory pricing and compilation.

Accepted Answer

The audit procedure "Perform tests of lower-of-cost-or-market, selling price, and obsolescence" provides assurance mainly for the realizable value objective for inventory pricing and compilation. This is because it helps ensure that inventory is valued at the lower of cost or market (i.e. the most conservative value), taking into account factors such as selling price and potential obsolescence.

Question 6

Pricing manufactured inventory is difficult. Auditors must evaluate the method of allocating manufacturing overhead for all but which of the following?

Accepted Answer

Compliance with generally accepted auditing standards is not a relevant factor in evaluating the method of allocating manufacturing overhead for pricing manufactured inventory. However, reasonableness, computational correctness, and consistency are important factors that auditors must consider when evaluating the method of allocating manufacturing overhead.

Question 7

The audit procedure "Foot the inventory listing schedules for raw materials, work-in-process, and finished goods" provides assurance mainly for the accuracy objective for inventory pricing and compilation.

Accepted Answer

The audit procedure "Foot the inventory listing schedules for raw materials, work-in-process, and finished goods" provides assurance for the completeness and existence objectives, as it ensures that all items included in the inventory listing schedules are actually present and accounted for. It does not provide assurance for the accuracy objective for inventory pricing and compilation, which would require additional procedures such as comparison of inventory costs to external data sources, analysis of inventory obsolescence or valuation allowances, and confirmation of inventory balances with third parties.

Question 8

When performing inventory valuation tests, the auditor must be concerned that the method is in accordance with accounting standards.

Accepted Answer

It is important for the auditor to ensure that the inventory valuation method used by the client is in accordance with the relevant accounting standards, such as GAAP or IFRS. This is to ensure that the financial statements fairly present the value of the inventory and comply with regulatory requirements.

Question 9

Controls which provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totaled, and included in the general ledger at the proper amount are known as

Accepted Answer

The controls described in the question refer to the compilation of physical inventory counts into financial statements, which is a part of the accounting cycle. Therefore, the appropriate term is "compilation internal controls." The other choices, such as standard cost controls and pricing internal controls, are related to different parts of the organization and are not directly relevant to inventory compilation. "Count quantity internal controls" is also not an appropriate term because it does not cover all the necessary aspects of inventory compilation.

Question 10

In pricing raw materials in manufactured products, auditors must consider both the unit cost of the raw materials and the number of units required to manufacture a unit of output.

Accepted Answer

This statement is true. The cost of raw materials used in the production process is an important component of the overall cost of manufactured goods. The unit cost of raw materials must be multiplied by the number of units required to produce a single unit of output in order to accurately price the finished product.

Question 11

When a client has standard cost records, an efficient and useful method of determining valuation is to review and analyze variances.

Accepted Answer

Reviewing and analyzing variances can provide valuable insights into the actual cost of production and help determine the correct valuation for inventory. This is because variances show the differences between actual costs and standard costs, which can then be used to adjust the valuation of inventory. Therefore, this method can be efficient and useful for companies that use standard cost records.

Question 12

Assume that the client's valuation of an inventory item is $10 per unit for 1,000 units, using first-in, first-out (FIFO). If the most recent acquisition of inventory was for 600 units at $10 per unit and the immediately preceding acquisition was for 700 units at $9 per unit, the inventory item is in error and it is

Accepted Answer

The error is that the inventory item is being valued at the most recent acquisition cost of $10 per unit, instead of using the FIFO method. Using FIFO, the cost of the 600 units would be based on the preceding acquisition cost of $9 per unit, resulting in a lower valuation of $5,400 (600 units x $9 per unit) instead of $6,000 (600 units x $10 per unit). Therefore, the inventory item is overstated by $600 ($6,000 - $5,400) or $400 (if rounded down to the nearest hundred).

Question 13

The test of details of balance procedure which requires the auditor to perform tests of lower of cost or market, selling price, and obsolescence is an attempt to satisfy the objective of

Accepted Answer

The test of details of balance procedure that requires the auditor to perform tests of lower of cost or market, selling price, and obsolescence is an attempt to satisfy the objective of realizable value. This procedure is aimed at determining whether the inventory can be sold at a price close to its book value or not.

Question 14

The auditor need not be concerned about inventory being classified and disclosed, properly, into finished goods, work-in-process and raw materials (separately) in the financial statements; this is management's responsibility, only.

Accepted Answer

While it is management's responsibility to properly classify and disclose inventory in the financial statements, the auditor should still be concerned about it, as inventory misstatements can have a significant impact on the financial statements. Therefore, the auditor should assess the appropriateness and accuracy of the inventory classification and disclosure.

Question 15

Inventory price tests include testing the client's summarization of the inventory counts.

Accepted Answer

Inventory price tests focus on verifying the valuation of inventory, not the summarization of inventory counts, which is part of inventory quantity tests.

Question 16

You are gathering evidence for the audit objective that existing inventory items are included in the inventory listing schedule. The audit procedure that would provide you with the best evidence to confirm this objective is

Accepted Answer

Tracing from inventory tags to the inventory listing schedule ensures that items physically present in the inventory are recorded accurately in the inventory records. This provides the best evidence to confirm that existing inventory items are included in the inventory listing schedule. Tracing inventory totals to the general ledger or performing tests of lower-of-cost-or-market are not directly relevant to this audit objective. Accounting for unused tags only confirms that no tags have been added, but it does not provide evidence of whether existing inventory items are included in the inventory listing schedule.

Question 17

Which of the following is an accurate statement regarding the audit of pricing and compilation of inventory?

Accepted Answer

Internal controls are necessary to ensure that the inventory compilation, which involves summarizing and pricing physical counts, is accurate. Option A is incorrect because inventory compilation tests do not include all tests of the client's unit prices. Option B is also incorrect because the review for obsolete inventory should be performed by the auditor, not the accounting department. Option C is incorrect because external verification by an outside consultant is not the most important internal control for accurate unit costs.

Question 18

When auditors observe the client counting inventory, the auditor should take special care in three areas with regards to selection of inventory items. What action should be taken in these areas?

Accepted Answer

The answer of When auditors observe the client counting inventory,...

Question 19

In valuing inventory, the auditor must consider all but which of the following factors?

Accepted Answer

The statement "LIFO must be used for work-in-process inventory" is incorrect as there is no requirement to use LIFO for any type of inventory. The other three factors listed are important considerations when valuing inventory.

Question 20

The first step in verifying the valuation of purchased inventory is in determining the valuation method used by the client. The next step is

Accepted Answer

Once the valuation method used by the client is determined, the next step is to identify which costs should be included in the valuation of an item of inventory. This could include direct costs such as purchase cost, freight, and customs duty as well as indirect costs such as storage and handling costs. This step is crucial in ensuring that the inventory is valued accurately in the financial statements.

Quiz 21: Audit of the Inventory and Warehousing Cycle