Question 1

From the auditors' point of view,inventory counts are more acceptable prior to the year end when
A)Internal control is weak.
B)Accurate perpetual inventory records are maintained.
C)Inventory is slow moving.
D)Significant amounts of inventory are held on a consignment basis.

Accepted Answer

Accurate perpetual inventory records provide a reliable basis for auditing inventory balances, and this enhances the precision of audits. By assessing the quality of perpetual inventory records before the year-end, auditors are better positioned to adjust and reconcile inventory balances.

Question 2

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to
A)Cost ledgers.
B)Perpetual inventory records.
C)Receiving reports.
D)Material requisitions.

Accepted Answer

Material requisitions are documents that authorize the transfer of materials from the storeroom to the production area, making them the appropriate source for verifying quantities charged to work-in-process.

Question 3

Which cycle is not directly linked to the production cycle?
A)Acquisition and expenditure cycle.
B)Payroll cycle.
C)Revenue and collection cycle.
D)Finance and investment cycle.

Accepted Answer

The finance and investment cycle is focused on managing the company's financial resources and investments, such as borrowing money or investing excess cash. It is not directly related to the production of goods or services, unlike the other cycles listed.

Question 4

An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a final inventory compilation.This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are
A)Owned by the client.
B)Not obsolete.
C)Physically present at the time of the preparation of the final inventory schedule.
D)Included in the final inventory schedule.

Accepted Answer

This procedure ensures that the items counted during the physical inventory are accurately recorded and included in the final inventory records.

Question 5

To make a year-to-year comparison of inventory turnover most meaningful,the auditor will perform the analysis
A)For the company as a whole.
B)By division.
C)By product.
D)All of the above.

Accepted Answer

Analyzing inventory turnover by product provides the most detailed and meaningful insights, as it allows the auditor to identify specific products that may be affecting overall inventory performance.

Question 6

Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?
A)Trace test counts noted during the entity's physical count to the entity's summarization of quantities.
B)Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.
C)Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales.
D)Inspect the open purchase order file for significant commitments that should be considered for disclosure.

Accepted Answer

Inspecting agreements to determine whether any inventory is pledged as collateral or subject to any liens would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories. This is because such information would typically be included in legal agreements and contracts, which are binding and enforceable. The other options may also be relevant to the audit of inventories but are less likely to provide as strong or reliable evidence.

Question 7

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
A)Supplies of relatively little value are expensed when purchased.
B)The cycle basis is used for physical counts.
C)The warehouse manager is responsible for maintenance of perpetual inventory records.
D)Perpetual inventory records are maintained only for items of significant value.

Accepted Answer

The warehouse manager being responsible for maintenance of perpetual inventory records is an internal control weakness because it violates the principle of segregation of duties. This principle requires that the responsibility for record-keeping and the physical custody of assets should be held by different individuals to reduce the risk of errors or fraud.

Question 8

Your client counts inventory three months before the end of the fiscal year.Internal controls over inventory are excellent.Which procedure is not necessary for the inventory roll-forward?
A)Check that shipping documents for the last three months agree with perpetual records.
B)Tracing receiving reports for the last three months to perpetual records.
C)Compare gross margin percentages for the last three months.
D)Request the client to recount inventory at the end of the year.

Accepted Answer

Requesting the client to recount inventory at the end of the year is not necessary if internal controls over inventory are excellent and the inventory was already counted three months before the end of the fiscal year. The other procedures (A, B, C) help in verifying the accuracy of the inventory records during the roll-forward period.

Question 9

To determine the client's planned amount and timing of production of a product,the auditor will review the
A)Sales forecast.
B)Inventory reports.
C)Production plan.
D)Purchases journal.

Accepted Answer

The production plan will provide information on the client's planned amount and timing of production for a specific product. The sales forecast may provide an indication of expected demand, but it does not provide information on production. Inventory reports and purchases journals may provide information related to production, but they do not give a complete picture of the planned amount and timing of production.

Question 10

When testing a company's cost accounting system,the auditor uses procedures that are primarily designed to determine that
A)Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand.
B)Physical inventories agree substantially with book inventories.
C)The system is in accordance with generally accepted accounting principles and is functioning as planned.
D)Costs have been properly assigned to finished goods,work-in-process,and cost of goods sold.

Accepted Answer

The main purpose of testing a company's cost accounting system is to ensure that costs have been properly allocated to finished goods, work-in-process, and cost of goods sold. This is essential to determine the accuracy of the company's financial statements and reports. Options A and B are related to inventory management, while option C is related to compliance with accounting principles, but these are not the primary focus when testing the cost accounting system.

Question 11

A retailer's physical count of inventory was higher than that shown by the perpetual records.Which of the following could explain the difference?
A)Inventory items had been counted but the tags placed on the items had not been taken off and added to the inventory accumulation sheets.
B)Credit memos for several items returned by customers had not been recorded.
C)No journal entry had been made on the retailer's books for several items returned to its suppliers.
D)An item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records.

Accepted Answer

The answer of A retailer's physical count of inventory was...

Question 12

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about
A)Existence.
B)Rights and obligations.
C)Completeness.
D)Accuracy and valuation.

Accepted Answer

Inventory turnover rates relate to how quickly inventory is being sold, which would provide evidence regarding the accuracy and valuation assertion. The existence assertion relates to whether inventory actually exists, the rights and obligations assertion relates to whether the inventory belongs to the company and whether it has any obligations related to the inventory, and the completeness assertion relates to whether all inventory has been included in the financial statements.

Question 13

A client maintains perpetual inventory records in quantities and in dollars.If the assessed control risk is high,an auditor would probably
A)Apply gross profit tests to ascertain the reasonableness of the physical counts.
B)Increase the extent of tests of controls relevant to the inventory cycle.
C)Request the client to schedule the physical inventory count at the end of the year.
D)Insist that the client perform physical counts of inventory items several times during the year.

Accepted Answer

When control risk is assessed as high, the auditor would likely request the client to schedule the physical inventory count at the end of the year to ensure that the inventory records are accurate and reliable, as this allows for a more thorough and accurate audit of the inventory.

Question 14

When evaluating inventory controls,an auditor would be least likely to
A)Inspect documents.
B)Make inquiries.
C)Observe procedures.
D)Consider policy and procedure manuals.

Accepted Answer

Considering policy and procedure manuals is a crucial part of evaluating inventory controls, and is not least likely to be done by an auditor. Inspecting documents, making inquiries, and observing procedures are also important steps.

Question 15

An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about
A)Existence.
B)Rights and obligations.
C)Completeness.
D)Valuation.

Accepted Answer

Vouching inventory to the vendor's invoice helps verify the valuation assertion by ensuring that inventory is recorded at the correct cost.

Question 16

Which of the following internal control activities most likely addresses the completeness assertion for inventory?
A)The work-in-process account is periodically reconciled with subsidiary inventory records.
B)Employees responsible for custody of finished goods do not perform the receiving function.
C)Receiving reports are prenumbered and the numbering sequence is checked periodically.
D)There is a separation of duties between the payroll department and inventory accounting personnel.

Accepted Answer

Prenumbered receiving reports help ensure that all inventory received is recorded, addressing the completeness assertion. Choice A addresses accuracy, Choice B addresses custody, and choice D addresses authorization.

Question 17

When auditing inventories,an auditor would least likely verify that
A)All inventory owned by the client is on hand at the time of the count.
B)The client has used proper inventory pricing.
C)The financial statement presentation of inventories is appropriate.
D)Damaged goods and obsolete items have been properly accounted for.

Accepted Answer

An auditor would least likely verify that all inventory owned by the client is on hand at the time of the count because it is not always feasible to have all inventory physically present due to logistics, timing, or location constraints. Instead, auditors focus on verifying the existence, completeness, and valuation of inventory.

Question 18

An auditor selected items for test counts while observing a client's physical inventory.The auditor then traced the test counts to the client's inventory listing.This procedure most likely obtained evidence concerning management's balance assertion of
A)Rights and obligations.
B)Completeness.
C)Existence.
D)Accuracy and valuation.

Accepted Answer

The answer of An auditor selected items for test counts...

Question 19

Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?
A)Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record.
B)Have an independent accounting firm prepare an internal control report on the effectiveness of the controls over inventory.
C)Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records.
D)Require a manager's signature for the removal of any inventory item with a value above $50.

Accepted Answer

The best option to prevent or detect the theft of valuable items from a large inventory would be to have separate warehouse space for the high-value items and to conduct frequent physical counts and comparisons to the perpetual inventory records. This would create a more secure environment for the more valuable items and make it easier to identify any discrepancies or missing items. Maintaining a perpetual inventory of only the more valuable items or requiring a manager's signature for the removal of any inventory item with a value above $50 may be helpful but would not provide the same level of security as physically separating the high-value items. Having an independent accounting firm prepare an internal control report would be a good practice, but it would not be as effective in preventing or detecting theft as the physical separation and frequent counts of high-value items.

Question 20

An auditor reviews job cost sheets to test which transaction assertion?
A)Occurrence.
B)Completeness.
C)Accuracy.
D)Classification.

Accepted Answer

Reviewing job cost sheets primarily tests the accuracy assertion, as it involves verifying that the amounts recorded for job costs are correct and appropriately reflect the actual costs incurred.

Quiz 9: Production Cycle

From the auditors' point of view,inventory counts are more acceptable prior to the year end when

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to

Which cycle is not directly linked to the production cycle?

To make a year-to-year comparison of inventory turnover most meaningful,the auditor will perform the analysis

Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

Your client counts inventory three months before the end of the fiscal year.Internal controls over inventory are excellent.Which procedure is not necessary for the inventory roll-forward?

To determine the client's planned amount and timing of production of a product,the auditor will review the

When testing a company's cost accounting system,the auditor uses procedures that are primarily designed to determine that

A retailer's physical count of inventory was higher than that shown by the perpetual records.Which of the following could explain the difference?

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about

A client maintains perpetual inventory records in quantities and in dollars.If the assessed control risk is high,an auditor would probably

When evaluating inventory controls,an auditor would be least likely to

An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about

Which of the following internal control activities most likely addresses the completeness assertion for inventory?

When auditing inventories,an auditor would least likely verify that

An auditor selected items for test counts while observing a client's physical inventory.The auditor then traced the test counts to the client's inventory listing.This procedure most likely obtained evidence concerning management's balance assertion of

Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

An auditor reviews job cost sheets to test which transaction assertion?