Question 1

What are the factors that increase inherent risks for the accounts within the inventory cycle?

Accepted Answer

Factors that increase inherent risks for the accounts within the inventory cycle are:1)Inventory is often stored in different locations,which makes physical control and counting difficult.
2)Inventory is easily transportable,is easy to steal,and may be hard to access.
3)Inventory that consists of items such as jewels,chemicals,and electronic parts is often difficult for the auditor to observe and value.In these circumstances,the auditor may need specialist assistance for both counting and valuation.
4)The industry is categorized by rapid and significant technological innovation,which increases the risk of obsolescence.
5)Customer returns are frequent,which causes accuracy,timing,and cutoff issues with recording of the physical return and the corresponding credit in sales.Poor quality client return processes will result in the need for increased audit tests.
6)There are several acceptable inventory valuation methods under ASPE and IFRS,which the auditor must determine have been applied consistently from year to year.

Question 2

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

Accepted Answer

Purchase requisitions and purchase orders are part of the acquisitions and payments cycle, which involves the acquisition of goods and services, the processing of purchase orders and receiving reports, and the disbursement of cash to suppliers. Therefore, controls over purchase requisitions and purchase orders are evaluated and tested as part of this cycle.

Question 3

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

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Question 4

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

Accepted Answer

The inventory and distribution cycle involves the physical flow of goods and the related costs, which include accounting for inventory and cost of goods sold.

Question 5

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

Accepted Answer

When materials are received, the receiving department completes a receiving report to document the receipt of the materials. This report will typically include information such as the date received, the quantity and description of the materials, and the purchase order number. Materials requisitions are used to request materials from inventory, bill of lading is a shipping document, and inventory acquisition summary is an internal report used to track inventory movements.

Question 6

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

Accepted Answer

The fact that there is a high risk of overvalued inventory indicates that there is a risk of inaccurate and misstated valuation. Therefore, additional testing of accuracy and valuation assertions is necessary.

Question 7

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

Accepted Answer

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Question 8

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

Accepted Answer

Master files, worksheets, and reports that accumulate material, labour, and overhead as the costs are incurred are referred to as cost accounting records. These records help in determining the cost of production and are used by organizations to make informed decisions about pricing, resource allocation, and budgeting. Accounting system controls are procedures and policies that ensure the accuracy and completeness of financial records. Storeroom documents are records that track inventory movements in and out of a warehouse or storeroom. Finished goods inventory records keep track of the quantity and value of finished products held by the company.

Question 9

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

Accepted Answer

A purchase requisition is a form used to request the purchasing department to place orders for inventory items. A purchase order is the actual document created by the purchasing department to place the order. A materials requisition is used to request materials from the warehouse or inventory to be used in production, and a bill of lading is a document used in shipping to confirm receipt of goods by a carrier.

Question 10

Shipping of finished goods is an integral part of the

Accepted Answer

Shipping of finished goods is part of the sales and collections cycle, as it involves delivering products to customers and is directly related to sales transactions.

Question 11

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

Accepted Answer

The human resources and payroll cycle is where labour costs are recorded, and this cycle includes verifying the proper accounting of these costs. Therefore, option B is the best choice. The inventory and distribution cycle deals with the movement of inventory, while the acquisitions and payments cycle deals with the acquisition of goods and services and payment for them. The cash cycle deals with cash receipts and disbursements, which are not directly related to labour costs.

Question 12

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

Accepted Answer

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Question 13

The bias in recording inventory would be toward

Accepted Answer

The bias in recording inventory would be toward overstatement because companies may want to show higher profits by inflating their inventory values. This can lead to overstated earnings and assets, which can ultimately mislead investors and other stakeholders.

Question 14

Which three cycles is the inventory cycle interconnected with in a manufacturing company?

Accepted Answer

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Question 15

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.

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Question 16

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

Accepted Answer

The internal transfer of assets and related costs would fall under the inventory and distribution cycle, as this cycle typically involves the movement and tracking of goods within a company.

Question 17

The auditor would like to test the existence and accuracy of the transfer of goods from the raw materials storeroom to the manufacturing assembly lines.Which of the following audit procedures should be used?

Accepted Answer

This procedure involves tracking the movement of raw materials from the storeroom to the assembly line, ensuring that the correct quantities were transferred and properly approved. This helps to test the existence and accuracy of the transfer of goods. The other options are not relevant to this specific audit objective.

Question 18

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

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Question 19

What are the significant risks relating to the inventory cycle?

Accepted Answer

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Question 20

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

Accepted Answer

The objective of the audit of the inventory and distribution cycle is to ensure that inventory and cost of goods sold are fairly presented on the financial statements, which is achieved by verifying the accuracy of inventory quantities and values, testing the effectiveness of internal controls over inventory, and ensuring that appropriate accounting methods are used for cost of goods sold. Option A refers only to the income statement, and option C is too broad and encompasses all financial statements, not just inventory and cost of goods sold. Option B focuses only on the balance sheet and does not address the accuracy of cost of goods sold.

Quiz 14: Audit of the Inventory and Distribution Cycle