Question 1

Your client plans to count inventory at several locations on the same day. No location is material in amount, but the total of inventory is quite material. How is an auditor likely to plan to observe?
A)Observe all counts at all locations by using the required number of auditors.
B)Insist the inventory be counted on separate days so the auditor can be present at all locations.
C)Work with the client to determine which locations to observe.
D)Observe a sample of locations on a surprise basis.

Accepted Answer

D

Question 2

Generally accepted accounting principles (GAAP) require that inventory be recorded at
A)the lower of cost or fair market value.
B)the lower of cost or net realizable value.
C)the higher of cost or net realizable value less a normal profit (floor).
D)None of the choices are correct.

Accepted Answer

D

Question 3

A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record
A)sales.
B)sales discounts.
C)purchases.
D)purchase discounts.

Accepted Answer

If the perpetual records do not reflect purchases made, then the physical count of inventory will be higher than what is reflected in the records. This means that the purchases were not recorded in a timely manner or not recorded at all, leading to an incorrect inventory balance. The failure to record sales or discounts would not lead to a higher physical count of inventory.

Question 4

Selecting a sample of cost accounting reports for labor and vouching it to time records is a procedure designed to test the ASB transaction assertion of
A)occurrence.
B)valuation.
C)completeness.
D)presentation and disclosure.

Accepted Answer

The answer of Selecting a sample of cost accounting reports...

Question 5

L. Martinez, CPA, was auditing a client, Marvelous Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which PCAOB assertion?
A)Rights and obligations.
B)Completeness.
C)Existence or occurrence.
D)Valuation or allocation.

Accepted Answer

By selecting a sample of inventory items from the perpetual records and vouching additions to receiving reports, L. Martinez, CPA is testing whether the inventory items exist and have occurred (i.e., that they have been received by the company) in order to satisfy the PCAOB assertion of existence or occurrence.

Question 6

Periodic or cycle counts of selected inventory items are made at various times during the year rather than during a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?
A)Complete recounts by independent teams are performed.
B)Perpetual inventory records are maintained.
C)Unit cost records are integrated with production accounting records.
D)Inventory balances are rarely at low levels.

Accepted Answer

If the auditor plans to observe inventories at interim dates, it is necessary that perpetual inventory records are maintained. This will allow the auditor to reconcile the physical inventory count with the perpetual inventory records to ensure accuracy.

Question 7

A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts. This reconciliation is most likely performed to provide assurance that
A)recorded production transactions are valid and documented.
B)valid production transactions are recorded and none omitted.
C)production accounting and posting is complete.
D)production transactions are recorded in the proper period.

Accepted Answer

The reconciliation of job cost sheets to work-in-process inventory accounts ensures that all production costs are accurately accounted for and posted, confirming the completeness of production accounting.

Question 8

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace
A)inventory tags noted during the auditor's observation to items in the inventory listing schedule.
B)inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices.
C)items in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.
D)items in receiving reports and vendors' invoices to the inventory listing schedule.

Accepted Answer

Tracing items in the inventory listing schedule to inventory tags and the auditor's recorded count sheets would provide assurance that all inventory items in the client's inventory listing schedule are valid. This ensures that all inventory items have been physically counted and recorded accurately in the inventory listing schedule. Tracing inventory tags noted during the auditor's observation to items in the inventory listing schedule would only ensure the accuracy of the inventory tags, not the completeness of the inventory listing schedule. Tracing inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices would only confirm the existence of the items in the receiving reports and vendors' invoices, not their inclusion in the inventory listing schedule. Tracing items in receiving reports and vendors' invoices to the inventory listing schedule would only confirm the accuracy of the inventory listing schedule, not the completeness.

Question 9

An auditor selected a product maintained in the finished goods warehouse. The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?
A)Existence
B)Completeness
C)Rights and obligations
D)Valuation

Accepted Answer

By counting the physical inventory and comparing it with the perpetual inventory records, the auditor is primarily testing completeness, i.e. whether all the units of the product have been recorded in the perpetual inventory account. The other assertions (existence, rights and obligations, and valuation) are less relevant to this particular procedure.

Question 10

To test the control assertion of completeness in the area of work-in-process inventory, the auditor most likely would
A)select a sample of open and closed production cost reports and recalculate all costs entered.
B)select a sample of issue slips from the raw materials stores file and trace materials-used reports to production cost reports.
C)select a sample of open and closed production cost reports and vouch overhead charges to overhead analysis schedules.
D)select a sample of production orders and determine whether the production orders were authorized.

Accepted Answer

The control assertion of completeness in the area of work-in-process inventory relates to ensuring that all materials used and costs incurred during the production process are captured and recorded accurately. To test this assertion, the auditor would select a sample of issue slips from the raw materials stores file and trace them to production cost reports to ensure that all materials used have been recorded. This procedure would help to ensure the completeness of the work-in-process inventory. Option A relates to testing the accuracy assertion, option C relates to testing the assertion of accuracy or valuation, and option D relates to testing the authorization assertion.

Question 11

Counting different parts of inventory at different times of the year is called
A)LIFO inventory.
B)inventory cutoff.
C)cycle counting.
D)just-in-time inventory.

Accepted Answer

Cycle counting is the process of counting different parts of inventory at different times of the year instead of performing a complete physical inventory count at the end of the year. It helps in minimizing disruptions to ongoing operations and provides more accurate inventory levels throughout the year. LIFO inventory is a method of valuing inventory, inventory cutoff refers to the end of the accounting period, and just-in-time inventory is a system of inventory management based on timely delivery and minimal stock.

Question 12

Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made?
A)Debit purchases/credit cost of goods sold.
B)Debit cost of goods sold/credit accounts payable.
C)Debit inventory/credit accounts payable.
D)None.

Accepted Answer

Since the goods were received and included in physical inventory, the cost must be added to the inventory account. At the same time, since the company has not yet recorded the expense, the accounts payable liability must be increased. Therefore, the correct adjustment would be to debit inventory and credit accounts payable.

Question 13

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record
A)purchase discounts.
B)purchase returns.
C)sales.
D)sales returns.

Accepted Answer

If the test counts were higher than the recorded quantities in the client's perpetual records, it could be due to the client's failure to record sales returns. This means that items that were returned by customers were not properly recorded in the client's system, leading to an overstatement of inventory.

Question 14

An auditor selected a product recorded in the finished goods perpetual inventory subsidiary account. The auditor went to the warehouse and counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?
A)Existence
B)Completeness
C)Rights and obligations
D)Valuation

Accepted Answer

The auditor is testing the existence of the product by physically counting it in the warehouse and comparing it to the amount recorded in the finished goods perpetual inventory subsidiary account. The existence assertion ensures that the assets and liabilities on a company's balance sheet actually exist and belong to the company.

Question 15

An auditor selected an invoice for a large inventory purchase and vouched the invoice to the receiving report. Which ASB transaction assertion is the auditor most likely testing?
A)Occurrence
B)Completeness
C)Rights and obligations
D)Valuation

Accepted Answer

By vouching the invoice to the receiving report, the auditor is testing whether the transaction actually occurred, which is part of the occurrence assertion.

Question 16

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to
A)test and observe the client's physical count of inventory.
B)verify independently the physical counts obtained by the client.
C)assist the client in taking test counts of year-end inventory.
D)determine whether inventory contains obsolete goods.

Accepted Answer

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to test and observe the client's physical count of inventory. This involves the auditor being present during the client's physical inventory count and performing procedures to ensure that the count is accurate and reliable. The auditor may also perform independent test counts to verify the client's count. The focus is on testing the accuracy and completeness of the physical count, rather than on determining whether inventory contains obsolete goods.

Question 17

If overhead is miscalculated so that it is underabsorbed, the result if the error is not corrected will be that
A)inventory will be understated and net income will be overstated.
B)inventory and net income will be overstated.
C)inventory will be overstated and net income will be understated.
D)inventory and net income will be understated.

Accepted Answer

If overhead is underabsorbed, it means that not enough overhead costs have been allocated to inventory. This results in inventory being understated because the costs associated with producing the inventory are lower than they should be. Consequently, net income will also be understated because the cost of goods sold will be higher than it should be, reducing the net income.

Question 18

Which of the following steps would not normally be included in a program for a physical inventory observation?
A)Vouch unit prices to vendors' invoices or other cost records.
B)Obtain the client's inventory counting instructions and review them for completeness.
C)Inspect the tags used and unused and record the tag numbers used.
D)Obtain the numbers of the last five receiving reports and last five shipping documents.

Accepted Answer

Vouching unit prices to vendors' invoices or other cost records is not a normal step in a physical inventory observation, as the focus of the observation is on verifying the existence and quantity of inventory on hand, not the prices paid for it. The other three options listed are normal steps in a physical inventory observation.

Question 19

An auditor who wished to test for the existence or occurrence of inventory would most likely select a sample of inventory items from the perpetual records and
A)trace additions to the general ledger.
B)vouch additions to receiving reports.
C)vouch additions to sales invoices.
D)trace receipts to receiving reports.

Accepted Answer

Vouching additions to receiving reports is a method used by auditors to test for the existence or occurrence of inventory. It involves selecting a sample of inventory items from the perpetual records and then verifying these items by checking against the receiving reports to ensure that the inventory was actually received and exists.

Question 20

An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the PCAOB assertion of
A)existence.
B)valuation.
C)completeness.
D)rights and obligations.

Accepted Answer

The answer of An auditor selected an inventory item on...

Quiz 9: Production Cycle 394

Your client plans to count inventory at several locations on the same day. No location is material in amount, but the total of inventory is quite material. How is an auditor likely to plan to observe?

Generally accepted accounting principles (GAAP) require that inventory be recorded at

A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record

Selecting a sample of cost accounting reports for labor and vouching it to time records is a procedure designed to test the ASB transaction assertion of

L. Martinez, CPA, was auditing a client, Marvelous Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which PCAOB assertion?

Periodic or cycle counts of selected inventory items are made at various times during the year rather than during a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?

A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts. This reconciliation is most likely performed to provide assurance that

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace

An auditor selected a product maintained in the finished goods warehouse. The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?

To test the control assertion of completeness in the area of work-in-process inventory, the auditor most likely would

Counting different parts of inventory at different times of the year is called

Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made?

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record

An auditor selected an invoice for a large inventory purchase and vouched the invoice to the receiving report. Which ASB transaction assertion is the auditor most likely testing?

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to

If overhead is miscalculated so that it is underabsorbed, the result if the error is not corrected will be that

Which of the following steps would not normally be included in a program for a physical inventory observation?

An auditor who wished to test for the existence or occurrence of inventory would most likely select a sample of inventory items from the perpetual records and

An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the PCAOB assertion of