Question 1

An auditor's tests of controls over the issuance of raw materials to production would most likely include
A)reconciling raw materials and work-in-process perpetual inventory records to general ledger balances.
B)inquiring of the custodian about the procedures followed when defective materials are received from vendors.
C)observing that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual.
D)examining material requisitions and reperforming client controls designed to process and record issuances.

Accepted Answer

The auditor's tests of controls over the issuance of raw materials to production would most likely include examining material requisitions and reperforming client controls designed to process and record issuances. This would involve selecting a sample of material requisitions and tracing them back to supporting documentation to ensure that proper controls were followed in the issuance of raw materials to production. Option A involves reconciling inventory records, which is a substantive procedure rather than a test of controls. Option B involves inquiring about procedures related to defective materials, which is not directly relevant to testing controls over the issuance of raw materials to production. Option C involves observing physical security, which is also not directly relevant to testing controls over the issuance of raw materials to production.

Question 2

Which of the following is not an acceptable method of determining inventory cost under GAAP?
A)FIFO.
B)LIFO.
C)Average cost.
D)All of the choices are acceptable.

Accepted Answer

All three methods (FIFO, LIFO, and Average Cost) are acceptable under GAAP, so D is the correct answer.

Question 3

Auditors record the last bill of lading used at the time of the inventory count to
A)search for unrecorded sales.
B)test cutoff.
C)verify ownership.
D)All of the choices.

Accepted Answer

Auditors record the last bill of lading used at the time of the inventory count to test cutoff, ensuring that all inventory transactions are properly recorded in the correct period.

Question 4

Which of the following methods for determining inventory cost is not allowed by GAAP?
A)Average cost.
B)FIFO.
C)LIFO.
D)Standard cost.

Accepted Answer

GAAP does not allow the use of standard cost for determining inventory cost. Standard cost is a management accounting tool used for planning and control purposes, but it is not an acceptable method for financial reporting under GAAP. Average cost, FIFO and LIFO are all acceptable methods for determining inventory cost under GAAP.

Question 5

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement (PCAOB) assertion of
A)valuation or allocation.
B)rights and obligations.
C)existence or occurrence.
D)presentation and disclosure.

Accepted Answer

Inquiries of production and sales personnel about possible obsolete or slow-moving inventory would provide evidence to support the management's assertion of valuation or allocation, as it helps to determine if the inventory is properly valued at the lower of cost or net realizable value, and if allowances for inventory obsolescence or slow-moving items are appropriate.

Question 6

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 the accuracy and completeness of the inventory records.

Question 7

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.

Question 8

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 choices are correct.

Accepted Answer

The answer of To make a year-to-year comparison of inventory...

Question 9

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

Credit memos for items returned by customers not being recorded would mean that the perpetual records still show these items as part of inventory, but they are not physically present, leading to a higher physical count than the records indicate.

Question 10

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

The procedure ensures that items observed during the physical count are accurately recorded in the final inventory records.

Question 11

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 outlines the client's planned amount and timing of production. The sales forecast and inventory reports may provide some information but may not be as comprehensive as the production plan. The purchases journal does not provide information on production planning.

Question 12

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

Having separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records would be the best procedure to prevent or detect theft of valuable items. This would ensure that the higher value items are kept in a more secure location and that regular physical counts are conducted to compare against the perpetual inventory records, which would help identify any discrepancies or missing items. The other options may not be as effective in preventing or detecting theft of valuable items.

Question 13

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

Verifying that all inventory owned by the client is on hand at the time of the count is not always possible or practical, especially for items in transit or held at third-party locations. Auditors focus on proper inventory pricing, appropriate financial statement presentation, and the correct accounting for damaged and obsolete items.

Question 14

Inventory count tags are controlled
A)to prevent counting errors.
B)to test cutoff.
C)to prevent subsequent addition of goods to the inventory.
D)for reasons specified in all of the choices.

Accepted Answer

The answer of Inventory count tags are controlled
A)to prevent counting...

Question 15

Counting inventory on the warehouse floor and tracing the count to the inventory compilation provides evidence to support which management (PCAOB) assertion?
A)Existence or occurrence.
B)Completeness.
C)Rights and obligations.
D)Valuation or allocation.

Accepted Answer

Counting inventory and tracing it to the compilation supports the completeness assertion, as it ensures that all inventory items have been accounted for and included in the inventory compilation.

Question 16

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 not directly linked to the production cycle, as it deals with activities related to securing funding for the organization, managing investments, and handling financial transactions. The other cycles listed (acquisition and expenditure, payroll, revenue and collection) are all closely connected to the production cycle, as they involve the acquisition of resources, payment of wages to production workers, and generation of revenue from the sale of finished goods.

Question 17

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 and periodic checks on the numbering sequence would help ensure that all received inventory is recorded, addressing the completeness assertion for inventory. Options A, B, and D address other internal control concerns, such as accuracy, safeguarding of assets, and prevention of fraud, but do not directly address completeness.

Question 18

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

When accurate perpetual inventory records are maintained, it is easier for auditors to review and confirm inventory counts because they have a basis for comparison. This reduces the risk of misstatement in inventory balances and makes inventory counts more acceptable prior to year end. Weak internal control, slow-moving inventory, or consignment basis do not necessarily affect the acceptability of inventory counts prior to year end.

Question 19

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 20

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...

Quiz 9: Production Cycle 394

An auditor's tests of controls over the issuance of raw materials to production would most likely include

Which of the following is not an acceptable method of determining inventory cost under GAAP?

Auditors record the last bill of lading used at the time of the inventory count to

Which of the following methods for determining inventory cost is not allowed by GAAP?

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement (PCAOB) assertion of

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

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

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

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

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

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?

When auditing inventories, an auditor would least likely verify that

Inventory count tags are controlled

Counting inventory on the warehouse floor and tracing the count to the inventory compilation provides evidence to support which management (PCAOB) assertion?

Which cycle is not directly linked to the production cycle?

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

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

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

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