Question 1

Auditing standards require that auditors satisfy themselves about the effectiveness of the client's methods of counting inventory and the reliance they can place on the client's representations about the quantities and physical condition of the inventories.To meet this requirement,auditors must perform four activities.List them below.

Accepted Answer

The answer of Auditing standards require that auditors satisfy themselves...

Question 2

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?
A)compilation tests
B)price tests
C)confirmation of inventory held by outside parties
D)physical examination of the inventory

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 3

To test for proper sales cutoff,an auditor would obtain the number of the last bill of lading issued during the period under audit and verify that the item shipped had been excluded from the inventory listing.

Accepted Answer

This is a valid method to test for proper sales cutoff. The auditor wants to ensure that items that have been shipped are not included in the ending inventory, so verifying that the last bill of lading issued during the period under audit has been excluded from the inventory listing can help confirm that the cutoff has been done correctly.

Question 4

Auditing standards recommend that auditors observe physical inventory counts by the client.

Accepted Answer

The answer of Auditing standards recommend that auditors observe physical...

Question 5

When part of the client's inventory is in a public warehouse or in the possession of other outside custodians,the auditor does not need to observe a physical count of the inventory if a written confirmation is obtained directly from the inventory custodians.

Accepted Answer

If a written confirmation is obtained directly from the inventory custodians, the auditor does not need to observe a physical count of the inventory.

Question 6

Boxes or other containers holding inventory should also be opened during test counts to determine the ________ of the inventory.
A)classification
B)detail tie-in
C)existence
D)realizable value

Accepted Answer

Opening boxes or containers can help determine the existence of the inventory.

Question 7

A common source of business risk for inventory is the reliance on a few key suppliers.

Accepted Answer

Reliance on a few key suppliers can create business risk for inventory. If these suppliers experience disruptions or fail to deliver, it can impact the business's ability to maintain adequate inventory levels and meet customer demand.

Question 8

An auditor selects a random sampling of tag numbers and identifies the tag with that number attached to the actual inventory.The purpose of the procedure is to
A)obtain proper cutoff information.
B)uncover the inclusion of nonexistent items as inventory.
C)determine if the client has adequately priced the inventory item.
D)verify that the client has not changed the recorded counts after the auditor left the premises.

Accepted Answer

The purpose of selecting random samples of tag numbers and identifying the corresponding inventory items is to uncover the inclusion of nonexistent items as inventory. This helps the auditor determine the accuracy of the client's inventory records. The other options (A, C, and D) are not directly related to this procedure.

Question 9

When the client's perpetual inventory master files are inadequate,the auditor will probably choose to test the physical inventory prior to the balance sheet date.

Accepted Answer

The answer of When the client's perpetual inventory master files...

Question 10

Discuss the key control procedures relating to the client's physical count of inventory.

Accepted Answer

The answer of Discuss the key control procedures relating to...

Question 11

The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate.The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a
A)sale in the current period.
B)sale in the subsequent period.
C)purchase in the current period.
D)purchase return in the subsequent period.

Accepted Answer

The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a sale in the current period. This will assure that the purchases and sales cutoffs were adequate. Option B is incorrect because the cutoff for the subsequent period is not relevant for the current year-end audit. Option C and D are also incorrect because they are not directly related to the inventory cutoffs.

Question 12

An auditor must inquire about consigned or customer inventory included on the client's premises to satisfy the balance-related audit objective of
A)cutoff.
B)classification.
C)rights.
D)completeness.

Accepted Answer

The rights-related audit objective pertains to ensuring the client has legal ownership or control over inventory. Inquiring about consigned or customer inventory included on the client's premises is necessary to determine if the client has the right to include those items in their inventory count.

Question 13

To best ascertain that a company has properly included merchandise that it owns in its ending inventory,the auditor should review and test the
A)terms of the open purchase orders.
B)purchase cutoff procedures.
C)contractual commitments made by the purchasing department.
D)purchase invoices received on or around year-end.

Accepted Answer

Purchase cutoff procedures ensure that transactions are recorded in the correct accounting period. Testing these helps verify that inventory ownership is accurately reflected in the ending inventory balance, ensuring that goods received by year-end are included and those not yet received are excluded.

Question 14

In the audit of inventory,the auditor and client are jointly responsible for making and recording the count of physical inventory;while the auditor is responsible for drawing conclusions about the adequacy of the physical inventory.

Accepted Answer

The client is responsible for making and recording the count of physical inventory, while the auditor is responsible for observing the count to gather evidence regarding the existence and condition of the inventory and drawing conclusions about the adequacy of the inventory count procedures and the inventory itself.

Question 15

Discuss the auditor's responsibilities for inventory maintained in public warehouses or with other outside custodians.

Accepted Answer

The answer of Discuss the auditor's responsibilities for inventory maintained...

Question 16

Inherent risk is typically assessed at a low level for inventory due to the nature of the asset.

Accepted Answer

Inherent risk for inventory can vary significantly depending on factors such as the industry, susceptibility to obsolescence or theft, and complexity of the valuation process. Therefore, inherent risk should be assessed on a case-by-case basis and may not always be low.

Question 17

When may auditors observe the physical inventory count?
A) 
B) 
C) 
D)

Accepted Answer

The answer of When may auditors observe the physical inventory...

Question 18

The adequacy of internal controls over the physical count of inventory is one of the key determinants of the amount of time needed to test inventory.

Accepted Answer

The strength of internal controls over the physical count of inventory affects the reliability of inventory records, which in turn affects the amount of time needed to test inventory. Therefore, the adequacy of internal controls is a key determinant of the time needed to test inventory.

Question 19

Which one of the following procedures would not be appropriate for an auditor in discharging his responsibilities concerning the client's physical inventories?
A)confirmation of goods in the hands of public warehouses
B)supervising the taking of the annual physical inventory
C)carrying out physical inventory procedures at an interim date
D)obtaining written representation from the client as to the existence,quality,and dollar amount of the inventory

Accepted Answer

The answer of Which one of the following procedures would...

Question 20

The auditor generally decides whether the inventory count can be taken before year-end primarily on the basis of
A)audit efficiency.
B)accuracy of the perpetual inventory master files.
C)client convenience.
D)audit staff availability.

Accepted Answer

The auditor's decision on whether the inventory count can be taken before the year-end is primarily based on the accuracy of the perpetual inventory master files. This is because the count is only reliable if the records used to support it are accurate. While audit efficiency, client convenience, and audit staff availability may also be factors in the decision-making process, they are not the primary consideration.

Quiz 21: Audit of the Inventory and Warehousing Cycle

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?

To test for proper sales cutoff,an auditor would obtain the number of the last bill of lading issued during the period under audit and verify that the item shipped had been excluded from the inventory listing.

Auditing standards recommend that auditors observe physical inventory counts by the client.

When part of the client's inventory is in a public warehouse or in the possession of other outside custodians,the auditor does not need to observe a physical count of the inventory if a written confirmation is obtained directly from the inventory custodians.

Boxes or other containers holding inventory should also be opened during test counts to determine the ________ of the inventory.

A common source of business risk for inventory is the reliance on a few key suppliers.

An auditor selects a random sampling of tag numbers and identifies the tag with that number attached to the actual inventory.The purpose of the procedure is to

When the client's perpetual inventory master files are inadequate,the auditor will probably choose to test the physical inventory prior to the balance sheet date.

Discuss the key control procedures relating to the client's physical count of inventory.

The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate.The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a

An auditor must inquire about consigned or customer inventory included on the client's premises to satisfy the balance-related audit objective of

To best ascertain that a company has properly included merchandise that it owns in its ending inventory,the auditor should review and test the

In the audit of inventory,the auditor and client are jointly responsible for making and recording the count of physical inventory;while the auditor is responsible for drawing conclusions about the adequacy of the physical inventory.

Discuss the auditor's responsibilities for inventory maintained in public warehouses or with other outside custodians.

Inherent risk is typically assessed at a low level for inventory due to the nature of the asset.

When may auditors observe the physical inventory count?

The adequacy of internal controls over the physical count of inventory is one of the key determinants of the amount of time needed to test inventory.

Which one of the following procedures would not be appropriate for an auditor in discharging his responsibilities concerning the client's physical inventories?

The auditor generally decides whether the inventory count can be taken before year-end primarily on the basis of