Question 1

You are auditing the inventory account and are concerned about the possibility of an inventory overstatement. What is the best audit procedure to detect damaged inventory?

Accepted Answer

Observing the condition of inventory during the client's physical count is the best audit procedure to detect damaged inventory as it allows the auditor to visually inspect the inventory for signs of damage, deterioration or obsolescence. This is a more effective procedure than comparing the current year's inventory to the previous year's count or comparing inventory turnover, as those procedures do not specifically address the issue of damaged inventory. Reconciling inventory counts to cost accounting records may help to detect inventory misstatements, but it does not specifically address the issue of damaged inventory.

Question 2

It is permissible for an auditor to test the entire inventory population for certain types of audit tests in order to eliminate the need for more costly tests involving sampling.

Accepted Answer

This is true. Auditing standards allow auditors to test the entire inventory population for certain types of audit tests, such as testing for existence or completeness, to eliminate the need for more costly tests involving sampling. However, this is not always feasible or necessary for all audit tests.

Question 3

Discuss the four aspects of the audit of cost accounting with which the auditor is most concerned.

Accepted Answer

The answer of Discuss the four aspects of the audit...

Question 4

Management may decide to allocate manufacturing overhead based upon machine hours. In this situation, the auditor must test and verify the reasonableness of the use of machine hours to allocate overhead.

Accepted Answer

The auditor must test and verify the reasonableness of the basis for allocating manufacturing overhead, which in this case is machine hours.

Question 5

In evaluating management's overhead cost allocations, the auditor must simply consider the reasonableness of the allocation method and determine if the valuation method complies with generally accepted accounting principles.

Accepted Answer

While determining the reasonableness of the allocation method is important, the auditor must also consider whether the allocation method aligns with the company's organizational structure, activities, and cost drivers. Additionally, the auditor must ensure that the allocation method is consistently applied and properly documented. Hence, the statement is not entirely true, and the correct answer is B.

Question 6

The extent and timing of an auditor's physical examination of inventory is significantly influenced by the adequacy of the client's perpetual inventory records.

Accepted Answer

The accuracy and completeness of the perpetual inventory records are important for an auditor in determining the extent and timing of physical inventory examination. If the client's perpetual inventory records are reliable and up-to-date, the auditor may perform fewer physical inventory tests. However, if the client's perpetual inventory records are inadequate, the auditor may need to perform more extensive tests and visit the client's site at a different time. Therefore, the answer is true.

Question 7

Internal controls over cost accounting records are very similar among companies.

Accepted Answer

Internal controls over cost accounting records can vary among companies depending on their industry, size, and complexity. Some companies may have more rigorous controls in place due to regulations or the nature of their business, while others may have less strict controls if their operations are less complicated.

Question 8

Ratios such as the gross margin percentage calculated as part of risk assessment procedures may be performed using aggregate data.

Accepted Answer

Ratios such as gross margin percentage can be calculated using aggregate data, making them useful for risk assessment procedures.

Question 9

Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility of obsolete inventory?

Accepted Answer

The inventory turnover ratio compares the cost of goods sold with the average inventory. If the ratio decreases significantly compared to previous years, it may indicate that inventory is not selling or becoming obsolete. Therefore, comparing inventory turnover ratio with previous years would be the most useful analytical procedure in alerting the auditor to the possibility of obsolete inventory. A, B, and D are not directly related to identifying obsolete inventory.

Question 10

Cost accounting systems and controls are the same for all manufacturing companies.

Accepted Answer

Cost accounting systems and controls are not the same for all manufacturing companies as they vary based on the size, nature of operations, and the products produced by the company. Each company may have its method of cost accounting and controls to suit their specific operations and needs.

Question 11

Significant improvements in audit effectiveness and efficiency may be achieved by the use of audit data analytics in the inventory and warehousing cycle.

Accepted Answer

Audit data analytics can help identify anomalies and potential errors in the inventory and warehousing cycle, leading to more effective and efficient audits. It can also automate some audit procedures and provide real-time insights into inventory and warehousing activities.

Question 12

A comparison of the current year's inventory turnover ratio with previous years' may indicate the presence of obsolete inventory.

Accepted Answer

If the inventory turnover ratio has decreased significantly compared to previous years, it could indicate that inventory is not selling well, which may be due to it being obsolete or outdated. A high inventory turnover ratio indicates that inventory is selling quickly, which is a positive sign. Therefore, a comparison of the current year's inventory turnover ratio with previous years can help identify the presence of obsolete inventory.

Question 13

Auditors should design appropriate tests of internal controls over cost accounting records based upon their understanding of those records and the extent they will be relied upon for reducing substantive tests.

Accepted Answer

Auditors should understand and evaluate internal controls over cost accounting records in order to reduce the extent of substantive testing. Based on their understanding, they should appropriately design tests to ensure the effectiveness of these controls.

Question 14

What are the auditor's primary concerns in verifying the transfer of inventory from one location to another?

Accepted Answer

The answer of What are the auditor's primary concerns in...

Question 15

Many of the internal controls over inventory and the details of the entire inventory population can be tested using audit software.

Accepted Answer

Audit software can assist auditors in testing the accuracy of inventory records and performing procedures such as tracing transactions and comparing physical counts to book balances. This can help to identify and assess the effectiveness of internal controls related to inventory.

Question 16

When determining the sample size for the number of items the auditor should count during the physical inventory,

Accepted Answer

The strength of internal controls over the physical count is a key determinant in deciding the sample size for inventory counting, as stronger controls may allow for a smaller sample size.

Question 17

Given the following information about your audit client, perform analytical procedures and comment on your findings.

Accepted Answer

The answer of Given the following information about your audit...

Question 18

In addition to performing analytical procedures that examine the relationship of inventory account balances with related financial statement accounts, auditor's will often use nonfinancial measures in determining the reasonableness of inventory balances. List below at least two nonfinancial measures that may be useful to auditors.

Accepted Answer

The answer of In addition to performing analytical procedures that...

Question 19

Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility inventory and cost of goods sold being overstated or understated?

Accepted Answer

Comparing inventory turnover ratio with previous years can reveal if inventory is being sold too slowly or too quickly, which can indicate if inventory and cost of goods sold are being overstated or understated. A slower inventory turnover ratio may suggest that inventory is being overvalued, while a faster turnover ratio may indicate that inventory is being undervalued. The other options may also provide useful information, but are not as directly relevant to identifying potential inventory and cost of goods sold misstatements.

Question 20

When verifying the transfer of inventory from one location to another, the audit objectives with which the auditor is primarily concerned are occurrence of recorded transfers, completeness of recorded transfers, and accuracy of recorded transfers.

Accepted Answer

This statement is true as the occurrence, completeness, and accuracy of recorded transfers are all important audit objectives in verifying inventory transfers between locations.

Quiz 21: Audit of the Inventory and Warehousing Cycle