Question 1

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

Accepted Answer

The auditor's primary concern in deciding whether inventory count can be taken before year-end is the accuracy of the perpetual inventory master files. This is because the accuracy of these files helps in determining the completeness and accuracy of inventory balances, which is essential for the preparation of year-end financial statements. Audit efficiency, client convenience, and audit staff availability are secondary factors in this decision-making process.

Question 2

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

Accepted Answer

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Question 3

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 4

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

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 5

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 depending on factors such as the industry, complexity of the inventory, and susceptibility to theft or damage. Therefore, it is not necessarily assessed at a low level by default.

Question 6

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

Accepted Answer

The balance-related audit objective of rights pertains to verifying that the company has legal ownership of the inventory, which includes ensuring that any consigned or customer inventory is properly accounted for. Therefore, an auditor must inquire about consigned or customer inventory included on the client's premises to satisfy the rights objective.

Question 7

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 adequacy of internal controls over the physical count of inventory is important in determining the amount of time needed to test inventory, as it affects the reliability of inventory counts and the risk of material misstatements. If the internal controls are strong and effective in ensuring accurate inventory counts, less testing may be needed. Conversely, if the internal controls are weak or inadequate, more extensive testing may be required to assess the risk of inventory misstatements.

Question 8

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 written confirmation is obtained directly from the inventory custodians, the auditor does not need to observe a physical count of the inventory. This is because the inventory custodians should have performed their own physical counts, and the written confirmation serves as sufficient evidence of the existence and valuation of the inventory.

Question 9

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

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 10

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

Accepted Answer

Test counts are performed to determine the existence of inventory, i.e., whether the inventory physically exists and is present in the warehouse or storage area. The other options, such as classification, detail tie-in, and realizable value, are not relevant to determining the existence of the inventory.

Question 11

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

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Question 12

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

Accepted Answer

The purpose of selecting a random sampling of tag numbers and identifying the tag with that number attached to the actual inventory is to uncover the inclusion of nonexistent items as inventory. This helps the auditor verify the accuracy of the physical inventory count and identify any potential overstatement or understatement of inventory. This procedure does not address obtaining proper cutoff information, determining adequate pricing, or verifying that the client has not changed recorded counts.

Question 13

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

Accepted Answer

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Question 14

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

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Question 15

When may auditors observe the physical inventory count?

Accepted Answer

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Question 16

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

The statement is true. This test helps to ensure that sales are properly recorded in the correct period by verifying that items shipped have been removed from inventory before the end of the period.

Question 17

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

Accepted Answer

Depending on a small number of suppliers can increase a company's exposure to supply chain disruptions, price volatility, and quality issues, all of which can have a negative impact on inventory management and profitability. Diversifying the supplier base and establishing contingency plans with alternate suppliers can help mitigate this risk.

Question 18

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

Accepted Answer

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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?

Accepted Answer

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Question 20

Auditors need to understand the client's physical inventory count controls before the count of the inventory begins so that

Accepted Answer

Auditors need to understand the client's physical inventory count controls to assess their effectiveness and identify potential weaknesses. This will enable them to make constructive suggestions as to the adequacy of the procedures and improve the accuracy of the inventory count. The other options are not as relevant to the objective of understanding the client's physical inventory count controls.

Quiz 21: Audit of the Inventory and Warehousing Cycle