Question 1

Items held on consignment with another company should not be included in a company's inventory.

Accepted Answer

Items held on consignment with another company should be included in a company's inventory because the legal owner of the goods is still the company and they remain responsible for the items until they are sold. However, they should be reported separately in the inventory records to indicate that they are on consignment.

Question 2

The Bill of Materials provides pricing information on all materials used in production.

Accepted Answer

False

Question 3

If control risk is assessed high,cost accumulations will require additional substantive procedures to lower the risk of failing to detect material misstatements in inventory.

Accepted Answer

When control risk is assessed as high, it means that the internal controls in place may not be effective in preventing or detecting material misstatements in inventory. Therefore, additional substantive procedures, such as more extensive testing or wider sampling, are necessary to gather more evidence and lower the risk of failing to detect such misstatements. This enhances the overall reliability and accuracy of inventory-related financial statements.

Question 4

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?

Accepted Answer

Since the goods have been received but not recorded, their cost should be added to inventory and the corresponding liability should also be recognized. Thus, the correct adjustment is to debit inventory and credit accounts payable. Option A is incorrect because it would result in double-counting the cost of the goods. Option B is incorrect because an adjustment is needed. Option D is incorrect because it would reduce cost of goods sold without recognizing the liability.

Question 5

Cost accounting is responsible for reconciling inventory usage with production.

Accepted Answer

Cost accounting tracks the cost of production and inventory usage, and reconciles the two to ensure accurate financial reporting.

Question 6

Inventory that is not used to produce finished goods should be accounted for as scrap inventory.

Accepted Answer

Inventory that is not used to produce finished goods should be accounted for as raw materials inventory or supplies inventory, depending on the type of inventory. Scrap inventory refers to items that are generated during the production process but are not part of the finished goods, and are subsequently sold or disposed of.

Question 7

An inventory roll back is required when inventory is counted prior to the end of the year.

Accepted Answer

The answer of An inventory roll back is required when...

Question 8

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

Accepted Answer

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

Question 9

The production order is the document used to authorize the movement of raw materials from inventory to the production line.

Accepted Answer

The answer of The production order is the document used...

Question 10

The auditors must be present when instructions are given to company personnel for conducting the physical inventory.

Accepted Answer

The answer of The auditors must be present when instructions...

Question 11

The sales forecast is the document that production uses to determine what to produce and when to produce it.

Accepted Answer

The answer of The sales forecast is the document that...

Question 12

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 POCAOB assertion?

Accepted Answer

By vouching additions to receiving reports, the auditor is trying to ensure that the inventory items actually exist and were received by the company, which satisfies the existence or occurrence assertion.

Question 13

At the completion of the physical inventory,the auditors should inspect the inventory area to ensure that all inventory has been counted.

Accepted Answer

It is important for the auditors to physically inspect the inventory area at the completion of the physical inventory to ensure that all inventory has been counted and that there are no discrepancies in the inventory count. This helps to ensure the accuracy and completeness of the inventory records.

Question 14

A comparison of the prior year's sales forecast with actual sales may provide an indication of slow moving inventory.

Accepted Answer

Comparing prior year's sales forecast with actual sales can help identify if inventory is not selling as quickly as expected, indicating slow moving inventory.

Question 15

Inventory observation must be observed if inventory is one of the major assets listed on the balance sheet.

Accepted Answer

The answer of Inventory observation must be observed if inventory...

Question 16

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?

Accepted Answer

The auditor is testing whether the inventory purchase actually occurred and whether the company actually received the inventory as per the receiving report. This assertion relates to the occurrence of the transaction, which is the accuracy and completeness of the transaction being recorded in the financial statements. Therefore, option A) Occurrence is the most appropriate choice.

Question 17

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

Accepted Answer

Vouching additions to receiving reports would provide evidence of the occurrence of inventory as it verifies that the inventory was actually received and recorded in the company's system. Tracing additions to the general ledger (A) would not be as relevant for testing for the existence of inventory as it only confirms that the record was updated, but not whether the actual inventory was received. Vouching additions to sales invoices (C) would not provide sufficient evidence for testing the existence of inventory as it only confirms that inventory was sold, not that it actually exists in the inventory. Tracing receipts to receiving reports (D) would be more relevant for testing the completeness of inventory, rather than its existence.

Question 18

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

Accepted Answer

The audit procedures used in an observation of the client's physical inventory taking are primarily designed to test and observe the client's physical count of inventory. This involves the auditors being present during the client's actual physical count of inventory to make sure that it is done accurately and according to proper procedures. The auditors may also take their own test counts to verify the accuracy of the client's count. The goal of this procedure is to obtain sufficient appropriate audit evidence about the existence and completeness of inventory, and to identify any potential errors or misstatements in the inventory records. Other objectives such as verifying independently the physical counts, assisting the client in taking test counts, and determining whether inventory contains obsolete goods may be secondary objectives, but the primary objective is to observe the client's physical count of inventory.

Question 19

If an auditor was not present at a new client's inventory count,the auditor should require the client to perform another inventory count.

Accepted Answer

The answer of If an auditor was not present at...

Question 20

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

Accepted Answer

If the physical count of inventory is higher than the quantities shown in the perpetual records, it is likely that purchases were made but not recorded. Sales and sales discounts, as well as purchase discounts, would not affect inventory quantities.

Quiz 9: Production Cycle