Question 1

Controls which provide a means of ensuring that the physical counts are properly summarized,priced at the same amount as the unit records,correctly extended and totaled,and included in the general ledger at the proper amount are known as:
A) standard cost controls.
B) pricing internal controls.
C) compilation internal controls.
D) count quantity internal controls.

Accepted Answer

The controls described are related to compiling the physical count data and ensuring accurate recording in the general ledger. Therefore, they are referred to as compilation internal controls. The other choices are not relevant to the described controls.

Question 2

Pricing manufactured inventory is difficult.Auditors must evaluate the method of allocating manufacturing overhead for all but which of the following?
A) Reasonableness
B) Computational correctness
C) Compliance with generally accepted auditing standards
D) Consistency

Accepted Answer

Compliance with generally accepted auditing standards is not directly relevant to the method of allocating manufacturing overhead, as it is a technical matter of accounting rather than a matter of auditing standards or ethics. However, auditors must ensure that the method used is reasonable, consistent, and computationally correct.

Question 3

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

Accepted Answer

Inherent risk in inventory can vary widely depending on factors such as the industry, complexity of the inventory system, susceptibility to obsolescence, and potential for theft or damage. Therefore, it cannot be assumed to be at a low level.

Question 4

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 5

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 6

You are gathering evidence for the audit objective that existing inventory items are included in the inventory listing schedule.The audit procedure that would provide you with the best evidence to confirm this objective is:
A) trace from inventory tags to the inventory listing schedule and make sure the inventory tag is included.
B) trace the inventory totals to the general ledger.
C) perform tests of lower-of-cost-or-market.
D) account for unused tags shown in the auditor's documentation to make sure no tags have been added.

Accepted Answer

Tracing from inventory tags to the inventory listing schedule and ensuring the inventory tag is included provides the most relevant evidence to confirm that existing inventory items are included in the inventory listing schedule. This procedure ensures that each item present in the actual inventory has been recognized and recorded in the inventory listing schedule. The other options, such as tracing inventory totals to the general ledger or performing tests of lower-of-cost-or-market, may provide some evidence of the completeness of the inventory listing but may not confirm if all existing inventory items are included in the schedule. Accounting for unused tags shown in the auditor's documentation is not relevant to this objective.

Question 7

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 8

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

The answer of If an auditor were concerned with obtaining...

Question 9

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 10

The test of details of balance procedure which requires the auditor to perform tests of lower of cost or market,selling price,and obsolescence is an attempt to satisfy the objective of:
A) existence.
B) completeness.
C) accuracy.
D) realizable value.

Accepted Answer

The test of details of balance procedure involving lower of cost or market, selling price, and obsolescence testing aims to verify the realizable value of inventory.

Question 11

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

If the internal controls over the physical count of inventory are strong, auditors can rely on those controls and perform less extensive testing of inventory. On the other hand, if the internal controls are weak or inadequate, auditors will need to perform more testing to ensure the accuracy of the inventory balances. Therefore, 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.

Question 12

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

Test counts are performed to verify the existence of inventory, meaning that the physical inventory actually exists and matches the inventory records. By opening boxes or containers and physically counting the inventory, the auditor can determine whether the inventory actually exists. The other choices - classification, detail tie-in, and realizable value - are also important aspects of inventory audit, but they are not directly related to verifying the existence of inventory through test counts.

Question 13

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 14

The first step in verifying the valuation of purchased inventory is in determining the valuation method used by the client.The next step is:
A) determining that all inventory that is purchased is expensed through cost of goods sold.
B) determining which costs should be included in the valuation of an item of inventory.
C) determining that all inventory on hand reconciles to the perpetual inventory records.
D) determining that cut-off procedures have been adhered to prior to counting inventory.

Accepted Answer

Once the valuation method used by the client is determined, the next step is to determine which costs should be included in the valuation of an item of inventory. This includes determining whether costs such as shipping or handling fees should be included in the cost of the inventory.

Question 15

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 statement is true. By obtaining the number of the last bill of lading issued and verifying that the item shipped had been excluded from the inventory listing, the auditor can ensure that all sales transactions occurring up to and including the period under audit have been properly recorded and accounted for in the financial statements.

Question 16

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

Accepted Answer

Depending on a few key suppliers puts a business at risk if anything should happen to those suppliers, such as a sudden price increase, quality issues or a disruption in the supply chain. Diversifying suppliers can help to mitigate this risk.

Question 17

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 18

A major source of cutoff information for sales and purchases of inventory is:
A) confirmations from outside parties.
B) the test of details of balances.
C) physical observation.
D) the performance of analytical procedures.

Accepted Answer

The answer of A major source of cutoff information for...

Question 19

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 20

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 below.

Accepted Answer

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

Quiz 20: Audit of the Inventory and Warehousing Cycle

Controls which provide a means of ensuring that the physical counts are properly summarized,priced at the same amount as the unit records,correctly extended and totaled,and included in the general ledger at the proper amount are known as:

Pricing manufactured inventory is difficult.Auditors must evaluate the method of allocating manufacturing overhead for all but which of the following?

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

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.

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.

You are gathering evidence for the audit objective that existing inventory items are included in the inventory listing schedule.The audit procedure that would provide you with the best evidence to confirm this objective is:

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

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?

When may auditors observe the physical inventory count?

The test of details of balance procedure which requires the auditor to perform tests of lower of cost or market,selling price,and obsolescence is an attempt to satisfy the objective of:

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.

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

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.

The first step in verifying the valuation of purchased inventory is in determining the valuation method used by the client.The next step is:

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.

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

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

A major source of cutoff information for sales and purchases of inventory is:

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