Question 1

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?
A) Occurrence
B) Completeness
C) Rights and obligations
D) Valuation

Accepted Answer

The auditor is most likely testing the occurrence assertion since they are verifying that the inventory purchase actually happened (i.e. the goods were actually received) by comparing the invoice to the receiving report. The occurrence assertion relates to whether the transactions recorded in the financial statements actually happened.

Question 2

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
A) Sales.
B) Sales discounts.
C) Purchases.
D) Purchase discounts.

Accepted Answer

If the physical count is higher than the perpetual records, then it means that some purchases may have been missed.

Question 3

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?
A) Debit Purchases/credit Cost of Goods Sold.
B) None.
C) Debit Inventory/credit Accounts Payable.
D) Debit Cost of Goods Sold/credit Accounts Payable.

Accepted Answer

The adjustment required is to recognize the inventory that was received but not recorded. To do this, we need to debit Inventory and credit Accounts Payable. This will increase Inventory by the amount of the goods received and decrease the liability of Accounts Payable, as these goods have now been recognized as received. Option A would increase Purchases and decrease Cost of Goods Sold, which is not appropriate in this situation. Option B, None, is not correct as there is a need for adjustment. Option D would decrease Accounts Payable and increase Cost of Goods Sold, which is not appropriate either as we want to increase Inventory, not decrease it.

Question 4

The audit procedures for inventory and related cost of sales accounts frequently are typically extensive in an audit engagement.

Accepted Answer

Inventory and related cost of sales accounts are significant accounts that have a material impact on a company's financial statements. As a result, the audit procedures for these accounts usually involve a thorough examination of the company's inventory system, including physical inventory counts, valuation methods, and the accuracy of cost of sales calculations. Therefore, the audit procedures for inventory and related cost of sales accounts are typically extensive in an audit engagement.

Question 5

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
A) Trace additions to the general ledger.
B) Vouch additions to receiving reports.
C) Vouch additions to sales invoices.
D) Trace receipts to receiving reports.

Accepted Answer

The answer of An auditor who wished to test for...

Question 6

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
A) Existence.
B) Valuation.
C) Completeness.
D) Rights and obligations.

Accepted Answer

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

Question 7

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?
A) Rights and obligations.
B) Completeness.
C) Existence or occurrence.
D) Valuation or allocation.

Accepted Answer

The procedure of vouching additions to receiving reports from perpetual records is intended to verify the existence or occurrence of inventory items. It confirms whether the inventory items recorded in the perpetual records do actually exist at the client's location or have occurred as per the accounts. Thus, this procedure relates to the existence or occurrence assertion of POCAOB.

Question 8

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

Accepted Answer

If the control risk is assessed as very low, it means that the controls in place are effective and reliable in preventing or detecting material misstatements in inventory. Therefore, additional substantive procedures may not be necessary to lower the risk further.

Question 9

Based on the production orders,management develops a plan for the amount and timing of production.

Accepted Answer

Management takes into consideration the production orders to develop a plan for the amount and timing of production.

Question 10

Production planning interacts with inventory planning to produce production orders.

Accepted Answer

Production planning and inventory planning are closely related and impact each other. Production planning determines what products to manufacture, how much to produce, and when to produce. Inventory planning ensures that the necessary amount of raw materials, supplies, and finished goods are available at the right time for production. Together, they create production orders that dictate what needs to be produced and when. Therefore, production planning interacts with inventory planning to produce production orders.

Question 11

The auditors must be present during some counting operations to evaluate cycle inventory counting plans and the execution.

Accepted Answer

The presence of auditors during cycle inventory counting operations is necessary to evaluate the effectiveness of the counting plans and ensure proper execution.

Question 12

When inventory is counted on a date other than the balance-sheet date,no additional procedures would normally be required to satisfy generally accepted auditing standards.

Accepted Answer

Generally accepted auditing standards require auditors to perform additional procedures when inventory is counted on a date other than the balance-sheet date. These procedures may include testing the accuracy and completeness of the inventory count and determining if there are any subsequent events that may affect the inventory balance.

Question 13

When inventory quantities are determined solely by means of a physical count,it is necessary for the auditor to be present at the time of the count.

Accepted Answer

This is true because the auditor needs to observe and verify the count to ensure accuracy and completeness of the inventory listings.

Question 14

If inventory located off the client's premise,the auditor might confirm the amount with the custodian to satisfy evidence requirements.

Accepted Answer

If the inventory is located at a third-party location, such as a warehouse or a consignment location, the auditor might confirm the amount with the custodian to satisfy evidence requirements. This is because the client may not physically control the inventory at these locations and may rely on the custodian to provide accurate information about the inventory.

Question 15

Standard costing of inventory is a generally accepted accounting principle.

Accepted Answer

Standard costing is not a generally accepted accounting principle (GAAP); it is a cost accounting method used internally by companies for budgeting and performance evaluation.

Question 16

If an auditor was not present at a new client's inventory count,the auditor has no obligation to test the inventory.

Accepted Answer

The auditor still has an obligation to test the inventory, but may need to rely on other audit procedures to gather sufficient evidence about the inventory balance. This could include reviewing documentation related to inventory transactions, assessing the reliability of the client's inventory counting procedures, and performing analytical procedures to compare inventory levels to historical trends or industry benchmarks.

Question 17

Most businesses try to estimate sales levels and seasonal timing and then try to plan production schedules to meet customer demand.

Accepted Answer

This statement is true. Most businesses do try to estimate sales levels and seasonal timing to plan production schedules and meet customer demand.

Question 18

In general,the auditors' best opportunity to detect inventory errors and frauds is during the physical observation of the inventory count.

Accepted Answer

Physical observation of inventory is an important step in auditing inventory. It enables the auditor to confirm the existence and valuation of inventory, and identify any discrepancies or irregularities. Therefore, the best opportunity for auditors to detect inventory errors and frauds is during the physical observation of inventory count.

Question 19

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to
A) Test and observe the client's physical count of inventory.
B) Verify independently the physical counts obtained by the client.
C) Assist the client in taking test counts of year-end inventory.
D) Determine whether inventory contains obsolete goods.

Accepted Answer

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to test and observe the client's physical count of inventory, ensuring that it is accurate and reliable. This is done to provide assurance that the financial statements accurately reflect the value of inventory on hand at the balance sheet date. The other options (B, C, D) are not the primary objectives of an observation of the client's physical inventory taking.

Question 20

Forecasts of the following year can be used in connection with valuing the inventory at lower of cost or market,which influences the amount of cost of goods sold that is shown in the financial statements.

Accepted Answer

Forecasts of the following year can be used to estimate the market value of inventory and compare it to the cost of the inventory. If the market value is lower than the cost, the inventory must be written down to reflect the lower value, which can impact the cost of goods sold shown in financial statements.

Quiz 9: Production Cycle

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?

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

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?