Question 1

The major control procedure for preventing fictitious inventory transactions from being recorded is proper segregation of duties.

Accepted Answer

Proper segregation of duties is a key control procedure for preventing fictitious inventory transactions from being recorded. For example, the person responsible for issuing inventory should be different from the person responsible for receiving inventory, and both should be different from the person responsible for maintaining inventory records. This helps ensure that no one person has complete control over inventory transactions and reduces the risk of fraud or errors.

Question 2

Inventory should be valued using the lower-of-cost-or-market rule.

Accepted Answer

The lower-of-cost-or-market rule requires that inventory should be valued at whichever is lower between its cost and its market value (replacement cost or net realizable value). This is a generally accepted accounting principle.

Question 3

Shipping orders are forwarded from the revenue process to
A) The materials requisitions department.
B) Finished goods stores.
C) Raw materials stores.
D) Inventory management.

Accepted Answer

Shipping orders are for the finished goods, so they would be forwarded to the finished goods stores.

Question 4

The auditor's observation of inventory is a generally accepted auditing procedure.

Accepted Answer

The auditor's observation of inventory is a generally accepted auditing procedure, as it allows the auditor to physically verify the existence and condition of the inventory.

Question 5

A high inventory turnover ratio normally indicates inefficient inventory policies.

Accepted Answer

A high inventory turnover ratio indicates that a company is selling its inventory quickly, which is generally seen as a positive indication of efficiency. Therefore, a low inventory turnover ratio typically indicates inefficient inventory policies.

Question 6

In the audit of inventory,the client is responsible for actually making and recording the count of physical inventory; the auditor's responsibility is to evaluate and observe the client's procedures and draw conclusions about the adequacy of the physical inventory.

Accepted Answer

The client is responsible for actually making and recording the count of physical inventory, while the auditor's responsibility is to evaluate and observe the client's procedures and draw conclusions about the adequacy of the physical inventory.

Question 7

Once the controls in the inventory system have been tested,the auditor sets the level of control risk.

Accepted Answer

Once the auditor has tested the controls in the inventory system, they will set the level of control risk based on the effectiveness of the controls. This is a crucial step in the audit process as it helps the auditor to determine the nature, timing, and extent of further audit procedures.

Question 8

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 9

The three components that make up the cost of producing a product include materials,direct labor,and indirect labor.

Accepted Answer

The three main components of the cost of producing a product are materials, direct labor, and overhead (not indirect labor). Overhead includes both indirect labor and other indirect costs.

Question 10

The "cradle-to-grave" cycle for inventory begins when goods are purchased and stored and ends when the finished goods are shipped to customers.

Accepted Answer

The "cradle-to-grave" cycle for inventory covers the entire process from acquiring raw materials to producing finished goods to distributing them to customers.

Question 11

Sale of finished goods is a part of the inventory management process.

Accepted Answer

Sale of finished goods is considered a part of the sales and distribution process, not inventory management. Inventory management primarily deals with the ordering, storing, and using a company's inventory.

Question 12

Obsolete inventory should be written down to its current market value.

Accepted Answer

This is generally accepted accounting practice, as recording the inventory at its current market value provides a more accurate representation of the company's financial position.

Question 13

Production personnel should ordinarily be responsible for maintaining perpetual inventory records.

Accepted Answer

Production personnel are responsible for producing goods and managing production processes, but maintaining inventory records is typically the responsibility of the inventory control department or personnel.

Question 14

The audit test of control "Review and test procedures for issuing materials to manufacturing departments" provides assurance mainly for the occurrence assertion for inventory management.

Accepted Answer

The test of control for reviewing and testing procedures for issuing materials to manufacturing departments provides assurance mainly for the occurrence assertion for inventory management. This is because it ensures that the materials issued are genuine and actually exist in the inventory, thereby reducing the risk of inventory misstatements.

Question 15

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

Accepted Answer

A decrease in inventory turnover ratio may indicate the presence of outdated or obsolete inventory that is not being sold quickly enough.

Question 16

An approved purchase requisition form authorizes shipment of goods to customers.

Accepted Answer

An approved purchase requisition form is used by an organization to request the purchase of goods or services internally. It is not used to authorize shipment of goods to customers.

Question 17

Which of the following best describes the occurrence assertion for inventory?
A) Purchase requisitions initiated by authorized personnel.
B) Recorded inventory actually exists.
C) Inventory properly accumulated from journals and ledgers.
D) All inventory is recorded.

Accepted Answer

The occurrence assertion for inventory is that recorded inventory actually exists. This means that the physical inventory count matches the inventory balance recorded in the accounting system. The other options do not specifically address the occurrence assertion for inventory.

Question 18

Which of the following departments typically approves purchase requisitions?
A) Raw materials stores.
B) Cost accounting.
C) Inventory management.
D) IT.

Accepted Answer

Inventory management is responsible for approving purchase requisitions, as they are responsible for managing inventory levels and ensuring that there is enough stock on hand to meet business needs. Raw materials stores may be involved in the ordering process, but they would not typically be responsible for approving purchase requisitions. Cost accounting may be involved in analyzing the cost of purchases, but they would not be responsible for approving requisitions. IT would not typically be involved in the purchasing process unless the purchase was related to technology or software.

Question 19

A receiving report records the shipment of goods to customers.

Accepted Answer

A receiving report documents the receipt of goods by a company from its suppliers, not the shipment of goods to customers.

Question 20

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

Accepted Answer

Inherent risk for inventory is often assessed at a higher level due to factors such as susceptibility to theft, obsolescence, and valuation complexities.

Quiz 21: Assurance,Attestation,and Internal Auditing Services