Question 1

Which of the following is an appropriate substantive test of details of account balances for the inventory cycle for the verification of an accurate cutoff?
A) Test movements between raw materials, work-in-process, and finished goods by selecting transactions from the inventory records and examining supporting documents.
B) Reperform calculations testing mathematical accuracy including total extensions of price and quantity and unit or batch aggregations.
C) Examine shipping documents for a few days before and after year end and trace to inventory records, agreeing for proper inclusion and exclusion.
D) Review and recalculate client's analysis supporting adjustments resulting from the physical inventory count.

Accepted Answer

An appropriate substantive test of details of account balances for the inventory cycle for the verification of an accurate cutoff is to examine shipping documents for a few days before and after year end and trace to inventory records, agreeing for proper inclusion and exclusion. This will help ensure that all inventory transactions have been properly recorded in the correct period, which is critical for accurate financial reporting. Choices A, B, and D are also important tests, but they do not directly address the cutoff issue.

Question 2

In order for an auditor to test ownership of a client's inventories, each of the following substantive tests of details of account balances are appropriate except:
A) review loan agreements for inventory that has been pledged or assigned.
B) review sales agreements for bill-and-hold arrangements.
C) review contracts for inventory held on consignment.
D) review policy for asset impairment write-downs.

Accepted Answer

Reviewing the policy for asset impairment write-downs is not an appropriate test for ownership of inventories. The other options (reviewing loan agreements for inventory that has been pledged or assigned, reviewing sales agreements for bill-and-hold arrangements, and reviewing contracts for inventory held on consignment) are appropriate tests for ownership of inventories.

Question 3

Which of the following is not an acceptable manner of testing an audit client's estimates?
A) Compare subsequent actual amounts to the accounting estimates.
B) Recalculate accounting estimates using management's process.
C) Prepare an independent estimate and compare with management's result.
D) Observe management's process of calculating estimates.

Accepted Answer

Observing management's process of calculating estimates is not a testing method; it is more about understanding the process rather than testing the accuracy or reasonableness of the estimates.

Question 4

Which of the following audit steps for observing a client's inventory count are to be performed after the physical count is complete?
A) Obtain the number of the receiving report and shipping document for the last item of the period and check to see that the inventory is properly included or excluded.
B) Inquire of client's management about whether any inventory owned by others is held on consignment.
C) Trace items selected and included in audit test recounts into the client's inventory records.
D) Check for the sequential numbering of tags used in the physical counts, including identification of all used and unused numbers.

Accepted Answer

Tracing items selected in the audit test recounts into the client's inventory records is a post-count observation that helps ensure proper recording of inventory. Option A is performed during the physical count process, while options B and D are pre-count observations that should be performed before the physical count.

Question 5

A test of controls can be modified to be performed as a dual purpose test if the modification provides evidence about the related account balances. Describe a substantive procedure that can be added to a test of controls in order make it a dual purpose test. The substantive procedure you identify must be one that could be added to most any test of controls involving a sample selection or mathematical verification.

Accepted Answer

The answer of A test of controls can be modified...

Question 6

When ICFR and the quality of perpetual inventory records justify relying on an inventory count by the company at other than fiscal year end, the auditor's testing should include each of the following except:
A) verification of inventory purchases occurring during the period between the time of the physical count and year end.
B) tests of controls performed during the period between the time of the physical count and year end.
C) reconciliation of the count result to the final inventory balances in the financial statements.
D) verification of sales transactions during the period between the time of the physical count and year end.

Accepted Answer

The answer of When ICFR and the quality of perpetual...

Question 7

Land development and home building companies provide warranties for:
A) impaired assets.
B) manufacturer's defects and latent defects.
C) amenities.
D) obsolete or slow-moving items.

Accepted Answer

Land development and home building companies provide warranties for manufacturer's defects and latent defects, which are defects that may not be immediately apparent or visible but can cause problems later on. Warranties may also cover any defects in materials or workmanship that affect the structure of the home or make it unsafe to inhabit. Warranty coverage for amenities, impaired assets, or obsolete/slow-moving items would be uncommon in this industry.

Question 8

Which of the following is true regarding an auditor's assessment of management estimates for calculations related to inventory valuation in the land development and home building industry?
A) Greater uncertainty exists regarding estimates of future cash flows when development and construction are still in the early stages.
B) Since prospective buyers can cancel the contracts, management estimates expected cancellations using current engineering specifications.
C) If an auditor assessed the company's process and underlying assumptions in a prior period, the assessment does not need to be updated for subsequent audits unless there is a change in the underlying assumptions.
D) Auditors typically engage a specialist to perform detailed calculations of discounted cash flows expected from inventory.

Accepted Answer

The early stages of development and construction can lead to greater uncertainty in estimating future cash flows, which may affect inventory valuation. Option B is incorrect as it refers specifically to prospective buyer cancellations and does not address the issue of inventory valuation. Option C is also incorrect as the assessment of management estimates should be performed in each audit cycle to ensure that they are still valid. Option D may not always be necessary as it depends on the circumstances and the auditor's professional judgement.

Question 9

When well-maintained perpetual inventory records are verified periodically by the client by comparisons with physical counts, what is the appropriate timing of the auditor's observation procedures?
A) Either during the period under audit or at the balance sheet date.
B) Either during or after the end of the period under audit.
C) Only at the balance sheet date.
D) Only during the end of the period under audit.

Accepted Answer

The auditor's observation procedures can be performed either during or after the end of the period under audit to ensure that the physical counts are accurately reflected in the financial records, providing flexibility in timing to match the audit plan and objectives.

Question 10

In order for an auditor to test valuation of a client's inventories, each of the following substantive tests of details of account balances are appropriate except:
A) using computer-assisted auditing techniques, reperform calculations testing the mathematical accuracy of report extensions and batch aggregations.
B) reperform calculations supporting decisions about inventory write-downs or write-offs.
C) obtain documentation supporting amounts of obsolete or slow-moving inventory items.
D) evaluate any changes made to the client's impairment policies in light of engineering and production information or other underlying assumptions.

Accepted Answer

Using computer-assisted auditing techniques to reperform calculations testing the mathematical accuracy of report extensions and batch aggregations is an appropriate test for the valuation of inventories.

Question 11

In accounting for inventory, the quality of estimates made by a client's management is directly related to:
A) the likelihood of error in the allocation of common costs.
B) the strength of internal controls of the inventory process.
C) the degree of sophistication of the client's automated inventory processes.
D) the number of tags or count sheets used in the client's physical inventory count.

Accepted Answer

The quality of estimates made by a client's management in accounting for inventory is directly related to the strength of internal controls of the inventory process. Good internal controls increase the accuracy and reliability of inventory records, which in turn enables management to provide more accurate estimates of the inventory's value.

Question 12

Which of the following measures is not a good example of a substantive analytical procedure for inventory activities and related accounts?
A) The inventory turnover ratio.
B) Gross profit margin ratio.
C) Current ratio.
D) Number of days sales in inventory.

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay off its current liabilities with its current assets. It is not a substantive analytical procedure for inventory activities and related accounts. The other options, such as the inventory turnover ratio, gross profit margin ratio, and number of days sales in inventory, are all commonly used analytical procedures for inventory activities and related accounts.

Question 13

An auditor generally concludes that a client's estimate is appropriate if:
A) it is consistent with a prior year amount.
B) the underlying amount is not known with certainty.
C) it is within a range of acceptable amounts.
D) the underlying assumptions are subjective.

Accepted Answer

An auditor generally concludes that a client's estimate is appropriate if it falls within a range of acceptable amounts. This means that the estimate is within a reasonable and supportable range based on available information at the time of the audit. Consistency with prior year amounts, unknown certainty of underlying amounts, and subjectivity of underlying assumptions do not necessarily indicate the appropriateness of an estimate.

Question 14

Analytical procedures can help an auditor assess the reasonableness of the inventory balances by highlighting changes that:
A) suggest slow-moving inventory for possible obsolescence.
B) address whether inventory includes operating costs that should be expensed rather than capitalized.
C) compare the reasonableness of inventory balances with purchases and cost of goods sold.
D) All of the above.

Accepted Answer

Analytical procedures can help the auditor assess the reasonableness of inventory balances by highlighting changes in slow-moving inventory that may indicate possible obsolescence, determining if inventory includes operating costs that should be expensed rather than capitalized, and comparing the reasonableness of inventory balances with purchases and cost of goods sold. Therefore, all of the options presented are correct.

Question 15

While auditing a client's inventory processes, an auditor computes the gross profit margin ratio and compares it to prior years and budgeted amounts. If the result indicates that the gross profit margin has increased since the prior year and exceeds the budget, it is likely that:
A) ending inventory is overstated and cost of goods sold is understated.
B) both inventory and cost of goods sold is overstated.
C) both inventory and cost of goods sold is understated.
D) ending inventory is understated and cost of goods sold is overstated.

Accepted Answer

If the gross profit margin has increased since the prior year and exceeds the budget, it indicates that cost of goods sold has decreased or sales revenue has increased. In either case, it implies that inventory is less than what it should be, and cost of goods sold is greater. Therefore, ending inventory is overstated, and cost of goods sold is understated.

Question 16

The following tests of controls are being performed on the audit of Hoppes Homes, Inc. For each test of control, fill in the table to indicate the corresponding control and the purpose of the control.
 \(\begin{array}{|l|l|l|}
\hline \text { Test of Control: } & \text { Description of Control: } & \text { Pupose of Control: } \
\hline \begin{array}{l}
\text { 1. Tour the client's storageand } \
\text { production facilities and observe the } \
\text { security features in use for inventory. }
\end{array} & \begin{array}{l}

\end{array} & \begin{array}{l}

\end{array} \
\hline \begin{array}{l}
\text { 2. Select a sample of inventory items } \
\text { and examine them for proper category } \
\text { of the records. }\

\end{array} & \begin{array}{l}

\end{array}\
\hline \begin{array}{l}
 \text { 3. Select a sample of overhead } \
 \text { additions made to the cost accounting  } \
 \text { records and recalculate for accuracy  } \
 \text { and consistency with company policy. } \

\end{array}
&\begin{array}{l}

\end{array}&
\begin{array}{l}

\end{array}\
\hline \begin{array}{l}
 \text {4. Review the inventory records for  } \
 \text {evidence that they have been adjusted.   } \
 \text {based on the results of the physical  } \
 \text {   count. } \
\end{array}
&\begin{array}{l}

\end{array}&
\begin{array}{l}

\end{array}\
\hline \begin{array}{l}
 \text {5. Inspect documents identifying any  } \
 \text { decline in inventory value and } \
 \text { recalculate for accuracy and } \
 \text { consistency with company policy. } \
\end{array}
&\begin{array}{l}

\end{array}&
\begin{array}{l}

\end{array}\
\hline
\end{array}\)

Accepted Answer

The answer of The following tests of controls are being...

Question 17

Which of the following is the most appropriate test for auditing inventory in the land development and home building industry?
A) Examine subsequent invoices received in support of estimates of the cost of sales for individual units sold just before year end.
B) Calculate estimated ending inventory using standards and variance information.
C) Review sales contracts for bill-and-hold transactions.
D) All of the above tests are common in the land development and home building industry.

Accepted Answer

Examining subsequent invoices received in support of estimates of the cost of sales for individual units sold just before year end is a common and appropriate test for auditing inventory in the land development and home building industry, as it helps verify the accuracy of cost estimates and the timing of sales recognition.

Question 18

Which of the following documents is most likely to provide evidence to support the validity of estimates used in a client's standard costing system?
A) Variance reports.
B) Consignment confirmations.
C) Materials requisitions.
D) Purchase orders.

Accepted Answer

Variance reports compare actual costs to standard costs, and any significant differences can indicate issues with the validity of the estimates used in the standard costing system. Consignment confirmations, materials requisitions, and purchase orders do not necessarily provide evidence of the accuracy of standard cost estimates.

Question 19

What estimates are included in the cost of inventory in the land development and home building industry? Specifically, what past costs are allocated? What future amounts must be predicted? What future amounts must be predicted and allocated? Distinguish

Accepted Answer

The answer of What estimates are included in the cost...

Question 20

Ballpark Distributors, Inc. is a large public company with a calendar year end that distributes sports memorabilia to various retailers. Ballpark conducted an inventory count on November 30 of the year being audited. Instead of conducting another inventory count at year end, the company decided to estimate the year-end inventory using a sample of the year-end inventory on hand. The company uses a perpetual inventory system and feels that sampling to estimate the year-end inventory will produce a reliable financial statement amount.
Required:
Assume that the auditor observed and tested Ballpark's physical inventory count on
November 30, and was satisfied that the count and resulting adjustments produced
an appropriate inventory account balance on November 30.
(a)What roll-forward procedures between the inventory count date and year end
might the auditor perform?
(b)What additional tests of details of balances can the auditor perform?

Accepted Answer

The answer of Ballpark Distributors, Inc. is a large public...

Quiz 14: Auditing Inventory Processes: Tracking and Costing Products in the Land Development and Home Building Industry

Which of the following is an appropriate substantive test of details of account balances for the inventory cycle for the verification of an accurate cutoff?

In order for an auditor to test ownership of a client's inventories, each of the following substantive tests of details of account balances are appropriate except:

Which of the following is not an acceptable manner of testing an audit client's estimates?

Which of the following audit steps for observing a client's inventory count are to be performed after the physical count is complete?

When ICFR and the quality of perpetual inventory records justify relying on an inventory count by the company at other than fiscal year end, the auditor's testing should include each of the following except:

Land development and home building companies provide warranties for:

Which of the following is true regarding an auditor's assessment of management estimates for calculations related to inventory valuation in the land development and home building industry?

When well-maintained perpetual inventory records are verified periodically by the client by comparisons with physical counts, what is the appropriate timing of the auditor's observation procedures?

In order for an auditor to test valuation of a client's inventories, each of the following substantive tests of details of account balances are appropriate except:

In accounting for inventory, the quality of estimates made by a client's management is directly related to:

Which of the following measures is not a good example of a substantive analytical procedure for inventory activities and related accounts?

An auditor generally concludes that a client's estimate is appropriate if:

Analytical procedures can help an auditor assess the reasonableness of the inventory balances by highlighting changes that:

While auditing a client's inventory processes, an auditor computes the gross profit margin ratio and compares it to prior years and budgeted amounts. If the result indicates that the gross profit margin has increased since the prior year and exceeds the budget, it is likely that:

Which of the following is the most appropriate test for auditing inventory in the land development and home building industry?

Which of the following documents is most likely to provide evidence to support the validity of estimates used in a client's standard costing system?

What estimates are included in the cost of inventory in the land development and home building industry? Specifically, what past costs are allocated? What future amounts must be predicted? What future amounts must be predicted and allocated? Distinguish