Question 1

Which of the following is NOT a reason why inventory is a complex accounting and auditing area?
A)Diversity of items in inventory.
B)Low volume of activity.
C)Easily transportable.
D)Difficulty in applying the lower of cost or market principle.

Accepted Answer

Low volume of activity is not a reason why inventory is a complex accounting and auditing area. The other options (A, C, D) are all valid reasons why inventory can be complex, including the variety of items, their portability, and the complexity of applying the lower of cost or market principle.

Question 2

Which one of the following accounts would an auditor most likely test by performing analytical procedures?
A)Sales commissions expense.
B)Legal expenses.
C)Repairs and maintenance expense.
D)Travel expense.

Accepted Answer

Sales commissions expense is closely related to sales revenue, and changes in one account are likely to impact the other. Therefore, an auditor would most likely test this account by performing analytical procedures to ensure that the commission expenses are reasonable and in line with the company's sales revenue. The other accounts listed may not have a direct correlation with other accounts and may not be suitable for analytical procedures.

Question 3

Bar code scanning may best be utilized in the receiving process to accomplish which of the following?
A)Match incoming goods with purchase orders.
B)Notify the shipper that product has arrived.
C)Order new items on behalf of the purchasing department.
D)Record inventory that has been written off the books.

Accepted Answer

Bar code scanning can be used to quickly and accurately match incoming goods with purchase orders. This helps to ensure that the correct items and quantities have been received and can help with inventory management and replenishment.

Question 4

A primary feature of automated control in the acquisition cycle includes which of the following?
A)Authorization is no longer required.
B)Limits as to the number of items that can be received by the warehouse.
C)Calculated order quantities based on set criteria.
D)Funds transfer at the request of the controller.

Accepted Answer

Automated control in the acquisition cycle often involves using criteria to determine order quantities, which removes the need for manual authorization. It also helps prevent overstocking by setting limits on the number of items that can be received by the warehouse. However, funds transfer at the request of the controller is not necessarily a primary feature in automated control.

Question 5

During your audit of Brown Company you are trying to determine whether all accounts payable were recorded. Which assertion are you gathering evidence for?
A)Occurrence.
B)Presentation and disclosure.
C)Completeness.
D)Valuation or allocation.

Accepted Answer

The assertion being gathered evidence for is completeness, as the auditor is trying to ensure that all accounts payable have been recorded in the company's records.

Question 6

Which of the following procedures would the auditor perform in testing the completeness assertion for accounts payable?
A)Examine a sample of cash disbursements made after year-end to determine whether the disbursements were for goods acquired in the previous year.
B)Reconcile vendor's statements with the accounts receivable trial balance.
C)Examine production equipment for useful lives.
D)Gather purchase orders immediately previous to and subsequent to year-end.

Accepted Answer

Examining cash disbursements made after year-end helps ensure that liabilities existing at year-end are recorded, which is a test for completeness of accounts payable.

Question 7

Why should the client's legal expenses be examined?
A)To compare with previously released attorneys' letters.
B)To determine the types of fraud occurring in the organization.
C)To ensure proper recording of vendor payables.
D)To determine if there is any litigation pending or threatened.

Accepted Answer

Examining the client's legal expenses can help determine if there is any litigation pending or threatened. This information is important for assessing the potential financial impact on the organization and for understanding any legal risks that may exist.

Question 8

Which of the following is not an element of internal control for inventory?
A)Authorization for all purchases.
B)Proper accounting for receipt of inventory.
C)Perpetual inventory system.
D)Rapid introduction of new products without market studies.

Accepted Answer

Rapid introduction of new products without market studies does not relate to internal control for inventory. Internal controls for inventory typically include authorization for all purchases, proper accounting for receipt of inventory, and the use of a perpetual inventory system.

Question 9

An auditor may best test commissions expense for salespeople when control risk is low by performing which of the following procedures?
A)Analytical procedures.
B)Tagging and tracing.
C)Alternative procedures.
D)Subsequent proof of cash.

Accepted Answer

Analytical procedures are effective in environments with low control risk because they allow the auditor to evaluate financial information through analysis of plausible relationships among both financial and non-financial data. This can be particularly useful for testing commissions expense, as it involves comparing the expense to sales levels and trends, which should align with expectations in a low control risk setting.

Question 10

Which of the following is not an inherent risk associated with inventory?
A)Inventory accounts typically have a high volume of activity.
B)Inventory is easily transportable.
C)Inventory may become obsolete.
D)Inventory costing methods frequently change from one year to the next.

Accepted Answer

The other choices are inherent risks associated with inventory. However, inventory costing methods do not change frequently and are typically consistent from year to year. This is a management decision based on the cost flow assumption selected by the company.

Question 11

Which of the following would the auditor most likely do when testing the existence assertion for inventory?
A)Observe the client's count of the annual physical inventory and perform test counts.
B)Review vendor invoices for the amounts recorded.
C)Review open purchase orders at year-end.
D)Trace raw material purchases to invoices and to the general ledger.

Accepted Answer

When testing the existence assertion for inventory, the auditor would typically observe the client's count of the annual physical inventory and perform test counts to ensure that the inventory actually exists and to verify that the client's count is accurate. This helps to ensure that the inventory recorded in the client's books actually exists and that the amounts recorded are accurate. Reviewing vendor invoices (choice B) would help to test the completeness assertion, while reviewing open purchase orders (choice C) would help to test the cutoff assertion. Tracing raw material purchases to invoices and the general ledger (choice D) would help to test the occurrence assertion for raw material purchases, but would not necessarily provide direct evidence for the existence assertion for finished inventory.

Question 12

Which of the following might an auditor do in testing for the existence of accounts payable?
A)Review client's financial statement disclosure.
B)Review long-term purchase commitments.
C)Perform a cutoff test of purchases and cash disbursements.
D)Perform analytical review of related expense accounts.

Accepted Answer

Testing for the existence of accounts payable would involve performing a cutoff test of purchases and cash disbursements to ensure that they have been recorded in the correct period and matched to the appropriate vendor balances. Reviewing financial statement disclosure may provide information on accounts payable policy or changes in the balance, but it would not directly test for existence. Reviewing long-term purchase commitments and performing an analytical review of related expense accounts would not specifically test for existence either.

Question 13

When auditing expense accounts,which of the following would the auditor be least likely to subject to a detailed test of transactions?
A)Legal expense.
B)Utilities expense.
C)Repairs and maintenance expense.
D)Travel expense.

Accepted Answer

Utilities expense is a routine and recurring expense that is unlikely to be subject to fraudulent activity or material misstatement. Therefore, the auditor is least likely to subject it to a detailed test of transactions. Legal expense, repairs and maintenance expense, and travel expense are more susceptible to fraudulent activity or material misstatement and would typically be subject to a more detailed review by the auditor.

Question 14

Which assertion has the greatest emphasis when auditing accounts payable?
A)Existence.
B)Completeness.
C)Presentation.
D)Obligations.

Accepted Answer

When auditing accounts payable, the auditor's main focus is to ensure that all liabilities and expenses have been recorded, which means all outstanding invoices and bills have been included in the accounts payable balance. This emphasizes the completeness assertion as it is crucial to ensure that all obligations are included in the accounts.

Question 15

Which of the following is a required disclosure for inventory?
A)Inventory valuation method used (FIFO,LIFO,moving average)and percentage of inventory valued under each method.
B)LIFO or current cost if the inventory is valued using FIFO.
C)Type of inventory system used (periodic or perpetual).
D)All of the above.

Accepted Answer

Inventory valuation method used (FIFO, LIFO, moving average) and the percentage of inventory valued under each method are required disclosures to ensure transparency and consistency in financial reporting, allowing users of financial statements to understand how inventory is valued and compare financial information accurately.

Question 16

Which of the following would the auditor most likely do when testing the valuation assertion for inventory?
A)Confirm inventory on consignment.
B)Examine receiving reports for inventory,tracing the recorded amounts.
C)Observe the taking of physical inventory.
D)Vouch inventory purchases to vendor invoices.

Accepted Answer

Vouching inventory purchases to vendor invoices helps ensure that the inventory is recorded at the correct cost, which is directly related to the valuation assertion.

Question 17

A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained because of which of the following?
A)It requires that a full inventory count be taken at year-end by all warehouse employees.
B)It allows management to calculate cost of goods sold at year-end.
C)It provides information to management where book inventory is continuously in agreement with inventory on hand within specified time periods.
D)It better controls the receipt of goods.

Accepted Answer

A perpetual inventory system provides real-time information to management about the inventory levels and ensures that book inventory is continuously in agreement with inventory on hand. This helps in better controlling the inventory levels and managing the stock levels efficiently. It also helps in reducing the cost of periodic inventory counting at year-end. Therefore, option C is the correct choice. Options A, B, and D are incorrect as they do not explain the advantages of a perpetual inventory system but rather highlight the limitations of a periodic system.

Question 18

The auditor may discover that the recorded cost of inventory exceeds the designated market price when testing which assertion?
A)Existence.
B)Cutoff.
C)Valuation.
D)Rights.

Accepted Answer

The assertion being tested is valuation. This assertion relates to whether inventory is recorded at the appropriate cost, which includes ensuring that inventory is not overstated due to being recorded at a cost that exceeds its market value.

Question 19

Which of the following procedures will usually be performed by the auditor to determine if obsolete inventory exists?
A)Confirmation of inventory with customers.
B)Footing the inventory subsidiary ledger.
C)Tracing inventory ordered by the client to receiving reports.
D)Analysis of inventory turnover and sales reports.

Accepted Answer

The analysis of inventory turnover and sales reports would provide insight into whether inventory is sitting idle or not moving, which could lead to obsolescence. Confirmation of inventory with customers, footing the inventory subsidiary ledger, and tracing inventory ordered to receiving reports may provide other assurance over inventory, but would not specifically address the issue of obsolescence.

Question 20

Authorized purchase of goods or services.
A)2,5,4,1,3
B)2,4,5,1,3
C)2,1,4,5,3
D)2,5,1,4,3

Accepted Answer

Authorized purchase of goods or services is a process that involves several steps. The correct order of these steps is:1. Identification of need2. Requisition3. Purchase order4. Receipt of goods or services5. Invoice

Quiz 11: Auditing Inventory, Goods and Services, and Accounts Payable: the Acquisition and Payment Cycle

Which of the following is NOT a reason why inventory is a complex accounting and auditing area?

Which one of the following accounts would an auditor most likely test by performing analytical procedures?

Bar code scanning may best be utilized in the receiving process to accomplish which of the following?

A primary feature of automated control in the acquisition cycle includes which of the following?

During your audit of Brown Company you are trying to determine whether all accounts payable were recorded. Which assertion are you gathering evidence for?

Which of the following procedures would the auditor perform in testing the completeness assertion for accounts payable?

Why should the client's legal expenses be examined?

Which of the following is not an element of internal control for inventory?

An auditor may best test commissions expense for salespeople when control risk is low by performing which of the following procedures?

Which of the following is not an inherent risk associated with inventory?

Which of the following would the auditor most likely do when testing the existence assertion for inventory?

Which of the following might an auditor do in testing for the existence of accounts payable?

When auditing expense accounts,which of the following would the auditor be least likely to subject to a detailed test of transactions?

Which assertion has the greatest emphasis when auditing accounts payable?

Which of the following is a required disclosure for inventory?

Which of the following would the auditor most likely do when testing the valuation assertion for inventory?

A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained because of which of the following?

The auditor may discover that the recorded cost of inventory exceeds the designated market price when testing which assertion?

Which of the following procedures will usually be performed by the auditor to determine if obsolete inventory exists?

Authorized purchase of goods or services.