Question 1

Management assertions for inventory and accounts payable Identify and describe the management assertions relevant to: (a)inventory and (b)accounts payable.Which assertion(s)is usually the most relevant for each account?

Accepted Answer

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Question 2

Inventory obsolescence procedures Identify and describe at least four procedures the audit team may perform in order to determine potential obsolescence of items in the inventory balances.

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Question 3

Which of the following is a procedure used in an audit where there is a heightened risk of fraud related to accounts payable and other related expense accounts?
A)Send blank confirmations to vendors that ask them to furnish information about all outstanding invoices,payment terms,and payment histories.
B)Scan journals for unusual or large year-end transactions and adjustments.
C)Obtain and examine documentation for payments of invoices that are for amounts just under the limit that typically requires some level of approval.
D)All the above.

Accepted Answer

All of these procedures are commonly used in an audit with a heightened risk of fraud related to accounts payable and other related expense accounts. Sending blank confirmations to vendors can help identify fictitious or inflated invoices, scanning journals for unusual or large year-end transactions and adjustments can help identify improper recording of expenses, and obtaining and examining documentation for payments of invoices just under the approval limit can help identify fraudulent payments made to accomplices or fictitious vendors.

Question 4

The principle of lower of cost or market and the potential obsolescence of inventory are concerns for the audit team because of which of the following?
A)They are uncommon and may not exist.
B)They are a burden to the auditor in the undue amount of work caused.
C)They are likely to occur in the last month of the year and cause cutoff problems.
D)They are an inherent component of complexity related to valuation.

Accepted Answer

The principle of lower of cost or market is a concept that requires inventory to be valued at the lower of its cost or its market value. This can be a complex valuation issue that requires significant audit attention to ensure accuracy. Additionally, the potential obsolescence of inventory is a concern because it can result in inventory becoming overvalued, which can distort financial statements. Both of these factors are inherent components of complexity related to valuation, which is a key concern for auditors.

Question 5

Which of the following is not a procedure that the auditor should perform related to the physical inventory count?
A)Document the first and last tag numbers used.
B)Take notations of all items that appear to be obsolete or are in questionable condition.
C)Make counts of all items and record the counts for subsequent tracing into the client's inventory compilation.
D)Observe whether there is any physical movement of goods during the counting of the inventory.

Accepted Answer

The auditor's role during a physical inventory count is to observe and perform test counts to verify the client's counts, not to count all items and record these counts themselves. This is the responsibility of the client's personnel.

Question 6

Physical inventory procedures Discuss the procedures the audit team will most likely perform during the physical observation of inventory.

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Question 7

Auditing accounts payable What are the procedures available to auditors in auditing accounts payable and what level of assurance is obtained by each? Describe at least three.Which primary assertion is tested through these approaches?

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Question 8

Comparison of Controls in Traditional and Automated Systems Discuss the differences between a traditional receiving system and an automated integrated receiving system.

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Question 9

Physical inventory procedures Discuss the procedures that the audit team will most likely perform upon arrival at each site right before physical inventory is taken.

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Question 10

Which of the following is a condition which would not create a conducive situation for a client to take a physical inventory at an interim date before year-end?
A)The control risk over inventory is high.
B)The auditor will be able to review material transactions in the roll-forward period.
C)The auditor can effectively test the year-end balance through a combination of analytical procedures and selective testing of transactions between the physical count and the year-end.
D)The auditor reviews the intervening transactions for evidence of any manipulation or unusual activity.

Accepted Answer

A high control risk over inventory would indicate that there is a risk of material misstatement in inventory and would not create a conducive situation for taking a physical inventory at an interim date before year-end. The other options suggest that the auditor can effectively review and test inventory, making it a conducive situation for taking a physical inventory at an interim date.

Question 11

Which of the following is not an item reviewed by the auditor to test the client's assertion related to the presentation and disclosure of inventory?
A)The inventory valuation methods used.
B)The amount of obsolete inventory on hand.
C)The existence of contingent losses associated with long-term purchase commitments.
D)The classification of inventory as raw material,work in process or finished goods.

Accepted Answer

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Question 12

The acquisition cycle begins with which of the following?
A)A payment.
B)A purchase order.
C)A requisition.
D)A receiving report.

Accepted Answer

The acquisition cycle typically starts with a requisition. This is a request made by a department or individual within an organization for approval to purchase goods or services. Once the requisition is approved, a purchase order is issued, followed by the receipt of goods, a receiving report, and ultimately payment.

Question 13

Acquisition and payment processes What are the five major phases of the acquisition and payment process?

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Question 14

Inventory controls What are some of the important controls that are expected to be included in a well-conceived inventory control system?

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Question 15

Preparing for an inventory observation In the audit of inventory the auditor must perform important procedures prior to the actual observation.Identify the steps the auditor must take prior to the day the inventory is actually counted.

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Question 16

Which of the following is not a potential fraud indicator in the acquisition and payment cycle?
A)Expenses that are significantly above or below industry norms.
B)Expense accounts that have significant debit entries.
C)Unexpected increases in gross margin.
D)Capital assets that seem to be growing faster than the business.

Accepted Answer

Expense accounts naturally have debit entries because expenses are recorded as debits in accounting. This is a normal part of financial operations and not necessarily an indicator of fraud.

Question 17

Which of the following is not a standard procedure that the auditor normally should follow in the observation of inventory at year-end?
A)Observe the client taking inventory.
B)Make selected test counts and trace into client's inventory compilation.
C)Look for slow-moving,obsolete,or damaged inventory.
D)Review disclosure of inventory valuation.

Accepted Answer

Reviewing the disclosure of inventory valuation is not typically part of the physical inventory observation process. The auditor's role during inventory observation primarily involves physically observing the inventory count, making test counts, and evaluating the condition of inventory to ensure it is properly recorded and valued. Reviewing disclosure of inventory valuation is more related to the audit procedures performed during the review of financial statements, not the physical observation of inventory.

Question 18

An auditor reviews purchase contracts to assess the conditions for the return of merchandise as a test related to which management assertion?
A)Existence.
B)Completeness.
C)Rights and obligations.
D)Valuation.

Accepted Answer

The management assertion that relates to the conditions for the return of merchandise is "rights and obligations". This assertion relates to the company's ownership of assets and liabilities and whether they have the appropriate rights and obligations related to these items. By reviewing purchase contracts, the auditor can assess whether the company is meeting its obligations related to merchandise returns, which is a key aspect of the "rights and obligations" assertion.

Question 19

Standard cost systems When auditing a manufacturing concern,what inquiries would the auditor likely make about the standard cost system?

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Question 20

When testing a standard cost system,the auditor does not normally make which of the following inquiries?
A)The method for developing standard costs.
B)The method for identifying components of overhead and of allocating overhead to products.
C)The method for identifying sales cutoff.
D)The method used for allocating variances to inventory and cost of goods sold.

Accepted Answer

Sales cutoff is not directly related to the standard cost system and is therefore not typically a focus of the auditor's inquiries in relation to that system. The other answer choices are all relevant to understanding and testing the standard cost system.

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

Management assertions for inventory and accounts payable Identify and describe the management assertions relevant to: (a)inventory and (b)accounts payable.Which assertion(s)is usually the most relevant for each account?

Inventory obsolescence procedures Identify and describe at least four procedures the audit team may perform in order to determine potential obsolescence of items in the inventory balances.

Which of the following is a procedure used in an audit where there is a heightened risk of fraud related to accounts payable and other related expense accounts?

The principle of lower of cost or market and the potential obsolescence of inventory are concerns for the audit team because of which of the following?

Which of the following is not a procedure that the auditor should perform related to the physical inventory count?

Physical inventory procedures Discuss the procedures the audit team will most likely perform during the physical observation of inventory.

Auditing accounts payable What are the procedures available to auditors in auditing accounts payable and what level of assurance is obtained by each? Describe at least three.Which primary assertion is tested through these approaches?

Comparison of Controls in Traditional and Automated Systems Discuss the differences between a traditional receiving system and an automated integrated receiving system.

Physical inventory procedures Discuss the procedures that the audit team will most likely perform upon arrival at each site right before physical inventory is taken.

Which of the following is a condition which would not create a conducive situation for a client to take a physical inventory at an interim date before year-end?

Which of the following is not an item reviewed by the auditor to test the client's assertion related to the presentation and disclosure of inventory?

The acquisition cycle begins with which of the following?

Acquisition and payment processes What are the five major phases of the acquisition and payment process?

Inventory controls What are some of the important controls that are expected to be included in a well-conceived inventory control system?

Preparing for an inventory observation In the audit of inventory the auditor must perform important procedures prior to the actual observation.Identify the steps the auditor must take prior to the day the inventory is actually counted.

Which of the following is not a potential fraud indicator in the acquisition and payment cycle?

Which of the following is not a standard procedure that the auditor normally should follow in the observation of inventory at year-end?

An auditor reviews purchase contracts to assess the conditions for the return of merchandise as a test related to which management assertion?

Standard cost systems When auditing a manufacturing concern,what inquiries would the auditor likely make about the standard cost system?

When testing a standard cost system,the auditor does not normally make which of the following inquiries?