Question 1

On the income statement,the inventory process is related to

Accepted Answer

The inventory process refers to the activities involved in managing inventory, such as tracking the flow of goods, conducting physical inventory counts, and monitoring inventory levels. These activities directly impact the cost of goods sold, which is a key component of the income statement. As inventory is sold, its cost is recognized as an expense on the income statement, reducing the company's profit for the period. Therefore, the inventory process is related to the cost of goods sold on the income statement.

Question 2

The auditor must determine whether the inventory process transactions recorded in the revenue and expense accounts during the year

Accepted Answer

The auditor's main objective is to ensure that the financial statements are free from material misstatements. Therefore, they must determine whether the inventory process transactions recorded in the revenue and expense accounts during the year have been recorded in accordance with an applicable financial reporting framework, such as Generally Accepted Accounting Principles (GAAP). This ensures that the financial statements provide accurate and reliable information to the users. Hence, option B is the best choice.

Question 3

Management prepares the financial statements and footnotes but the auditor prepares the discussion of the inventory.

Accepted Answer

The management is responsible for preparing the financial statements, footnotes, and all other disclosures. The auditor's role is to audit and provide an opinion on the financial statements, which includes the inventory balance and disclosures. The auditor may offer suggestions for improving the inventory discussion, but they are not responsible for preparing it.

Question 4

Clients may understate inventory to reduce income tax expense.

Accepted Answer

Clients may understate inventory in order to reduce their income tax expense because lower inventory values result in lower taxable income. However, this practice is illegal and can result in penalties and fines if discovered by tax authorities.

Question 5

As with all income statement accounts,the inventory process expense accounts begin the year with

Accepted Answer

Inventory process expense accounts, like all income statement accounts, start each year with a zero balance because income statement accounts are reset at the end of each accounting period to begin the new period with a clean slate.

Question 6

According to FASB Concept Statement No.5,Recognition and Measurement in Financial Statements of Business Enterprises,assets are recorded at the price paid on the date of recognition.

Accepted Answer

FASB Concept Statement No. 5 states that assets are initially recorded at their historical cost, which is the price paid to acquire them at the date of recognition.

Question 7

Automated inventory systems may be used to maintain control over inventory,but not to keep track of production quantities.

Accepted Answer

Automated inventory systems can be used for both maintaining control over inventory as well as keeping track of production quantities. These systems can track the amount of raw materials used in production, monitor production processes, and record finished product quantities.

Question 8

The totals in the inventory process balance sheet accounts reflect

Accepted Answer

The totals in the inventory process balance sheet accounts reflect only the amounts in the accounts on the last day of the year (choice C) and the net amount of the transactions recorded during the year (choice E). Therefore, the best choice is G, which includes both options.

Question 9

The cost accounting system determines the cost of the inventory manufactured by the company.

Accepted Answer

The cost accounting system tracks and allocates costs to inventory, which helps in determining the actual cost of goods manufactured by the company.

Question 10

For the inventory process,management asserts that inventory exists at the income statement date and that the costs of goods sold transactions recorded in the inventory process occurred during the year.

Accepted Answer

Management asserts that inventory exists at the balance sheet date, not the income statement date. The assertion related to the costs of goods sold transactions occurring during the year is about the occurrence and completeness of transactions, not directly about the inventory process assertion of existence at the income statement date.

Question 11

In the inventory process,the auditor typically uses only substantive testing due to the nature of the accounts in the business process.

Accepted Answer

Substantive testing is typically used in the inventory process because it involves physical counting of goods and verifying the existence and valuation of inventory. This is different from controls testing, which is used to test the effectiveness of internal controls over financial reporting.

Question 12

If the inventory count is done at a date other than the end of the year,the auditor does not have to observe the inventory count but should perform his own count at year end.

Accepted Answer

If the inventory count is done at a date other than the end of the year, the auditor should still observe the inventory count or perform his own count near the date of the client's count. This is because inventory can fluctuate throughout the year, and the auditor needs to ensure that inventory is properly valued at year-end.

Question 13

On the balance sheet,the inventory process includes which of the following accounts?

Accepted Answer

The inventory process involves maintaining a record of inventory on the balance sheet. Therefore, the account "inventory" is included in the inventory process. Additionally, the cost of goods sold is a financial statement item that is calculated based on changes in the inventory balances. This calculation requires knowledge of inventory levels and costs, which makes it a part of the inventory process. Finally, the allowance account for LIFO adjustments is an account that is maintained to reflect changes in inventory valuations due to the use of the LIFO inventory costing method. Thus, the best choice is option G, which includes both C and D. The allowance account for FIFO adjustments is not necessary for the inventory process, as it is used to reflect changes in inventory valuations due to the use of the FIFO method, which is an alternative inventory costing method.

Question 14

Because the most likely misstatement in the inventory process is an understatement misstatement,existence and valuation are often identified as relevant assertions for this process.

Accepted Answer

The most likely misstatement in the inventory process is actually an overstatement, not an understatement, which is why existence (to ensure inventory exists) and valuation (to ensure it is valued correctly) are relevant assertions to verify the accuracy and completeness of inventory records.

Question 15

The inventory process involves the balance sheet accounts but not the income statements accounts.

Accepted Answer

The inventory process involves both the balance sheet accounts (such as inventory asset account and accounts payable account for inventory purchases) as well as the income statement accounts (such as cost of goods sold account which is affected by inventory).

Question 16

In the inventory process,adjustments to the ending inventory balance are always recorded against

Accepted Answer

Adjustments to the ending inventory balance, such as write-offs for damaged or obsolete inventory, are recorded against the cost of goods sold account to reflect the reduced inventory value and the corresponding expense incurred.

Question 17

The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm.If LIFO inventory is greater than FIFO inventory,

Accepted Answer

When LIFO inventory is greater than FIFO inventory, the LIFO reserve account is debited and the allowance account is credited to adjust the cost of goods sold to the FIFO amount.

Question 18

The totals at the end of the year in the inventory process expense accounts reflect

Accepted Answer

The totals in the inventory process expense accounts at the end of the year reflect all the transactions recorded throughout the year, including those that may have been initiated in an earlier period and carried over into the current year. Therefore, choice C is the best answer.

Question 19

The auditor is responsible,in the inventory process,for determining

Accepted Answer

The auditor is responsible for determining if the ending balance in the inventory account is stated in accordance with the applicable financial reporting framework. This includes verifying the existence and completeness of inventory, as well as its valuation and allocation. The auditor is not responsible for determining the beginning balance in the balance sheet account or the beginning balance in the income statement account, as these are not directly related to the inventory process.

Question 20

The inventory physical count gives the company inventory quantities that must be priced to arrive at the ending inventory balance reported on the balance sheet.

Accepted Answer

The physical count of inventory provides the company with actual quantities of inventory on hand, which must then be valued in order to calculate ending inventory for reporting on the balance sheet. This valuation is necessary in order to determine the cost of goods sold and gross profit for the period.

Quiz 7: Auditing the Inventory Business Process