Question 1

The applicable financial reporting framework allows the audit client to determine both the cost and market value of inventory.Select the correct item(s)from the following list regarding these determinations:
A)The client must use FIFO to determine the cost of inventory at year-end.With FIFO,the client determines the cost of good sold using the earliest inventory items purchased.
B)The client must use FIFO to determine the cost of inventory at year-end.With FIFO,the client determines the cost of good sold using the latest inventory items purchased.
C)The client determines the market value of the inventory by using the last purchase price of the inventory item to estimate the market value.
D)The client determines the market value of inventory by estimating the amount the inventory can be sold for at the end of the year.

Accepted Answer

The answer of The applicable financial reporting framework allows the...

Question 2

The disclosures related to the financial statements are usually found in
A)the auditor's work papers
B)the footnotes to the financial statements
C)a separate report attached to the financial statements
D)in the "Management Discussion and Analysis" section of the annual report
E)in the internal control report
F)both A and C
G)both B and D
H)both D and E

Accepted Answer

The footnotes to the financial statements usually contain disclosures related to the financial statements, while the "Management Discussion and Analysis" section of the annual report contains additional relevant information. Therefore, option G (both B and D) is the best choice. The auditor's work papers and internal control report are not typically included in the financial statements, and a separate report attached to the financial statements is not a common practice.

Question 3

The applicable financial reporting framework allows the audit client to determine both the cost and market value of inventory.Select the correct item(s)from the following list regarding these determinations:
A)The client must use FIFO to determine the cost of inventory at year-end.With FIFO,the client determines the cost of good sold using the earliest inventory items purchased.
B)The client must use FIFO to determine the cost of inventory at year-end.With FIFO,the client determines the cost of good sold using the latest inventory items purchased.
C)The client can choose to use either FIFO or average cost to determine the cost of inventory at year-end (in the U.S.LIFO can also be used to determine the cost of inventory).
D)The client determines the market value of inventory by estimating the amount the sales price of inventory at the end of the year.

Accepted Answer

The applicable financial reporting framework allows the client to choose either FIFO or average cost to determine the cost of inventory at year-end. In the U.S., LIFO can also be used. The client must compare the cost and market value of inventory and use the lower value as the basis for reporting the inventory on the balance sheet. The client determines the market value of inventory by estimating the amount that it would sell for in the normal course of business, less disposal costs.

Question 4

It is the auditor's job to review the client's estimate of obsolete inventory to evaluate whether the ending inventory balance has been determined in accordance with the applicable financial reporting framework.To do this,the auditor considers whether the inventory balance includes
A)only inventory the client expects to sell in the future
B)inventory that the client does not own
C)inventory that has not been paid for at the end of the year
D)inventory valued at the lower of cost or market
E)both A and C
F)both A and D
G)both D and E

Accepted Answer

The auditor should consider whether the inventory balance includes only inventory the client expects to sell in the future (answer A) and whether it is valued at the lower of cost or market (answer D). Option E is incorrect because the question does not mention anything about inventory that has not been paid for. Option B is incorrect because the inventory under consideration is obsolete inventory, which by definition belongs to the client. Option C is irrelevant to the question. Therefore, F is the best choice.

Question 5

How does the auditor gather evidence during the physical inventory count?
A)The auditor determines that the items on hand that are not owned by the client are counted.
B)The auditor begins the test count process after the client has finished counting the inventory.
C)Management determines if all inventory has been tagged and counted.The auditor asks management if this task has been done.
D)The auditor determines whether the inventory count tags are properly controlled and that all count tags are returned.

Accepted Answer

During the physical inventory count, the auditor gathers evidence by verifying whether the inventory count tags are properly controlled and that all count tags are returned. This helps to ensure that all items have been counted and that there is no double counting or omission of inventory. Additionally, the auditor may observe the count process, test the accuracy of the count, and perform analytical procedures to further corroborate the inventory balance. Option A is incorrect as it relates to ownership, which is not relevant to the count process, and it does not provide evidence of the accuracy of the count. Option B is incorrect as the auditor should be present during the count process to ensure the accuracy of the count. Option C is also incorrect as it is management's responsibility to ensure that all inventory has been tagged and counted, but it does not provide evidence of the accuracy of the count itself.

Question 6

If the auditor selects the sample of inventory items on the final inventory listing to perform price tests,the auditor gathers evidence about which assertion(s)?
A)existence and occurrence.
B)accuracy.
C)valuation or allocation.
D)completeness.
E)presentation and disclosure.

Accepted Answer

Price tests are used to gather evidence about the valuation or allocation assertion, which verifies that inventory is recorded at accurate amounts and has been properly classified or allocated. This type of test does not address the existence, occurrence, completeness, or presentation and disclosure assertions.

Question 7

How does the auditor gather evidence during the physical inventory count?
A)The auditor determines that the items on hand that are not owned by the client are identified.
B)The auditor begins the test count process after the client has finished counting the inventory.
C)Management observes that all inventory has been tagged and counted.The auditor verifies that management has performed this practice.
D)The auditor observes that client personnel are performing test counts in the areas where they are most familiar with the inventory.

Accepted Answer

The auditor gathers evidence by ensuring that items not owned by the client are identified, which helps in verifying the accuracy and completeness of the inventory records.

Question 8

At the end of the audit,the auditor will decide whether the accounts in the inventory business process are presented in accordance with the applicable financial reporting framework.If they are not,the auditor will:
A)issue a "subject to" audit report citing the incorrect accounts
B)issue an adverse report citing a GAAP non-compliance
C)propose audit adjustments to correct the accounts
D)assist the client in making adjustments to correct the accounts

Accepted Answer

The answer of At the end of the audit,the auditor...

Question 9

An inventory balance is immaterial when
A)knowing the correct balance would not change the decision of an outside user of the financial statements
B)the balance includes obsolete inventory
C)inventory is a long term asset
D)the cash balance exceeds the inventory balance

Accepted Answer

An inventory balance is considered immaterial when knowing the correct balance would not change the decision of an outside user of the financial statements. This means that the inventory balance is not significant enough to impact decisions made by users such as investors or creditors. The other options are not relevant criteria for determining materiality of an inventory balance.

Question 10

If the auditor selects the sample of inventory items to count from the inventory on the warehouse shelves,the auditor gathers evidence about which assertion(s)?
A)existence and occurrence.
B)accuracy.
C)valuation or allocation.
D)completeness.
E)presentation and disclosure.

Accepted Answer

The answer of If the auditor selects the sample of...

Question 11

How does the auditor gather evidence during the physical inventory count?
A)The auditor determines that the items on hand that are not owned by the client are counted.
B)The auditor performs test counts at the same time the client is counting the inventory.
C)Management observes that all inventory has been tagged and counted.The auditor verifies that management has performed this task.
D)The auditor observes that client personnel are performing test counts in the areas where they are most familiar with the inventory.

Accepted Answer

The auditor performs test counts at the same time the client is counting the inventory. This allows the auditor to observe the counting procedures and gather evidence of the accuracy of the physical count. It also allows the auditor to identify any discrepancies and investigate further. The other options either do not involve the auditor directly gathering evidence or are not effective ways of obtaining evidence during the physical inventory count.

Question 12

The auditor should plan the audit of the inventory business process with the following presumption:
A)there is a risk of material misstatement due to fraud relating to inventory transactions.
B)professional skepticism is necessary to find misstatements.
C)planning the audit requires a questioning mind.
D)the general environment or tone in the company may allow management to rationalize committing fraud.

Accepted Answer

The answer of The auditor should plan the audit of...

Question 13

Management often uses internal controls in the inventory process
A)Because the inventory process is highly susceptible to fraud.
B)Because this makes evidence gathering easier for the auditor.
C)Due to the large number of transactions in the process.
D)This statement is not true.Management does not use internal controls in the inventory process.

Accepted Answer

The answer of Management often uses internal controls in the...

Question 14

The auditor uses substantive tests of balances in the inventory process to
A)gather evidence for income statement accounts in the business process
B)gather evidence for balance sheet accounts in the business process
C)determine the valuation of income statement accounts in the business process
D)determine the valuation for balance sheet accounts in the business process
E)Both B and D

Accepted Answer

Substantive tests of balances are used for balance sheet accounts, and in the case of inventory, it would be used to determine the valuation of inventory (a balance sheet account) by testing physical inventory counts, cost calculations, and other valuation methods. However, the results of these tests may also impact certain income statement accounts related to inventory, such as cost of goods sold or inventory write-downs. Therefore, the answer is Both B and D.

Question 15

If the auditor reviews the lower of cost of market inventory adjustment made by the client,the auditor gathers evidence about which assertion(s)?
A)existence and occurrence.
B)accuracy.
C)valuation or allocation.
D)completeness.
E)presentation and disclosure.

Accepted Answer

The lower of cost or market adjustment relates to the valuation or allocation of inventory, as it involves reducing the carrying value of inventory to the lower of its cost or its market value. The auditor will gather evidence to ensure that this adjustment has been accurately calculated and appropriately reflected in the financial statements.

Question 16

The applicable financial reporting framework allows the audit client to determine both the cost and market value of inventory.Select the correct item(s)from the following list regarding these determinations:
A)The client must use FIFO to determine the cost of inventory at year-end.With FIFO,the client determines the cost of good sold using the earliest inventory items purchased.
B)The client must use FIFO to determine the cost of inventory at year-end.With FIFO,the client determines the cost of good sold using the latest inventory items purchased.
C)Because the market value of inventory is the most reliable measure of the value of the inventory,the market value of inventory is always stated at year-end.
D)The client determines the market value of inventory by estimating the amount the inventory can be sold for at the end of the year.

Accepted Answer

The answer of The applicable financial reporting framework allows the...

Question 17

If the auditor selects the sample of inventory items to count from the inventory listing at year-end,the auditor gathers evidence about which assertion(s)?
A)existence and occurrence.
B)accuracy.
C)valuation or allocation.
D)completeness.
E)presentation and disclosure.

Accepted Answer

By selecting a sample of inventory items to count at year-end, the auditor is gathering evidence about whether the inventory actually exists (existence assertion) and whether it pertains to the company at year-end (occurrence assertion). This helps the auditor to confirm the completeness and accuracy of the inventory listing, but those assertions are not directly tested by selecting a sample of inventory to count. Valuation or allocation and presentation and disclosure assertions are also not directly tested by inventory counts.

Question 18

After the auditor has completed the substantive tests of balances for the inventory process,he or she determines
A)whether the balance sheet accounts in the inventory process are prepared in accordance with the applicable financial reporting framework
B)whether the income statement accounts in the inventory process are prepared in accordance with the applicable financial reporting framework
C)whether the balance sheet accounts in the inventory process are audited in accordance with the applicable financial reporting framework
D)whether the income statement accounts in the inventory process are audited in accordance with the applicable financial reporting framework

Accepted Answer

After completing substantive tests of balances for the inventory process, the auditor's primary objective is to determine whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. The balance sheet accounts in the inventory process are part of the financial statements and thus, the auditor would need to determine whether they are prepared in accordance with the applicable framework. The income statement accounts are not part of the balance sheet accounts and, therefore, are not the primary focus of the substantive testing of balances for the inventory process.

Question 19

How does the auditor gather evidence during the physical inventory count?
A)The auditor determines that the items on hand that are not owned by the client are counted.
B)The auditor begins the test count process after the client has finished counting the inventory.
C)The auditor observes that all inventory has been tagged and counted.
D)The auditor observes that client personnel are performing test counts in the areas where they are most familiar with the inventory.

Accepted Answer

During the physical inventory count, the auditor gathers evidence by observing that all inventory has been properly tagged and counted. This includes verifying that all items have been included and none have been double-counted or omitted. The auditor may also perform test counts in areas where there are concerns about the accuracy of the inventory count. It is important for the auditor to be present during the entire inventory count process to ensure that all procedures are followed correctly and to address any issues that arise.

Question 20

Early substantive testing of inventory balances is only done when
A)the client has a good system of internal controls relating to expense account balances
B)the client has good policies and procedures relating to the account balances
C)the client has a good system of internal controls relating to the account balances.
D)the client has good policies and procedures relating to the account balances.

Accepted Answer

Early substantive testing of inventory balances is only done when the client has a good system of internal controls relating to the account balances. This is because substantive testing is used when there is a higher risk of material misstatement in the account balance, and a good system of internal controls can provide assurance that the balance is accurate. Good policies and procedures are also important, but they may not necessarily indicate a strong system of internal controls.

Quiz 7: Auditing the Inventory Business Process

The applicable financial reporting framework allows the audit client to determine both the cost and market value of inventory.Select the correct item(s) from the following list regarding these determinations:

The disclosures related to the financial statements are usually found in

The applicable financial reporting framework allows the audit client to determine both the cost and market value of inventory.Select the correct item(s) from the following list regarding these determinations:

It is the auditor's job to review the client's estimate of obsolete inventory to evaluate whether the ending inventory balance has been determined in accordance with the applicable financial reporting framework.To do this,the auditor considers whether the inventory balance includes

How does the auditor gather evidence during the physical inventory count?

If the auditor selects the sample of inventory items on the final inventory listing to perform price tests,the auditor gathers evidence about which assertion(s) ?

How does the auditor gather evidence during the physical inventory count?

At the end of the audit,the auditor will decide whether the accounts in the inventory business process are presented in accordance with the applicable financial reporting framework.If they are not,the auditor will:

An inventory balance is immaterial when

If the auditor selects the sample of inventory items to count from the inventory on the warehouse shelves,the auditor gathers evidence about which assertion(s) ?

How does the auditor gather evidence during the physical inventory count?

The auditor should plan the audit of the inventory business process with the following presumption:

Management often uses internal controls in the inventory process

The auditor uses substantive tests of balances in the inventory process to

If the auditor reviews the lower of cost of market inventory adjustment made by the client,the auditor gathers evidence about which assertion(s) ?

The applicable financial reporting framework allows the audit client to determine both the cost and market value of inventory.Select the correct item(s) from the following list regarding these determinations:

If the auditor selects the sample of inventory items to count from the inventory listing at year-end,the auditor gathers evidence about which assertion(s) ?

After the auditor has completed the substantive tests of balances for the inventory process,he or she determines

How does the auditor gather evidence during the physical inventory count?

Early substantive testing of inventory balances is only done when