Question 1

Internal controls over the ship finished goods function in the inventory and warehousing cycle are not normally tested by the auditor as a part of performing tests of controls and substantive tests of transactions in the sales and collection cycle.

Accepted Answer

Internal controls over the ship finished goods function in the inventory and warehousing cycle may have an impact on the accuracy of inventory values and cost of goods sold in the financial statements, which relates to the sales and collection cycle. Therefore, the auditor should test these controls as part of their audit procedures.

Question 2

Assume that the client's valuation of an inventory item is $10 per unit for 1,000 units, using first-in, first-out (FIFO). If the most recent acquisition of inventory was for 600 units at $10 per unit and the immediately preceding acquisition was for 700 units at $9 per unit, the inventory item is in error and it is:
A) understated $400.
B) understated $300.
C) overstated $400.
D) overstated $700.

Accepted Answer

Using FIFO, the most recent inventory acquisition costs would be used to value the inventory items first. Therefore, the valuation of the 600 units at $10 per unit is correct. However, the 400 remaining units from the original 1,000 units would have been acquired at $9 per unit, not $10 per unit. This means that the inventory item is overstated by 400 units at $1 per unit, resulting in an overstatement of $400.

Question 3

The audit procedure "Account for unused tag numbers shown in the auditor's working papers to make sure no tags have been added" provides assurance mainly for the existence objective for inventory pricing and compilation.

Accepted Answer

The audit procedure of accounting for unused tag numbers helps to ensure that all inventory items have been accounted for and none have been added without proper documentation, which provides assurance for the existence objective of inventory pricing and compilation.

Question 4

In pricing inventory, it is necessary to consider whether replacement cost is lower than historical cost. When applying lower of cost or market tests, what basis should auditors use for each of the following categories of inventory:
• Raw materials
• Work-in-process
• Purchased finished goods

Accepted Answer

The answer of In pricing inventory, it is necessary to...

Question 5

The audit procedure "Foot the inventory listing schedules for raw materials, work-in-process, and finished goods" provides assurance mainly for the accuracy objective for inventory pricing and compilation.

Accepted Answer

The audit procedure "Foot the inventory listing schedules for raw materials, work-in-progress, and finished goods" provides assurance mainly for the completeness objective for inventory. This procedure helps in ensuring that all the items that should be included in the inventory listing schedules are actually included.

Question 6

The audit procedure "Perform tests of lower-of-cost-or-market, selling price, and obsolescence" provides assurance mainly for the realizable value objective for inventory pricing and compilation.

Accepted Answer

The audit procedure "Perform tests of lower-of-cost-or-market, selling price, and obsolescence" is a common method used by auditors to test the realizable value of inventory. This procedure checks whether the valuation of inventory is lower than its current market value or whether it is obsolete and will not sell, and therefore needs to be written down to a lower value. This provides assurance primarily for the realizable value objective of inventory pricing and compilation.

Question 7

Controls which provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totaled, and included in the general ledger at the proper amount are known as:
A) standard cost controls.
B) pricing internal controls.
C) compilation internal controls.
D) count quantity internal controls.

Accepted Answer

These controls are compilation internal controls, which ensure accurate summarization, pricing, extension, and totaling of physical counts and their inclusion in the general ledger.

Question 8

The auditing procedures generally used for the physical observation of inventory and the pricing and compilation of inventory are:
A) analytical procedures and tests of transactions.
B) analytical procedures and tests of details of balances.
C) analytical procedures and control tests.
D) tests of transactions and tests of details of balances.

Accepted Answer

Analytical procedures are used to identify unusual fluctuations or relationships that may indicate errors or fraud. Tests of details of balances are used to verify the accuracy of the inventory balances by examining the supporting documentation.

Question 9

When labor is a significant part of inventory, verifying the proper accounting of these costs should be tested in the:
A) inventory and warehousing cycle.
B) payroll and personnel cycle.
C) acquisitions and payments cycle.
D) cash cycle.

Accepted Answer

Labor costs are typically recorded in the payroll and personnel cycle, where the proper accounting and classification of these costs should be tested. The inventory and warehousing cycle deals primarily with physical movements of inventory, while the acquisitions and payments cycle deals with purchasing and payments for inventory. The cash cycle deals with the company's cash receipts and disbursements.

Question 10

When performing price tests for purchased inventory, the auditor would not be concerned with the most recent vendors' invoices if the client uses the FIFO valuation method.

Accepted Answer

When using the FIFO valuation method, the most recent vendors' invoices would be relevant, as they represent the cost of the most recently purchased inventory items, which would be the first items sold under the FIFO method. The auditor would need to review these invoices to ensure they are accurately recorded in the client's inventory system.

Question 11

The design of tests of details of balances for inventory is affected by audit results from multiple cycles. Identify the cycles, other than the inventory and warehousing cycle that affect the audit of inventory.

Accepted Answer

The answer of The design of tests of details of...

Question 12

It is acceptable under generally accepted accounting principles for a company to use different valuation methods for different parts of its inventory.

Accepted Answer

GAAP allows companies to use different valuation methods for different types of inventory, such as FIFO for one type of inventory and LIFO for another type. The key is to disclose these methods in the financial statements so that users have a clear understanding of how inventory values are determined.

Question 13

Pricing manufactured inventory is difficult. Auditors must evaluate the method of allocating manufacturing overhead for all but which of the following?
A) reasonableness
B) computational correctness
C) compliance with accounting standards
D) consistency

Accepted Answer

The answer of Pricing manufactured inventory is difficult. Auditors must...

Question 14

The major considerations in evaluating the reasonableness of cost allocations are compliance with GAAP and consistency with prior years.

Accepted Answer

Compliance with GAAP and consistency with prior years are indeed major considerations in evaluating the reasonableness of cost allocations.

Question 15

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items:
A) included in the listing have been counted.
B) represented by inventory tags actually exist.
C) represented by inventory tags are included in the listing.
D) included in the listing are represented by inventory tags.

Accepted Answer

Tracing inventory tags to the physical inventory listing ensures that all items represented by the tags are included in the listing, verifying completeness.

Quiz 21: Audit of the Inventory and Warehousing Cycle

Internal controls over the ship finished goods function in the inventory and warehousing cycle are not normally tested by the auditor as a part of performing tests of controls and substantive tests of transactions in the sales and collection cycle.

The audit procedure "Account for unused tag numbers shown in the auditor's working papers to make sure no tags have been added" provides assurance mainly for the existence objective for inventory pricing and compilation.

In pricing inventory, it is necessary to consider whether replacement cost is lower than historical cost. When applying lower of cost or market tests, what basis should auditors use for each of the following categories of inventory: • Raw materials • Work-in-process • Purchased finished goods

The audit procedure "Foot the inventory listing schedules for raw materials, work-in-process, and finished goods" provides assurance mainly for the accuracy objective for inventory pricing and compilation.

The audit procedure "Perform tests of lower-of-cost-or-market, selling price, and obsolescence" provides assurance mainly for the realizable value objective for inventory pricing and compilation.

Controls which provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totaled, and included in the general ledger at the proper amount are known as:

The auditing procedures generally used for the physical observation of inventory and the pricing and compilation of inventory are:

When labor is a significant part of inventory, verifying the proper accounting of these costs should be tested in the:

When performing price tests for purchased inventory, the auditor would not be concerned with the most recent vendors' invoices if the client uses the FIFO valuation method.

The design of tests of details of balances for inventory is affected by audit results from multiple cycles. Identify the cycles, other than the inventory and warehousing cycle that affect the audit of inventory.

It is acceptable under generally accepted accounting principles for a company to use different valuation methods for different parts of its inventory.

Pricing manufactured inventory is difficult. Auditors must evaluate the method of allocating manufacturing overhead for all but which of the following?

The major considerations in evaluating the reasonableness of cost allocations are compliance with GAAP and consistency with prior years.

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items: