An auditor with the CPA firm is working to understand a clients inventory procurement system

9.20 Which of the following methods for determining inventory cost is not allowed by GAAP?

a. average cost.

b. FIFO

c. LIFO

d. standard cost

9.20 Answer: D

Although standard costs are commonly used, they must not be materially different than one of the allowed methods.

9.21 Which cycle is not directly linked to the production cycle?

a. acquisition and expenditure cycle

b. payroll cycle

c. revenue and collection cycle

d. finance and investment cycle

9.21 Answer: D

The finance and investment cycle is not dierectly linked to the production cycle, although, it is inderctly linked through investments in property, plant, and equipment.

9.22 To determine the client's planned amount and timing of production of a product, the auditor reviews the

a. sales forecast

b. inventory reports

c. production plan

d. pruchases journal

9.22 Answer: C

The production plan shows what is planned to be actually produced.

9.23 An auditor reviews job cost sheets to test which transaction assertation?

a. occurrence

b. completenss

c. accuracy

d. classification

9.23 Answer: C

The job cost sheets indicate the cost used in determining the accuracy of inventory produced.

9.24 Which of the following is internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

a. supplies of relatively little value are expensed when purchased

b. the cycle basis is used for physical counts

c. the warehouse manager is responsible for maintenance of perpetual inventory records

d. perpetual inventory records are maintained only for items of significant value

9.24 Answer: C

this weakness is an improper combination of of inventory custody and record-keeping responsibilities

9.25 To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis

a. for the company as a whole

b. by division

c. by product

d. all of the above

9.25 Answer: C

This is the most disaggregated level of the chosices given.

9.26 Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

a. maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record.

b. have an independent accounting firm prepare an internal control report on the effeciveness of the controls over inventory

c. have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records.

d. reuqire a manager's signature for the removal of any inventory item with a value of more than $50

9.26 Answer: C

The separate space facilitates security, and the frequent coutns enable company personnel to detect shortages in a timely manner.

9.27 An auditor ususally traces the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

a. owned by the client

b. not obsolete

c. physically present at the time of the preparation of the final inventory schedule

d. included in the final inventory schedule

9.27 Answer: D

If the sample is from the inventory in the physical location the tracing ahs the objective of auditing the completeness of the final inventory schedule.

9.28 A retailer's physical count of inventory was higher than that shown by the perpeutal records. Which of the following owuld explain the difference?

a. inventory items had been counted but the tags placed on the items had not been take off and added to the ineventory accumulation sheets

b. credit memos for several items returned by customers had not been recorded.

c. no journal entry had been made on the retailer's books for several items returned to its suppliers.

d. an item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records.

9.28 Answer: B

Unrecorded credit memos means that the returned inventory is not in the perpetual records; thus, the recorded amount will be smaller than the amount on hand.

9.29 From the auditor's point of view, inventory counts are more acceptable prior to the year-end when

a. internal control is weak

b. accurate perpetual inventory records are maintained

c. inventory is slow moving

d. significant amounts of inventory are held on a consignment basis.

9.29 Answer: B

Auditors rely on accurate perpetual records to maintain an accurate inventory balance during the intervening period between the physical count and the balance sheet date.

9.30 Which of the following internal control activites most likely addresses the completeness assertation for inventory?

a. the work-in process account is periodically reconciled with subsidiary inventory records.

b. employees responsible for custody of finished goods do not perform the recieving function.

c. recieving reports are prenumbered and the numbering sequence is check periodically.

d. there is a separation of duties between the payroll department and inventory accounting personnel.

9.30 Answer: C

Checking the numbering sequence on prenumbered recieving reprots is a way to detect omission of the recording of inventory recieved.

9.31 When auditing inventories, an auditor would least likely verify that

a. all inventory owned by the client is on hand at the time of the count.

b. the client has used proper inventory pricing.

c. the financial statement presentation of inventories is appropriate.

d. damaged goods and obsolete itemes have been properly accounted for.

9.31 answer: A

an auditor does not expect all inventories to which the auditee has title to be on hand a the date of the count. some purchased goods may still be in transit at that time. Also, some inventory may be on consignment or in public warehouses alhtough properly included in the county.

9.32 A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably

a. apply gross profit tests to ascertain the reasonableness of the physical coutns

b. increase the extent of tests of controls relevant to the inventory cycle.

c. request the client to schedule the physical inventory count at the end of the year.

d. insist that the client peform physical counts of inventory items several times during the year.

9.32 Answer: C

If control risk is high, a timelier audit procedure may be necessary, and extending the results of work done on an interim basis to year-end might be inappropriate. Thus, observation of inventory at year-end would provide the best evidence as to existence .

9.33 An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertation of

a. rights and obligations

b. completeness

c. existence

d. valuation and allocation

9.33 Answer: B

Tracing the details of test couts to the final inventory schedule assures the auditor that items in the observed physical inventory are included in the inventory records. The auditor should ocmpare the inventory tag sequence numbers in the final invenotry schedule to those in the records of his or her test counts made during the client's physical inventory.

9.34 Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertation of rights and obligations related to inventories

a. trace test counts noted during the entity's physical count to the entity's summarization of quantities.

b. inspect agreements to determine whether any inventory is pleged as collateral or subject to an liens.

c. select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales.

d. inspect the open purchase order file for significant commitments taht should be considered for disclosure.

9.34 Answer: B

The major audit objective of testing the assertation of rights and obligations for inventories is to determine that the entity hs legal title or similar rights of ownership to the inventories. Typically, the auditor will examine paid vendors' invoices, consignment agreements, and contracts.

9.35 An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about

a. existence

b. rights and obligations

c. completeness

d. valuation and allocation

9.35 Answer: D

Assertations about valuation or allocation concern whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts. An examination of inventory turnover pertains to the audit objective of identifying slow-moving, excess, defective, and obsolete items included in inventories. This audit objective relates to the valutation or allocation assertion.

9.36 An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about

a. existence

b. rights and obligaitons

c. completeness

d. valuation

9.36 Answer: D

The first inclination is to choose answer (a) because tha auditor is vouching, and vouching usually implies a test for existence. However, in this case, a vendor invoice would provide evidence about only the amount that is being billed (valuation) but would not provide invormation regarding the fact that the goods were recieved and appropriately included in the inventory status report. vouching for existence and tracing for completeness are good guidelines, but should not replace the students thought process on what evidence is being gathered.

9.37 When evaluating inventory controls, an auditor would be least likely to

a. inspect documents

b. make inquiries

c. observe procedures

d. consider policy and procedure manuals

9.37 Answer: D

Policy and procedure manuals are least important because the most important features are the acutal workings of the controls as indicated by the other three choices.

9.38 When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that

a. quantities on ahnd have been computed based on acceptable cost accoutning techniques that reasonably approximate acutal quantities on hand.

b. physical inventories agree substantially with book inventories.

c. the system is in accordance with generally accepted accounting pricniples and is functioning as planned.

d. costs have been properly assigned to finished goods, work-iin process, and cost of godos sold.

9.38 Answer: D

Auditors need to determine whether the cost accounting sytsem assigns costs properly to the inventories.

9.39 The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to

a. cost ledgers

b. perpetual inventory records

c. recieving reports

d. material requistions

9.39 Answer: D

Material requisitons are the authorization for the inventory custodian to release raw materials and supplies to production personnel.

9.40 Your client counts inventory three months before the end of the fiscal year because controls over inevntory are excellent. Which procedure is not necessary for he roll-forward?

a. check that shipping documents for the last three months agree with perpetual records

b. trace recieving reports for the last three months to perpetual records

c. compare gross margin percentages for the last three months.

d. request the client to recount inventory at the end of the year.

9.40 Answer: D

If the controls are excellent and the roll-forward is teasted, a recount is not necessary.

9.41 An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions do GAAS require tests of controls to be performed by an auditor?

a. significant weaknesses were found in the company's internal control.

b. the auditor hopes to reduce the amount of work to be done in assessing the inherit risk

c. the auditor believes tht testing the controls could lead to a reduction in overall audit time and cost.

d. tests of controls are always performed when the auditor begins to assess control risk

9.41 Answer: C

the auditor tests the controls to reduce sustantive risks

Which of the following procedures carried out at an inventory count by an auditor is a test primarily for overstatement of inventory?

What is the responsibility of the auditor during an inventory count?

Which statement is correct relating to the count of inventory when a company that specializes in taking such counts?

What is the purpose of auditing the inventories and work in progress?