Question 1

Boxes or other containers holding inventory should also be opened during test counts to determine the ________ of the inventory.

Accepted Answer

A)  classification 
B)  detail tie-in 
C)  existence 
D)  realizable value 
A)  classification 
B)  detail tie-in 
C)  existence 
D)  realizable value

Question 2

Which of the following is an accurate statement regarding the audit of pricing and compilation of inventory?

Accepted Answer

A)  Inventory compilation tests include all of the tests of the client's unit prices to determine whether they are correct. 
B)  The review for obsolete inventory should be performed by the accounting department. 
C)  The most important internal control for accurate unit costs is external verification by an outside consultant. 
D)  Inventory compilation internal controls are needed to ensure that the physical counts are correctly summarized and priced. 
A)  Inventory compilation tests include all of the tests of the client's unit prices to determine whether they are correct. 
B)  The review for obsolete inventory should be performed by the accounting department. 
C)  The most important internal control for accurate unit costs is external verification by an outside consultant. 
D)  Inventory compilation internal controls are needed to ensure that the physical counts are correctly summarized and priced.

Question 3

If the perpetual inventory master files show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded

Accepted Answer

A)  sales. 
B)  sales discounts. 
C)  purchases. 
D)  purchase discounts. 
A)  sales. 
B)  sales discounts. 
C)  purchases. 
D)  purchase discounts.

Question 4

What are two factors affecting the complexity of the audit of inventory?

Accepted Answer

• Inventory is often the largest account

Question 5

Separate perpetual records are likely to be kept only for raw materials inventory.

Accepted Answer

A) True 
 B)False

Question 6

Management may decide to allocate manufacturing overhead based upon machine hours. In this situation, the auditor must test and verify the reasonableness of the use of machine hours to allocate overhead.

Accepted Answer

A) True 
 B)False

Question 7

An adequate cost accounting system is an important part of the processing of goods function for all manufacturing companies.

Accepted Answer

A) True 
 B)False

Question 8

An approved purchase requisition form authorizes shipment of goods to customers.

Accepted Answer

A) True 
 B)False

Question 9

The auditor need not be concerned about inventory being classified and disclosed, properly, into finished goods, work-in-process and raw materials (separately) in the financial statements; this is management's responsibility, only.

Accepted Answer

A) True 
 B)False

Question 10

When a physical count of inventory is performed at an interim date, the auditor observes it at that time and tests the perpetual records for transactions

Accepted Answer

A)  throughout the year. 
B)  which are a representative sample of the period under audit. 
C)  from the date of the count to year-end. 
D)  from the date of the count to the end of the audit field work. 
A)  throughout the year. 
B)  which are a representative sample of the period under audit. 
C)  from the date of the count to year-end. 
D)  from the date of the count to the end of the audit field work.

Question 11

Many of the internal controls over inventory and the details of the entire inventory population can be tested using audit software.

Accepted Answer

A) True 
 B)False

Question 12

Inventory items such as jewels, chemicals, and electronic parts are easy for auditors to observe and to value.

Accepted Answer

A) True 
 B)False

Question 13

When may auditors observe the physical inventory count?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 14

It is permissible for an auditor to test the entire inventory population for certain types of audit tests in order to eliminate the need for more costly tests involving sampling.

Accepted Answer

A) True 
 B)False

Question 15

The auditor traces inventory tags identified as non-owned during the physical observation to the inventory listing schedule to make sure these have not been included. This test satisfies the balance-related audit objective of

Accepted Answer

A)  cutoff. 
B)  rights. 
C)  accuracy. 
D)  existence. 
A)  cutoff. 
B)  rights. 
C)  accuracy. 
D)  existence.

Question 16

When a client has standard cost records, an efficient and useful method of determining valuation is to review and analyze variances.

Accepted Answer

A) True 
 B)False

Question 17

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the

Accepted Answer

A)  terms of the open purchase orders. 
B)  purchase cutoff procedures. 
C)  contractual commitments made by the purchasing department. 
D)  purchase invoices received on or around year-end. 
A)  terms of the open purchase orders. 
B)  purchase cutoff procedures. 
C)  contractual commitments made by the purchasing department. 
D)  purchase invoices received on or around year-end.

Question 18

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

A) True 
 B)False

Question 19

In evaluating management's overhead cost allocations, the auditor must simply consider the reasonableness of the allocation method and determine if the valuation method complies with generally accepted accounting principles.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A)  understated $400. 
B)  understated $300. 
C)  overstated $400. 
D)  overstated $700. 
A)  understated $400. 
B)  understated $300. 
C)  overstated $400. 
D)  overstated $700.

Exam 21: Audit of the Inventory and Warehousing Cycle

Boxes or other containers holding inventory should also be opened during test counts to determine the ________ of the inventory.

Which of the following is an accurate statement regarding the audit of pricing and compilation of inventory?

If the perpetual inventory master files show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded

What are two factors affecting the complexity of the audit of inventory?

Separate perpetual records are likely to be kept only for raw materials inventory.

Management may decide to allocate manufacturing overhead based upon machine hours. In this situation, the auditor must test and verify the reasonableness of the use of machine hours to allocate overhead.

An adequate cost accounting system is an important part of the processing of goods function for all manufacturing companies.

An approved purchase requisition form authorizes shipment of goods to customers.

The auditor need not be concerned about inventory being classified and disclosed, properly, into finished goods, work-in-process and raw materials (separately) in the financial statements; this is management's responsibility, only.

When a physical count of inventory is performed at an interim date, the auditor observes it at that time and tests the perpetual records for transactions

Many of the internal controls over inventory and the details of the entire inventory population can be tested using audit software.

Inventory items such as jewels, chemicals, and electronic parts are easy for auditors to observe and to value.

When may auditors observe the physical inventory count?

It is permissible for an auditor to test the entire inventory population for certain types of audit tests in order to eliminate the need for more costly tests involving sampling.

The auditor traces inventory tags identified as non-owned during the physical observation to the inventory listing schedule to make sure these have not been included. This test satisfies the balance-related audit objective of

When a client has standard cost records, an efficient and useful method of determining valuation is to review and analyze variances.

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the

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.

In evaluating management's overhead cost allocations, the auditor must simply consider the reasonableness of the allocation method and determine if the valuation method complies with generally accepted accounting principles.

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Materiality

Assessing the Risk of Material Misstatement

Fraud Auditing

Internal Control and Coso Framework

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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