Question 1

Which of the following is not true relating to the auditors' observation of the client's physical inventory?

Accepted Answer

A)  The auditors should evaluate the client's planning of the physical inventory. 
B)  The auditors should make certain that consigned items from suppliers are included in physical inventory totals. 
C)  The auditors should evaluate the adequacy of the client's counting procedures. 
D)  The auditors should take test counts of the client's inventory. 
A)  The auditors should evaluate the client's planning of the physical inventory. 
B)  The auditors should make certain that consigned items from suppliers are included in physical inventory totals. 
C)  The auditors should evaluate the adequacy of the client's counting procedures. 
D)  The auditors should take test counts of the client's inventory.

Question 2

Which of the following is not a part of the auditors' responsibility regarding a client's count of its inventory?

Accepted Answer

A)  Evaluate condition of inventory. 
B)  Determine which counts they will make and which counts the client will make. 
C)  Observe compliance with management's instructions for the count. 
D)  Make some test counts. 
A)  Evaluate condition of inventory. 
B)  Determine which counts they will make and which counts the client will make. 
C)  Observe compliance with management's instructions for the count. 
D)  Make some test counts.

Question 3

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

Accepted Answer

A)  Supplies of relatively little value are expensed when purchased. 
B)  The cycle basis is used for physical counts. 
C)  The storekeeper is responsible for maintenance of perpetual inventory records. 
D)  Perpetual inventory records are maintained only for items of significant value. 
A)  Supplies of relatively little value are expensed when purchased. 
B)  The cycle basis is used for physical counts. 
C)  The storekeeper is responsible for maintenance of perpetual inventory records. 
D)  Perpetual inventory records are maintained only for items of significant value.

Question 4

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company:

Accepted Answer

A)  Has paid for the merchandise. 
B)  Has physical possession of the merchandise. 
C)  Holds legal title to the merchandise. 
D)  Holds the shipping documents for the merchandise issued in the company's name. 
A)  Has paid for the merchandise. 
B)  Has physical possession of the merchandise. 
C)  Holds legal title to the merchandise. 
D)  Holds the shipping documents for the merchandise issued in the company's name.

Question 5

A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record:

Accepted Answer

A)  Sales. 
B)  Sales discounts. 
C)  Purchases. 
D)  Purchase returns. 
A)  Sales. 
B)  Sales discounts. 
C)  Purchases. 
D)  Purchase returns.

Question 6

Tracing copies of computer-generated sales invoices to copies of the corresponding computer-generated shipping documents provides evidence that:

Accepted Answer

A)  Shipments to customers were properly billed. 
B)  Entries in the accounts receivable subsidiary ledger were for sales actually shipped. 
C)  Sales billed to customers were actually shipped. 
D)  No duplicate shipments to customers were made. 
A)  Shipments to customers were properly billed. 
B)  Entries in the accounts receivable subsidiary ledger were for sales actually shipped. 
C)  Sales billed to customers were actually shipped. 
D)  No duplicate shipments to customers were made.

Question 7

The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record:

Accepted Answer

A)  Purchases. 
B)  Purchase discounts. 
C)  Sales. 
D)  Sales discounts. 
A)  Purchases. 
B)  Purchase discounts. 
C)  Sales. 
D)  Sales discounts.

Question 8

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors 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 9

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:

Accepted Answer

A)  Merchandise received. 
B)  Vendor's invoices. 
C)  Canceled checks. 
D)  Receiving reports. 
A)  Merchandise received. 
B)  Vendor's invoices. 
C)  Canceled checks. 
D)  Receiving reports.

Question 10

Which of the following best describes the reason for the auditors' review of the client's cost accounting system?

Accepted Answer

A)  To obtain evidence regarding the quantities of good described as work in process. 
B)  To obtain evidence about the valuation of work in process, finished goods, and cost of goods sold. 
C)  To obtain evidence about the profit margin on specific jobs. 
D)  To obtain evidence about compliance with Cost Accounting Standards. 
A)  To obtain evidence regarding the quantities of good described as work in process. 
B)  To obtain evidence about the valuation of work in process, finished goods, and cost of goods sold. 
C)  To obtain evidence about the profit margin on specific jobs. 
D)  To obtain evidence about compliance with Cost Accounting Standards.

Question 11

In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the:

Accepted Answer

A)  Purchases journal. 
B)  Purchase requisitions. 
C)  Purchase orders. 
D)  Vendors' invoices. 
A)  Purchases journal. 
B)  Purchase requisitions. 
C)  Purchase orders. 
D)  Vendors' invoices.

Question 12

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

Accepted Answer

A)  Test the computation of standard overhead rates. 
B)  Tour the manufacturing plant or production facility. 
C)  Compare inventory balances to anticipated sales volume. 
D)  Review inventory experience and trends. 
A)  Test the computation of standard overhead rates. 
B)  Tour the manufacturing plant or production facility. 
C)  Compare inventory balances to anticipated sales volume. 
D)  Review inventory experience and trends.

Question 13

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?

Accepted Answer

A)  Factory supervisor salary. 
B)  Indirect materials. 
C)  Miscellaneous expense. 
D)  Sales expense. 
A)  Factory supervisor salary. 
B)  Indirect materials. 
C)  Miscellaneous expense. 
D)  Sales expense.

Question 14

An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly?

Accepted Answer

A)  Completeness. 
B)  Existence. 
C)  Legality. 
D)  Valuation. 
A)  Completeness. 
B)  Existence. 
C)  Legality. 
D)  Valuation.

Question 15

Auditors should not review the client's planning of the physical inventory.

Accepted Answer

A) True 
 B)False

Question 16

To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into:

Accepted Answer

A)  Net sales. 
B)  Cost of goods sold. 
C)  Operating income. 
D)  Gross sales. 
A)  Net sales. 
B)  Cost of goods sold. 
C)  Operating income. 
D)  Gross sales.

Question 17

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

Accepted Answer

A)  Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. 
B)  Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. 
C)  Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. 
D)  Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks. 
A)  Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. 
B)  Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. 
C)  Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. 
D)  Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

Question 18

A "bill and hold" scheme is most likely to include:

Accepted Answer

A)  Shipment of items to a customer beyond what the customer has ordered. 
B)  Recording as sales items that the company retains as of year-end. 
C)  Billing of items that are held by customers for future revenue production purposes. 
D)  Selling items at substantial discounts near year-end. 
A)  Shipment of items to a customer beyond what the customer has ordered. 
B)  Recording as sales items that the company retains as of year-end. 
C)  Billing of items that are held by customers for future revenue production purposes. 
D)  Selling items at substantial discounts near year-end.

Question 19

Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories?

Accepted Answer

A)  Confirmation of goods in the hands of public warehouses. 
B)  Supervising the taking of the annual physical inventory. 
C)  Carrying out physical inventory procedures at an interim date. 
D)  Obtaining written representation from the client as to the existence, quality, and dollar amount of the inventory. 
A)  Confirmation of goods in the hands of public warehouses. 
B)  Supervising the taking of the annual physical inventory. 
C)  Carrying out physical inventory procedures at an interim date. 
D)  Obtaining written representation from the client as to the existence, quality, and dollar amount of the inventory.

Question 20

Which of the following is least likely to be an accurate statement concerning characteristics of an audit?

Accepted Answer

A)  An analysis of inventory turnover addresses whether the proper method of determining inventory costs-as contrasted to market values-is being applied. 
B)  Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed. 
C)  The direction of tests for overstatement errors is generally directed from the recorded entry to source documents. 
D)  Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end. 
A)  An analysis of inventory turnover addresses whether the proper method of determining inventory costs-as contrasted to market values-is being applied. 
B)  Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed. 
C)  The direction of tests for overstatement errors is generally directed from the recorded entry to source documents. 
D)  Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end.

Exam 12: Inventories and Cost of Goods Sold

Which of the following is not true relating to the auditors' observation of the client's physical inventory?

Which of the following is not a part of the auditors' responsibility regarding a client's count of its inventory?

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

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company:

A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record:

Tracing copies of computer-generated sales invoices to copies of the corresponding computer-generated shipping documents provides evidence that:

The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record:

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

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:

Which of the following best describes the reason for the auditors' review of the client's cost accounting system?

In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the:

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?

An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly?

Auditors should not review the client's planning of the physical inventory.

To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into:

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

A "bill and hold" scheme is most likely to include:

Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories?

Which of the following is least likely to be an accurate statement concerning characteristics of an audit?

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Legal Liability of Cpas

Audit Evidence and Documentation

Planning the Audit; Linking Audit Procedures to Risk

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Cash and Financial Investments

Accounts Receivable, Notes Receivable, and Revenue

Property, Plant, and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Report

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, Operational, and Compliance Auditing

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