Exam 12: Inventories and Cost of Goods Sold

The auditor determines that each of the following objectives will be part of your audit of Bozington Co., Inc. For each audit objective, select a substantive procedure that would help to achieve that objective. Each of the procedures may be used once, more than once, or not at all. Audit Objective 1. Establish the completeness of inventories. 2. Establish the accuracy of cost amounts of inventories. 3. Determine that the presentation and disclosure of inventories and cost of goods sold is adequate. 4. Establish that the client has rights to the recorded inventories. 5. Establish the existence of ending inventory. Substantwe Proceciures a. Examine current vendors' price lists. b. Review drafts of the financial statements. c. Select a sample of items during the physical inventory count and determine that they have been included on count sheets. d. Select a sample of rec orded items and examine supporting vendors' inwoices and contracts. e. Select a sample of rec orded tems on count sheets during the physical inventory count and determine that itemsare on hand. t. Test the reasonableness of general and administrative labor rates.

The use of a tagging system for inventory taking is designed to prevent double counting of goods.

Which statement is correct relating to the count of inventory when a company that specializes in taking such counts ("the company") is involved with counting a client's inventory?

The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders.

Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories?

A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect:

Observation of inventories is a required audit procedure under all circumstances.

To test the client's cutoff of inventories, the auditors will make a record of the serial number of the final receiving and shipping documents used prior to the taking of the physical inventory.

For good internal control over purchase transactions, purchases should be made from approved vendors by the department needing the goods.

Which of the following is true about the auditors' observation of the client's physical inventory?

Which of the following is true about the auditors' observation of the client's physical inventory?

The auditors will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditors at the time of the physical inventory count are:

An inventory turnover analysis is useful to the auditor because it may detect:

Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory?

When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unmodified (unqualified) opinion on the client's income statement.

Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles?

Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has:

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

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all: