Question 1

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 2

Which one of the following procedures would not be appropriate for an auditor in discharging his 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 3

Auditor tests of physical controls over raw materials, work-in-process, and finished goods are performed by:

Accepted Answer

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

Question 4

Inherent risk is typically assessed at a moderate level for inventory due to the nature of the asset.

Accepted Answer

A) True 
 B)False

Question 5

Inventory is a complex area to audit for all but which of the following reasons?

Accepted Answer

A)  Inventory is often in different locations. 
B)  There are several acceptable valuation methods and some entities use different methods for different types of inventory. 
C)  Inventory is often the largest account in working capital. 
D)  Inventory valuation includes few estimates. 
A)  Inventory is often in different locations. 
B)  There are several acceptable valuation methods and some entities use different methods for different types of inventory. 
C)  Inventory is often the largest account in working capital. 
D)  Inventory valuation includes few estimates.

Question 6

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

A) True 
 B)False

Question 7

For several years, a client's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal control that led to the failure to adjust the accounting records for some:

Accepted Answer

A)  purchases returned to vendors. 
B)  sales returns received. 
C)  sales discounts allowed. 
D)  cash purchases. 
A)  purchases returned to vendors. 
B)  sales returns received. 
C)  sales discounts allowed. 
D)  cash purchases.

Question 8

Which of the following controls would be appropriate regarding the release of materials from a stockroom?

Accepted Answer

A)  Production employees request materials be delivered to their work areas as they need them. 
B)  Stockroom employees deliver materials to work areas throughout the day to maintain acceptable levels of safety stock - no written records are maintained. 
C)  Production employees submit approved requisition forms to the stockroom for materials needed. 
D)  Production employer in need of materials should personally pick up needed materials from the stockroom. 
A)  Production employees request materials be delivered to their work areas as they need them. 
B)  Stockroom employees deliver materials to work areas throughout the day to maintain acceptable levels of safety stock - no written records are maintained. 
C)  Production employees submit approved requisition forms to the stockroom for materials needed. 
D)  Production employer in need of materials should personally pick up needed materials from the stockroom.

Question 9

The audit tests to verify that the client is using an inventory method which is generally accepted and to verify that physical counts were correctly summarized are performed during the audit of the:

Accepted Answer

A)  acquisition and payments cycle. 
B)  payroll and personnel cycle. 
C)  inventory and warehousing cycle. 
D)  sales and collection cycle. 
A)  acquisition and payments cycle. 
B)  payroll and personnel cycle. 
C)  inventory and warehousing cycle. 
D)  sales and collection cycle.

Question 10

A useful starting point for becoming familiar with the client's inventory is for the auditor to:

Accepted Answer

A)  read the AICPA's Industry Audit Guide. 
B)  review accounting theory covering special problems, such as gas and oil accounting, or lease-purchase agreements. 
C)  read the client's Accounting Manual. 
D)  tour the client's facility. 
A)  read the AICPA's Industry Audit Guide. 
B)  review accounting theory covering special problems, such as gas and oil accounting, or lease-purchase agreements. 
C)  read the client's Accounting Manual. 
D)  tour the client's facility.

Question 11

The auditor's objective during an observation of a client's physical inventory count is to:

Accepted Answer

A)  discover whether a client has counted a particular inventory item or group of items. 
B)  obtain direct knowledge that the inventory exists and has been properly counted. 
C)  provide an appraisal of the quality of the merchandise on hand on the day of the physical count. 
D)  allow the auditor to supervise the conduct of the count so as to obtain assurance that inventory quantities are reasonably accurate. 
A)  discover whether a client has counted a particular inventory item or group of items. 
B)  obtain direct knowledge that the inventory exists and has been properly counted. 
C)  provide an appraisal of the quality of the merchandise on hand on the day of the physical count. 
D)  allow the auditor to supervise the conduct of the count so as to obtain assurance that inventory quantities are reasonably accurate.

Question 12

Internal controls over the processing of purchase orders function, the receipt of raw materials function, and the storage of raw materials function in the inventory and warehousing cycle are normally tested by the auditor as a part of performing tests of controls and substantive tests of transactions in the acquisition and payment cycle and the payroll and personnel cycle.

Accepted Answer

A) True 
 B)False

Question 13

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

A) True 
 B)False

Question 14

Handling the receipt of ordered goods is a part of the ________ cycle.

Accepted Answer

A)  purchasing 
B)  acquisition and payment 
C)  inventory 
D)  inventory and warehousing 
A)  purchasing 
B)  acquisition and payment 
C)  inventory 
D)  inventory and warehousing

Question 15

When finished goods are completed, they are usually stored in the packing area.

Accepted Answer

A) True 
 B)False

Question 16

If an auditor were concerned with obtaining evidence about the appropriateness of the value of inventory, which of the following tests would be most appropriate?

Accepted Answer

A)  compilation tests 
B)  price tests 
C)  confirmation of inventory held by outside parties 
D)  physical examination of the inventory 
A)  compilation tests 
B)  price tests 
C)  confirmation of inventory held by outside parties 
D)  physical examination of the inventory

Question 17

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 18

The extent and timing of an auditor's physical examination of inventory is significantly influenced by the adequacy of the client's perpetual inventory records.

Accepted Answer

A) True 
 B)False

Question 19

________ accumulate costs by individual jobs as material is issued into production and labor costs are incurred.

Accepted Answer

A)  Just-in-time production systems 
B)  Job order cost systems 
C)  Process cost systems 
D)  Manufacturing systems 
A)  Just-in-time production systems 
B)  Job order cost systems 
C)  Process cost systems 
D)  Manufacturing systems

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 21: Audit of the Inventory and Warehousing Cycle

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

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

Auditor tests of physical controls over raw materials, work-in-process, and finished goods are performed by:

Inherent risk is typically assessed at a moderate level for inventory due to the nature of the asset.

Inventory is a complex area to audit for all but which of the following reasons?

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.

Which of the following controls would be appropriate regarding the release of materials from a stockroom?

The audit tests to verify that the client is using an inventory method which is generally accepted and to verify that physical counts were correctly summarized are performed during the audit of the:

A useful starting point for becoming familiar with the client's inventory is for the auditor to:

The auditor's objective during an observation of a client's physical inventory count is to:

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.

Handling the receipt of ordered goods is a part of the ________ cycle.

When finished goods are completed, they are usually stored in the packing area.

If an auditor were concerned with obtaining evidence about the appropriateness of the value of inventory, which of the following tests would be most appropriate?

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

The extent and timing of an auditor's physical examination of inventory is significantly influenced by the adequacy of the client's perpetual inventory records.

________ accumulate costs by individual jobs as material is issued into production and labor costs are incurred.

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

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

The CPA Profession

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Section 404 Audits of Internal Control and Control Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Plan and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

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 and Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls and 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 Balances

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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