Question 1

A)State seven specific balance-related audit objectives for inventory pricing and compilation and,for each objective,describe one common test of details of balances related to that objective.B)Explain why the audit of work-in-process and finished goods inventory is generally more complex than the audit of purchased inventory.

Accepted Answer

A)Balance-related audit objectives for inventory pricing and compilation include:
1.Inventory on the inventory listing schedule agrees with the physical inventory counts,the extensions are correct,and the total is correctly added and agrees with the general ledger (allocation).Foot the inventory listing schedules.
2.Inventory items on the inventory listing schedule exist (existence).Trace inventory listed in the schedule to inventory tags and auditor's recorded counts for existence and description.
3.Existing inventory items are included on the inventory listing schedule (completeness).Account for unused tag numbers shown in the auditor's working papers to make sure no tags have been added.
4.Inventory items on the inventory listing schedule are accurate (accuracy).Trace inventory listed in the schedule to inventory tags and auditor's recorded counts for quantity and description.
5.Inventory items on the inventory listing schedule are properly classified (classification).Compare the classification into raw materials,work-in-process,and finished goods by comparing the descriptions on inventory tags and auditor's recorded test counts with the inventory listing schedule.
6.Inventory items on the inventory listing are stated at realizable value (valuation).Perform tests of lower-of-cost-or-market,selling price,and obsolescence.
7.The client has rights to inventory items on the inventory listing schedule (rights).Trace inventory tags identified as non-owned during the physical observation to the inventory listing schedule to make sure these have not been included.
B)The need to verify the cost of raw materials,direct labour,and manufacturing overhead in pricing work-in-process and finished goods has the effect of making the audit of work-in-process and finished goods inventory more complex than the audit of purchased inventory.

Question 2

Cost accounting controls are those related to the physical inventory and the consequent costs from the point at which

Accepted Answer

A)  materials are ordered for purchase until the finished product is sold.
B)  raw materials are requisitioned until the finished product is sent to storage.
C)  raw materials are requisitioned until the finished product is completely manufactured.
D)  the customer's order is received until the finished product is shipped. B

Question 3

The auditor's tests of the adequacy of the physical controls over raw materials,work-in-process,and finished goods are usually limited to

Accepted Answer

A)  observation and inquiry.
B)  inspection and observation.
C)  inspection and confirmation.
D)  inspection and inquiry. A

Question 4

A public accountant observes his client's physical inventory count on December 31.There are eight inventory-taking teams and a tag system is used.The public accountant's observation normally may be expected to result in detection of which of the following inventory errors?

Accepted Answer

A)  The inventory takers forgot to count all the items in one room of the warehouse.
B)  An error is made in the count of one inventory item.
C)  Some of the items included in the inventory had been received on consignment.
D)  The inventory omits items on consignment to wholesalers.

Question 5

When a physical count of inventory is permitted at an interim date,the auditor observes it at that time,and also tests the perpetual inventory 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.

Question 6

If the auditor is appointed after the year-end of the client,the auditor

Accepted Answer

A)  should qualify the audit opinion for the inventory balance and cost of sales.
B)  could attend a current perpetual inventory count and roll backward with the records.
C)  should do an inventory count as soon as he is appointed.
D)  will inquire with management about the inventory count performed at year-end.

Question 7

Which analytical procedures will help an auditor identify possible misstatements in compilation,unit costs,or extensions that affect inventory and cost of goods sold?

Accepted Answer

A)  comparing gross margin percentage with previous years
B)  comparing unit costs of inventory with previous years
C)  comparing inventory turnover with previous years
D)  comparing extended inventory value with previous years

Question 8

Master files,worksheets,and reports that accumulate material,labour,and overhead as the costs are incurred are

Accepted Answer

A)  accounting system controls.
B)  storeroom documents.
C)  finished goods inventory records.
D)  cost accounting records.

Question 9

A common inventory observation procedure is to be alert for items that are damaged,rust- or dust-covered,or located in inappropriate places.The balance-related audit objective achieved by this procedure is

Accepted Answer

A)  classification.
B)  cutoff.
C)  valuation.
D)  rights.

Question 10

The client has a perpetual inventory system,and takes an inventory count of 100 items every two weeks for comparison to the perpetual records.There are no plans to have a complete year-end physical count of inventory.How will the auditor conduct the audit of physical inventory?

Accepted Answer

A)  Select an attribute sample of items to count at the year end for comparison to the perpetual records.
B)  Select a dollar unit sample of items to count at the year end for comparison to the perpetual records.
C)  Use roll-forwards to carry forward the inventory records from the cyclical counts for an attribute sample of inventory items.
D)  Conduct test counts and compare the perpetual records with a cyclical count during the interim audit.

Question 11

Reconciling the open production cost reports to the work-in-process inventory control account is a procedure designed to test the control objective of

Accepted Answer

A)  completeness.
B)  accounting.
C)  validity.
D)  authorization.

Question 12

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

Accepted Answer

A)  obtain and review industry ratios.
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 13

What are the significant risks relating to the inventory cycle?

Accepted Answer

The answer of What are the significant risks relating to...

Question 14

The bias in recording inventory would be toward

Accepted Answer

A)  overstatement.
B)  understatement.
C)  increasing share price.
D)  income smoothing.

Question 15

To protect the inventory,Globus Corp wants to assign the custody of inventory to a specific responsible individual.Globus can accomplish this by

Accepted Answer

A)  having a designated employee to authorize movement of inventory.
B)  requiring employees to have photo id cards.
C)  having restricted access to the production facility.
D)  performing frequent inventory counts.

Question 16

When auditing merchandise inventory at year-end,the auditor performs a purchase cutoff test to obtain evidence that

Accepted Answer

A)  all goods purchased before year-end are received before the physical inventory count.
B)  no goods held on consignment for customers are included in the inventory balance.
C)  no goods observed during the physical count are pledged or sold.
D)  all goods owned at year-end are included in the current period inventory balance.

Question 17

State six specific balance-related audit objectives for physical inventory observation and,for each objective,describe one common test of details of balances related to that objective.

Accepted Answer

The answer of State six specific balance-related audit objectives for...

Question 18

Dishware Distribution Limited uses average costing to cost its inventory.It keeps a perpetual inventory file that is linked to its sales systems.It orders inventory in for specific customers as needed,and traditionally has a slow time just before its year-end.Accordingly,inventory at the year-end is about $2000,while materiality is about $30 000.How should the auditor approach the audit of physical inventory?

Accepted Answer

A)  Exclude testing of physical inventory from the audit program.
B)  Use attribute sampling to select a sample of items to count.
C)  Use dollar-unit sampling to select a sample of items to count.
D)  Count only those items that have a dollar value in excess of $100.

Question 19

XYZ Company uses standard costs for allocating costs to work-in-process and finished goods inventory.For the last few months,there have been high variances between total standard costs and actual costs.What is one of the likely reasons for this variance?

Accepted Answer

A)  The accounting department has been developing the costs.
B)  Production quantities are different than expected.
C)  There is an increase in inventory quantities on hand.
D)  The receiving department has been stockpiling raw materials.

Question 20

An auditor has determined that there is a high risk that her client has overvalued inventory.Which audit assertions would require additional testing?

Accepted Answer

A)  accuracy and existence
B)  allocation and accuracy
C)  accuracy and valuation
D)  valuation and classification

Exam 14: Audit of the Inventory and Distribution Cycle