Question 1

The auditor evaluates the internal transfer of assets and related costs during the

Accepted Answer

A)   acquisition and payments cycle.
B)   human resources and payroll cycle.
C)   sales and collection cycle.
D)   inventory and distribution cycle. D

Question 2

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. D

Question 3

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 4

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 5

Obtaining an adequate understanding of the client's business is important in physical observation of inventory because

Accepted Answer

A)   it is required by GAAP.
B)   it will help the auditor in assessing the risk of theft of inventory.
C)   inventory is normally a significant item.
D)   inventory varies significantly for different companies.

Question 6

Sample size in physical observation of inventory is

Accepted Answer

A)   determined using attributes sampling.
B)   determined using variables sampling.
C)   determined using dollar-unit sampling.
D)   difficult to specify because the emphasis is on observing the client's procedures.

Question 7

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 8

The costs used to value the physical inventory must be tested to determine whether the client has correctly followed an inventory method that is in accordance with an acceptable financial reporting framework and is consistent with previous years. The audit procedures used to verify these costs are referred to as inventory

Accepted Answer

A)   price tests.
B)   compilation tests.
C)   cost allocation tests.
D)   consistency tests.

Question 9

Which one of the following analytical procedures would be most helpful in alerting the auditor to the possibility of obsolete inventory?

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 current year manufacturing costs with previous years

Question 10

An inventory observation procedure that compares physical counts with the perpetual inventory master file is an attempt to satisfy the audit objective of

Accepted Answer

A)   existence.
B)   completeness.
C)   accuracy.
D)   classification.

Question 11

Controls that provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totalled, and included in the general ledger at the proper amount are known as

Accepted Answer

A)   standard cost records.
B)   pricing internal controls.
C)   compilation internal controls.
D)   count quantity internal controls.

Question 12

The auditor must verify whether the physical counts were correctly summarized, the inventory quantities and prices were correctly extended, and the extended inventory was correctly footed. These tests are called

Accepted Answer

A)   price tests.
B)   compilation tests.
C)   cost tests.
D)   mechanical tests.

Question 13

The auditor would like to test the existence and accuracy of the transfer of goods from the raw materials storeroom to the manufacturing assembly lines. Which of the following audit procedures should be used?

Accepted Answer

A)   Conduct a variance analysis of the costs associated with manufacturing, looking for gross profit fluctuations.
B)   Account for a sequence of raw material requisitions, examining details and looking for proper approvals.
C)   Look at overtime records to determine the amount and timing of overtime hours used in the manufacturing process.
D)   Inquire with the inventory custodian regarding procedures used to transfer raw materials to the production line.

Question 14

XYZ Company uses standard costs for allocating costs to work-in-process and finished goods inventory. What internal control is required with respect to these costs to ensure proper valuation of inventory?

Accepted Answer

A)   Procedures must be designed to keep the standards updated for changes in production processes and costs.
B)   Computer software should be used to make sure that the standard costs are properly updated into the inventory item master file.
C)   Input edit routines should be used to help detect input data entry errors for the entry of the standard costs.
D)   Standard costs should be used to provide a value for inventory every month by calculating cost times quantity on hand.

Question 15

Discuss the methodology for designing tests of details of balances for inventory.

Accepted Answer

The answer of Discuss the methodology for designing tests of...

Question 16

CAS for audit procedures for inventory indicate that the auditor

Accepted Answer

A)   must count the inventory.
B)   must be present at the inventory count and must receive adequate documentation from the client regarding the effectiveness of inventory-taking.
C)   must be present at the inventory count and evaluate the methods followed in the determination of quantities and values.
D)   need not be present at the count but must review the methods followed in the determination of quantities and values.

Question 17

When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to

Accepted Answer

A)   fraud.
B)   audit risk.
C)   illegal acts.
D)   business risks.

Question 18

The auditor is determining which specific inventory items should be selected for pricing tests. The auditor has selected a representative sample, and those items that have a large dollar amount. In addition, the auditor should select those items that

Accepted Answer

A)   are prone to breakage or theft.
B)   have wide fluctuations in price.
C)   are stored in multiple locations.
D)   are likely to have been miscounted during the inventory count.

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

It is frequently possible to test the physical inventory prior to the balance sheet date when

Accepted Answer

A)   there are accurate perpetual inventory master files.
B)   year-end sales are small.
C)   the internal control system is no better at year-end than at an earlier point in time.
D)   client counts inventory at interim dates.

Exam 14: Audit of the Inventory and Distribution Cycle