Question 1

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.

Accepted Answer

The answer of The auditor determines that each of the...

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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?

Accepted Answer

A)  The auditor should consider the company a specialist, and follow the procedures outlined for addressing an auditor's specialist. 
B)  The auditor should not consider the counts by the company, by themselves, sufficient appropriate audit evidence. 
C)  The auditor must observe all inventory counts taken by the company. 
D)  The auditor should observe a letter of representations form the company.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A)  The determination of inventory valuation directly affects net income. 
B)  The existence of inventories is inherently difficult to substantiate. 
C)  Special valuation problems often exist for inventories. 
D)  Inventories are often the largest current asset of an enterprise.

Question 6

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:

Accepted Answer

A)  Deliveries for which no purchase order was issued. 
B)  Unapproved sales orders. 
C)  Partial deliveries. 
D)  Deliveries of a greater quantity of items than those ordered.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A)  The count must be made at year-end. 
B)  The auditors should supervise the client's personnel. 
C)  The auditors' observation addresses the existence assertion. 
D)  The auditors should justify any omission of the observation in the audit report.

Question 11

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

Accepted Answer

A)  The auditors should plan the physical inventory. 
B)  The auditors should segregate damaged and obsolete goods. 
C)  The auditors should evaluate the adequacy of the client's counting procedures. 
D)  The auditors should supervise the client's personnel.

Question 12

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:

Accepted Answer

A)  Owned by the client. 
B)  Not obsolete. 
C)  Physically present at the time of the preparation of the final inventory schedule. 
D)  Included in the final inventory schedule.

Question 13

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

Accepted Answer

A)  Inadequacies in inventory pricing. 
B)  Methods of avoiding cyclical holding cost. 
C)  The optimum automatic reorder points. 
D)  The existence of obsolete merchandise.

Question 14

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

Accepted Answer

A)  The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used. 
B)  The auditors should qualify their opinion, because the client must perform a complete count of the inventory. 
C)  The auditors should increase the extent of their test counts to compensate for the use of a statistical technique. 
D)  The auditors should withdraw from the engagement.

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A)  Valuing inventory at cost. 
B)  Including in inventory items that are consigned out to vendors, but not yet sold. 
C)  Using standard cost as the measure of inventory cost. 
D)  Including in inventory items shipped subsequent to year-end, but for which valid orders did exist at year-end.

Question 17

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

Accepted Answer

A)  The ability to prepare payment vouchers based on the information on a vendor's invoice. 
B)  The responsibility of reviewing purchase orders issued by user departments. 
C)  The authority to make purchases of requisitioned materials and services. 
D)  A direct reporting responsibility to controller of the organization.

Question 18

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

Accepted Answer

A)  Shipping documents. 
B)  Receiving reports. 
C)  Purchase orders. 
D)  Vendors' invoices.

Question 19

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:

Accepted Answer

A)  Cash disbursements. 
B)  Approved vouchers. 
C)  Receiving reports. 
D)  Vendors' invoices.

Exam 12: Inventories and Cost of Goods Sold

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?

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: