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Audt.invtories&cogs Audt.invtories&cogs Document Transcript

  • Chapter 12 - Inventories and Cost of Goods Sold Chapter 12 Inventories and Cost of Goods SoldTrue / False Questions1. Observation of inventories is a generally accepted auditing standard.True False2. The receiving department should accept only goods for which there is an approvedpurchase order on hand.True False3. For good internal control over purchase transactions, purchases should be made fromapproved vendors by the department needing the goods.True False4. Auditors should not review the clients planning of the physical inventory.True False5. The proper cutoff of inventories is best achieved when the client uses prenumberedpurchase orders.True False6. The lower of cost or market test by the auditors is generally designed to assure thatinventories are not valued above their net realizable values.True False7. When the auditors cannot satisfy themselves as to the accuracy of ending inventory and amaterial misstatement may exist, they normally may still give an unqualified opinion on theclients income statement.True False 12-1
  • Chapter 12 - Inventories and Cost of Goods Sold8. To test the clients cutoff of inventories, the auditors will make a record of the serialnumber of the final receiving and shipping documents used prior to the taking of the physicalinventory.True False9. The use of a tagging system for inventory taking is designed to prevent double counting ofgoods.True False10. The examination of warehouse receipts is not sufficient verification of a material amountof goods stored in public warehouses.True FalseMultiple Choice Questions11. An auditor suspects that certain client employees are ordering merchandise for themselvesover the Internet without recording the purchase or receipt of the merchandise. When vendorsinvoices arrive, one of the employees approves the invoices for payment. After the invoicesare paid, the employee destroys the invoices and the related vouchers. In gathering evidenceregarding the fraud, the auditor most likely would select items for testing from the file of allA. Cash disbursements.B. Approved vouchers.C. Receiving reports.D. Vendors invoices.12. Which of the following is not true relating to the auditors observation of the clientsphysical inventory?A. The auditors should evaluate the clients planning of the physical inventory.B. The auditors should make certain that consigned items from suppliers are included inphysical inventory totals.C. The auditors should evaluate the adequacy of the clients counting procedures.D. The auditors should take test counts of the clients inventory. 12-2
  • Chapter 12 - Inventories and Cost of Goods Sold13. A receiving department compares inventory items received with copies of purchaseorders. The purchase orders list the name of the vendor and do not list the quantities of thematerial ordered. Using the purchase orders, the receiving department is most likely to detect: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.14. To measure how effectively a client employs its assets, an auditor calculates inventoryturnover by dividing the average inventory into:A. Net sales.B. Cost of good sold.C. Operating income.D. Gross sales.15. Which of the following audit procedures most likely would provide assurance that amanufacturing entitys inventory valuation is proper?A. Testing the entitys computation of standard overhead rates.B. Obtaining confirmation of inventories pledged under loan agreements.C. Reviewing a cutoff procedure for inventories.D. Tracing test counts to the entitys inventory listing.16. A client uses a periodic inventory system. Would one expect a credit to which of thefollowing accounts at the point of sale?A. Option AB. Option BC. Option CD. Option D 12-3
  • Chapter 12 - Inventories and Cost of Goods Sold17. A client uses a perpetual inventory system. Would one expect a credit to which of thefollowing accounts at the point of sale?A. Option AB. Option BC. Option CD. Option D18. Which of the following would an auditor most likely question included in calculation ofthe overhead rate for a company that manufactures a product?A. Factory supervisor salary.B. Indirect materials.C. Miscellaneous expense.D. Sales expense.19. A "bill and hold" scheme is most likely to include:A. Shipment of items to a customer beyond what the customer has ordered.B. Recording as sales items that the company retains as of year-end.C. Billing of items that are held by customers for future revenue production purposes.D. Selling items at substantial discounts near year-end.20. Which of the following is an auditor least likely to consider a departure from generallyaccepted accounting principles?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 ordersdid exist at year-end. 12-4
  • Chapter 12 - Inventories and Cost of Goods Sold21. Which of the following is least likely to be accurate statement concerning characteristicsof an audit?A. An analysis of inventory turnover addresses whether the proper method of determininginventory costs--as contrasted to market values--is being applied.B. Characteristics of the double entry bookkeeping system make it possible to test foroverstated sales when tests of accounts receivable are being performed.C. The direction of tests for overstatement errors is generally directed from the recorded entryto source documents.D. Use of a perpetual rather than a periodic inventory system is likely to affect the nature ofcutoff errors made at year-end.22. Which of the following is not a reason for the special significance attached by the auditorsto the verification of inventories?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.23. Which of the following is true about the auditors observation of the clients physicalinventory?A. The count must be made at year-end.B. The auditors should supervise the clients personnel.C. The auditors observation addresses the existence assertion.D. The auditors should justify any omission of the observation in the audit report.24. In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditorwould be most interested in examining the:A. Purchases journal.B. Purchase requisitions.C. Purchase orders.D. Vendors invoices. 12-5
  • Chapter 12 - Inventories and Cost of Goods Sold25. In verifying credits to perpetual inventory records of a non-manufacturing firm, theauditor would be most interested in examining the:A. Shipping documents.B. Receiving reports.C. Purchase orders.D. Vendors invoices.26. The clients physical count of inventories is lower than the inventory quantities in theperpetual records. This could be the result of a failure to record:A. Purchases.B. Purchase discounts.C. Sales.D. Sales discounts.27. An auditor has accounted for a sequence of inventory tags and is now going to traceinformation on a representative number of tags to the inventory summary sheets. Whichassertion does this procedure relate to most directly?A. Completeness.B. Existence.C. Legality.D. Valuation.28. The use of a "blind" purchase order is designed to prevent errors by the:A. Purchase department.B. Receiving department.C. Stores department.D. Accounting department.29. An auditor performs a test to determine whether all merchandise for which the client wasbilled was received. The population for this test consists of all:A. Merchandise received.B. Vendors invoices.C. Canceled checks.D. Receiving reports. 12-6
  • Chapter 12 - Inventories and Cost of Goods Sold30. To assure that all purchases are authorized before payment is made, accountingdepartment personnel should match the vendors invoice to:A. The purchase requisition.B. The receiving report.C. The purchase order.D. The voucher.31. Which of the following is true about the auditors observation of the clients physicalinventory?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 clients counting procedures.D. The auditors should supervise the clients personnel.32. Which of the following is not a procedure that typically is used by the auditors in theirexamination of a clients goods held in the custody of a public warehouse?A. Confirmation.B. Obtaining reports on internal control at the warehouse.C. Observation.D. Corresponding with the state agency regarding the authenticity of the public warehouse.33. Which of the following best describes the reason that the auditors record their inventorytest counts in the working papers?A. To document every test count.B. For subsequent comparison with the completed inventory listing.C. To document compliance with generally accepted accounting principles.D. For use in subsequent audits. 12-7
  • Chapter 12 - Inventories and Cost of Goods Sold34. Which of the following best describes the auditors response to a clients use of statisticalsampling techniques to estimate the inventory?A. The auditors should satisfy themselves as to the statistical validity of the technique, and thereasonableness of the allowance for sampling risk and sampling error used.B. The auditors should qualify their opinion, because the client must perform a completecount of the inventory.C. The auditors should increase the extent of their test counts to compensate for the use of astatistical technique.D. The auditors should withdraw from the engagement.35. Which of the following best describes the reason for the auditors review of the clientscost accounting system?A. To obtain evidence regarding the quantities of good described as work-in-process.B. To obtain evidence about the valuation of work-in-process, finished goods, and cost ofgoods sold.C. To obtain evidence about the profit margin on specific jobs.D. To obtain evidence about compliance with Cost Accounting Standards.36. Effective internal control for purchases generally can be achieved in a well-plannedorganizational structure with a separate purchasing department that has:A. The ability to prepare payment vouchers based on the information on a vendors 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.37. Purchase cutoff procedures should be designed to test that merchandise is included in theinventory of the client company, if the company:A. Has paid for the merchandise.B. Has physical possession of the merchandise.C. Holds legal title to the merchandise.D. Holds the shipping documents for the merchandise issued in the companys name. 12-8
  • Chapter 12 - Inventories and Cost of Goods Sold38. Which of the following is an internal control weakness for a company whose inventory ofsupplies consists of a large number of individual items?A. Supplies of relatively little value are expensed when purchased.B. The cycle basis is used for physical counts.C. The storekeeper is responsible for maintenance of perpetual inventory records.D. Perpetual inventory records are maintained only for items of significant value.39. The auditors will usually trace the details of the test counts made during the observation ofthe physical inventory taking to a final inventory schedule. This audit procedure is undertakento provide evidence that items physically present and observed by the auditors at the time ofthe physical inventory count are: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.40. An internal control questionnaire indicates that an approved receiving report is required toaccompany every check request for payment of merchandise. Which of the followingprocedures provides the greatest assurance that this control is operating effectively?A. Select and examine receiving reports and ascertain that the related canceled checks aredated no earlier than the receiving reports.B. Select and examine receiving reports and ascertain that the related canceled checks aredated no later than the receiving reports.C. Select and examine canceled checks and ascertain that the related receiving reports aredated no earlier than the checks.D. Select and examine canceled checks and ascertain that the related receiving reports aredated no later than the checks.41. A clients physical count of inventories was higher than the inventory quantities per theperpetual records. This situation could be the result of the failure to record:A. Sales.B. Sales discounts.C. Purchases.D. Purchase returns. 12-9
  • Chapter 12 - Inventories and Cost of Goods Sold42. Which one of the following procedures would not be appropriate for the auditors indischarging their responsibilities concerning the clients physical inventories?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 dollaramount of the inventory.43. To best ascertain that a company has properly included merchandise that it owns in itsending inventory, the auditors should review and test the: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.44. Which of the following is not one of the independent auditors objectives regarding theexamination of inventories?A. Verifying that inventory counted is owned by the client.B. Verifying that the client has used proper inventory pricing.C. Ascertaining the physical quantities of inventory on hand.D. Verifying that all inventory owned by the client is on hand at the time of the count.45. Purchase cutoff procedures should be designed to test whether all inventory:A. Owned by the company was recorded.B. On the year end balance sheet was carried at lower of cost or market.C. On the year end balance sheet was paid for by the company.D. Owned by the company is in the possession of the company. 12-10
  • Chapter 12 - Inventories and Cost of Goods Sold46. Which of the following is an effective control that encourages receiving departmentpersonnel to count and inspect all merchandise received?A. Quantities ordered are excluded from the receiving department copy of the purchase order.B. Vouchers are prepared by accounts payable department personnel only after they matchitem counts on the receiving report with the purchase order.C. Receiving department personnel are expected to match and reconcile the receiving reportwith the purchase order.D. Internal auditors periodically examine, on a surprise basis, the receiving department copiesof receiving reports.47. The accuracy of perpetual inventory records may be established, in part, by comparingperpetual inventory records with:A. Purchase requisitions.B. Receiving reports.C. Purchase orders.D. Vendor payments.48. An inventory turnover analysis is useful to the auditor because it may detect:A. Inadequacies in inventory pricing.B. Methods of avoiding cyclical holding cost.C. The optimum automatic reorder points.D. The existence of obsolete merchandise.49. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to thephysical inventory listing to obtain evidence that all items:A. Included in the listing have been counted.B. Represented by inventory tags are included in the listing.C. Included in the listing are represented by inventory tags.D. Represented by inventory tags are bona fide. 12-11
  • Chapter 12 - Inventories and Cost of Goods Sold50. The most reliable procedure for an auditor to use to test the existence of a clientsinventory at an outside location would be toA. Observe physical counts of the inventory items.B. Trace the total on the inventory listing to the general ledger inventory account.C. Obtain a confirmation from the client indicating inventory ownership.D. Analytically compare the current-year inventory balance to the prior-year balance.51. Tracing copies of computer-prepared sales invoices to copies of the correspondingcomputer-prepared shipping documents provides evidence thatA. Shipments to customers were properly billed.B. Entries in the accounts receivable subsidiary ledger were for sales actually shipped.C. Sales billed to customers were actually shipped.D. No duplicate shipments to customers were made.52. In auditing a manufacturing entity, which of the following procedures would an auditorleast likely perform to determine whether slow-moving, defective, and obsolete itemsincluded in inventory are properly identified?A. Test the computation of standard overhead rates.B. Tour the manufacturing plant or production facility.C. Compare inventory balances to anticipated sales volume.D. Review inventory experience and trends.Essay Questions53. In auditing a clients inventory, the auditors must be concerned with the detection of goodsthat are both damaged and obsolete.a. Why are the auditors concerned with detecting damaged and obsolete goods?b. How do the auditors test for damaged goods in the clients inventory?c. How do the auditors test for obsolete goods in the clients inventory? 12-12
  • Chapter 12 - Inventories and Cost of Goods Sold54. Observation of a clients inventory is a generally accepted auditing procedure that shouldbe performed whenever it is possible.a. What part should the auditors play in planning the physical inventory?b. Describe the procedures performed by the auditors during their observation of a clientsphysical inventory.c. Why do the auditors document their inventory test counts in their working papers? 12-13
  • Chapter 12 - Inventories and Cost of Goods SoldChapter 12 Inventories and Cost of Goods Sold Answer KeyTrue / False Questions1. Observation of inventories is a generally accepted auditing standard.FALSEDifficulty: Easy2. The receiving department should accept only goods for which there is an approvedpurchase order on hand.TRUEDifficulty: Medium3. For good internal control over purchase transactions, purchases should be made fromapproved vendors by the department needing the goods.FALSEDifficulty: Medium4. Auditors should not review the clients planning of the physical inventory.FALSEDifficulty: Medium5. The proper cutoff of inventories is best achieved when the client uses prenumberedpurchase orders.FALSEDifficulty: Medium 12-14
  • Chapter 12 - Inventories and Cost of Goods Sold6. The lower of cost or market test by the auditors is generally designed to assure thatinventories are not valued above their net realizable values.TRUEDifficulty: Easy7. When the auditors cannot satisfy themselves as to the accuracy of ending inventory and amaterial misstatement may exist, they normally may still give an unqualified opinion on theclients income statement.FALSEDifficulty: Medium8. To test the clients cutoff of inventories, the auditors will make a record of the serialnumber of the final receiving and shipping documents used prior to the taking of the physicalinventory.TRUEDifficulty: Medium9. The use of a tagging system for inventory taking is designed to prevent double counting ofgoods.TRUEDifficulty: Easy10. The examination of warehouse receipts is not sufficient verification of a material amountof goods stored in public warehouses.TRUEDifficulty: MediumMultiple Choice Questions 12-15
  • Chapter 12 - Inventories and Cost of Goods Sold11. An auditor suspects that certain client employees are ordering merchandise for themselvesover the Internet without recording the purchase or receipt of the merchandise. When vendorsinvoices arrive, one of the employees approves the invoices for payment. After the invoicesare paid, the employee destroys the invoices and the related vouchers. In gathering evidenceregarding the fraud, the auditor most likely would select items for testing from the file of allA. Cash disbursements.B. Approved vouchers.C. Receiving reports.D. Vendors invoices.Difficulty: MediumSource: AICPA12. Which of the following is not true relating to the auditors observation of the clientsphysical inventory?A. The auditors should evaluate the clients planning of the physical inventory.B. The auditors should make certain that consigned items from suppliers are included inphysical inventory totals.C. The auditors should evaluate the adequacy of the clients counting procedures.D. The auditors should take test counts of the clients inventory.Difficulty: Easy13. A receiving department compares inventory items received with copies of purchaseorders. The purchase orders list the name of the vendor and do not list the quantities of thematerial ordered. Using the purchase orders, the receiving department is most likely to detect: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.Difficulty: Hard 12-16
  • Chapter 12 - Inventories and Cost of Goods Sold14. To measure how effectively a client employs its assets, an auditor calculates inventoryturnover by dividing the average inventory into:A. Net sales.B. Cost of good sold.C. Operating income.D. Gross sales.Difficulty: Medium15. Which of the following audit procedures most likely would provide assurance that amanufacturing entitys inventory valuation is proper?A. Testing the entitys computation of standard overhead rates.B. Obtaining confirmation of inventories pledged under loan agreements.C. Reviewing a cutoff procedure for inventories.D. Tracing test counts to the entitys inventory listing.Difficulty: Hard16. A client uses a periodic inventory system. Would one expect a credit to which of thefollowing accounts at the point of sale?A. Option AB. Option BC. Option CD. Option DDifficulty: Easy 12-17
  • Chapter 12 - Inventories and Cost of Goods Sold17. A client uses a perpetual inventory system. Would one expect a credit to which of thefollowing accounts at the point of sale?A. Option AB. Option BC. Option CD. Option DDifficulty: Easy18. Which of the following would an auditor most likely question included in calculation ofthe overhead rate for a company that manufactures a product?A. Factory supervisor salary.B. Indirect materials.C. Miscellaneous expense.D. Sales expense.Difficulty: Easy19. A "bill and hold" scheme is most likely to include:A. Shipment of items to a customer beyond what the customer has ordered.B. Recording as sales items that the company retains as of year-end.C. Billing of items that are held by customers for future revenue production purposes.D. Selling items at substantial discounts near year-end.Difficulty: Hard 12-18
  • Chapter 12 - Inventories and Cost of Goods Sold20. Which of the following is an auditor least likely to consider a departure from generallyaccepted accounting principles?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 ordersdid exist at year-end.Difficulty: Medium21. Which of the following is least likely to be accurate statement concerning characteristicsof an audit?A. An analysis of inventory turnover addresses whether the proper method of determininginventory costs--as contrasted to market values--is being applied.B. Characteristics of the double entry bookkeeping system make it possible to test foroverstated sales when tests of accounts receivable are being performed.C. The direction of tests for overstatement errors is generally directed from the recorded entryto source documents.D. Use of a perpetual rather than a periodic inventory system is likely to affect the nature ofcutoff errors made at year-end.Difficulty: Hard22. Which of the following is not a reason for the special significance attached by the auditorsto the verification of inventories?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.Difficulty: Hard 12-19
  • Chapter 12 - Inventories and Cost of Goods Sold23. Which of the following is true about the auditors observation of the clients physicalinventory?A. The count must be made at year-end.B. The auditors should supervise the clients personnel.C. The auditors observation addresses the existence assertion.D. The auditors should justify any omission of the observation in the audit report.Difficulty: Medium24. In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditorwould be most interested in examining the:A. Purchases journal.B. Purchase requisitions.C. Purchase orders.D. Vendors invoices.Difficulty: Hard25. In verifying credits to perpetual inventory records of a non-manufacturing firm, theauditor would be most interested in examining the:A. Shipping documents.B. Receiving reports.C. Purchase orders.D. Vendors invoices.Difficulty: Hard26. The clients physical count of inventories is lower than the inventory quantities in theperpetual records. This could be the result of a failure to record:A. Purchases.B. Purchase discounts.C. Sales.D. Sales discounts.Difficulty: Medium 12-20
  • Chapter 12 - Inventories and Cost of Goods Sold27. An auditor has accounted for a sequence of inventory tags and is now going to traceinformation on a representative number of tags to the inventory summary sheets. Whichassertion does this procedure relate to most directly?A. Completeness.B. Existence.C. Legality.D. Valuation.Difficulty: Medium28. The use of a "blind" purchase order is designed to prevent errors by the:A. Purchase department.B. Receiving department.C. Stores department.D. Accounting department.Difficulty: Medium29. An auditor performs a test to determine whether all merchandise for which the client wasbilled was received. The population for this test consists of all:A. Merchandise received.B. Vendors invoices.C. Canceled checks.D. Receiving reports.Difficulty: MediumSource: AICPA30. To assure that all purchases are authorized before payment is made, accountingdepartment personnel should match the vendors invoice to:A. The purchase requisition.B. The receiving report.C. The purchase order.D. The voucher.Difficulty: Medium 12-21
  • Chapter 12 - Inventories and Cost of Goods Sold31. Which of the following is true about the auditors observation of the clients physicalinventory?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 clients counting procedures.D. The auditors should supervise the clients personnel.Difficulty: Medium32. Which of the following is not a procedure that typically is used by the auditors in theirexamination of a clients goods held in the custody of a public warehouse?A. Confirmation.B. Obtaining reports on internal control at the warehouse.C. Observation.D. Corresponding with the state agency regarding the authenticity of the public warehouse.Difficulty: Medium33. Which of the following best describes the reason that the auditors record their inventorytest counts in the working papers?A. To document every test count.B. For subsequent comparison with the completed inventory listing.C. To document compliance with generally accepted accounting principles.D. For use in subsequent audits.Difficulty: Medium 12-22
  • Chapter 12 - Inventories and Cost of Goods Sold34. Which of the following best describes the auditors response to a clients use of statisticalsampling techniques to estimate the inventory?A. The auditors should satisfy themselves as to the statistical validity of the technique, and thereasonableness of the allowance for sampling risk and sampling error used.B. The auditors should qualify their opinion, because the client must perform a completecount of the inventory.C. The auditors should increase the extent of their test counts to compensate for the use of astatistical technique.D. The auditors should withdraw from the engagement.Difficulty: Medium35. Which of the following best describes the reason for the auditors review of the clientscost accounting system?A. To obtain evidence regarding the quantities of good described as work-in-process.B. To obtain evidence about the valuation of work-in-process, finished goods, and cost ofgoods sold.C. To obtain evidence about the profit margin on specific jobs.D. To obtain evidence about compliance with Cost Accounting Standards.Difficulty: Medium36. Effective internal control for purchases generally can be achieved in a well-plannedorganizational structure with a separate purchasing department that has:A. The ability to prepare payment vouchers based on the information on a vendors 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.Difficulty: HardSource: AICPA 12-23
  • Chapter 12 - Inventories and Cost of Goods Sold37. Purchase cutoff procedures should be designed to test that merchandise is included in theinventory of the client company, if the company:A. Has paid for the merchandise.B. Has physical possession of the merchandise.C. Holds legal title to the merchandise.D. Holds the shipping documents for the merchandise issued in the companys name.Difficulty: MediumSource: AICPA38. Which of the following is an internal control weakness for a company whose inventory ofsupplies consists of a large number of individual items?A. Supplies of relatively little value are expensed when purchased.B. The cycle basis is used for physical counts.C. The storekeeper is responsible for maintenance of perpetual inventory records.D. Perpetual inventory records are maintained only for items of significant value.Difficulty: HardSource: AICPA39. The auditors will usually trace the details of the test counts made during the observation ofthe physical inventory taking to a final inventory schedule. This audit procedure is undertakento provide evidence that items physically present and observed by the auditors at the time ofthe physical inventory count are: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.Difficulty: MediumSource: AICPA 12-24
  • Chapter 12 - Inventories and Cost of Goods Sold40. An internal control questionnaire indicates that an approved receiving report is required toaccompany every check request for payment of merchandise. Which of the followingprocedures provides the greatest assurance that this control is operating effectively?A. Select and examine receiving reports and ascertain that the related canceled checks aredated no earlier than the receiving reports.B. Select and examine receiving reports and ascertain that the related canceled checks aredated no later than the receiving reports.C. Select and examine canceled checks and ascertain that the related receiving reports aredated no earlier than the checks.D. Select and examine canceled checks and ascertain that the related receiving reports aredated no later than the checks.Difficulty: HardSource: AICPA41. A clients physical count of inventories was higher than the inventory quantities per theperpetual records. This situation could be the result of the failure to record:A. Sales.B. Sales discounts.C. Purchases.D. Purchase returns.Difficulty: MediumSource: AICPA42. Which one of the following procedures would not be appropriate for the auditors indischarging their responsibilities concerning the clients physical inventories?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 dollaramount of the inventory.Difficulty: MediumSource: AICPA 12-25
  • Chapter 12 - Inventories and Cost of Goods Sold43. To best ascertain that a company has properly included merchandise that it owns in itsending inventory, the auditors should review and test the: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.Difficulty: MediumSource: AICPA44. Which of the following is not one of the independent auditors objectives regarding theexamination of inventories?A. Verifying that inventory counted is owned by the client.B. Verifying that the client has used proper inventory pricing.C. Ascertaining the physical quantities of inventory on hand.D. Verifying that all inventory owned by the client is on hand at the time of the count.Difficulty: MediumSource: AICPA45. Purchase cutoff procedures should be designed to test whether all inventory:A. Owned by the company was recorded.B. On the year end balance sheet was carried at lower of cost or market.C. On the year end balance sheet was paid for by the company.D. Owned by the company is in the possession of the company.Difficulty: MediumSource: AICPA 12-26
  • Chapter 12 - Inventories and Cost of Goods Sold46. Which of the following is an effective control that encourages receiving departmentpersonnel to count and inspect all merchandise received?A. Quantities ordered are excluded from the receiving department copy of the purchase order.B. Vouchers are prepared by accounts payable department personnel only after they matchitem counts on the receiving report with the purchase order.C. Receiving department personnel are expected to match and reconcile the receiving reportwith the purchase order.D. Internal auditors periodically examine, on a surprise basis, the receiving department copiesof receiving reports.Difficulty: EasySource: AICPA47. The accuracy of perpetual inventory records may be established, in part, by comparingperpetual inventory records with:A. Purchase requisitions.B. Receiving reports.C. Purchase orders.D. Vendor payments.Difficulty: MediumSource: AICPA48. An inventory turnover analysis is useful to the auditor because it may detect:A. Inadequacies in inventory pricing.B. Methods of avoiding cyclical holding cost.C. The optimum automatic reorder points.D. The existence of obsolete merchandise.Difficulty: MediumSource: AICPA 12-27
  • Chapter 12 - Inventories and Cost of Goods Sold49. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to thephysical inventory listing to obtain evidence that all items:A. Included in the listing have been counted.B. Represented by inventory tags are included in the listing.C. Included in the listing are represented by inventory tags.D. Represented by inventory tags are bona fide.Difficulty: MediumSource: AICPA50. The most reliable procedure for an auditor to use to test the existence of a clientsinventory at an outside location would be toA. Observe physical counts of the inventory items.B. Trace the total on the inventory listing to the general ledger inventory account.C. Obtain a confirmation from the client indicating inventory ownership.D. Analytically compare the current-year inventory balance to the prior-year balance.Difficulty: MediumSource: AICPA51. Tracing copies of computer-prepared sales invoices to copies of the correspondingcomputer-prepared shipping documents provides evidence thatA. Shipments to customers were properly billed.B. Entries in the accounts receivable subsidiary ledger were for sales actually shipped.C. Sales billed to customers were actually shipped.D. No duplicate shipments to customers were made.Difficulty: MediumSource: AICPA 12-28
  • Chapter 12 - Inventories and Cost of Goods Sold52. In auditing a manufacturing entity, which of the following procedures would an auditorleast likely perform to determine whether slow-moving, defective, and obsolete itemsincluded in inventory are properly identified?A. Test the computation of standard overhead rates.B. Tour the manufacturing plant or production facility.C. Compare inventory balances to anticipated sales volume.D. Review inventory experience and trends.Difficulty: HardSource: AICPAEssay Questions53. In auditing a clients inventory, the auditors must be concerned with the detection of goodsthat are both damaged and obsolete.a. Why are the auditors concerned with detecting damaged and obsolete goods?b. How do the auditors test for damaged goods in the clients inventory?c. How do the auditors test for obsolete goods in the clients inventory?a. Auditors are concerned about detecting damaged and obsolete inventory because therecorded cost of these goods may be significantly greater than their net realizable value.b. Auditors test for damaged goods by inquiry of client personnel and observation during theclients physical inventory.c. Tests for obsolescence include:1. Review of perpetual inventory records,2. Analytical procedures, such as calculation of ratios, such as inventory turnover, and3. Inquiry of client personnel.Difficulty: Medium 12-29
  • Chapter 12 - Inventories and Cost of Goods Sold54. Observation of a clients inventory is a generally accepted auditing procedure that shouldbe performed whenever it is possible.a. What part should the auditors play in planning the physical inventory?b. Describe the procedures performed by the auditors during their observation of a clientsphysical inventory.c. Why do the auditors document their inventory test counts in their working papers?a. The auditors should review the clients planning of the physical inventory and makesuggestions for improvement.b. During the inventory observation the auditors:1. Evaluate whether the inventory procedures are followed that assure that all items arecounted and nothing is counted twice.2. Be alert for goods that appear to be damaged or obsolete.3. Obtain information to test the clients cutoff of purchases and sales.4. Make test counts and record them in their working papers.5. Make inquiries regarding goods on consignment.6. Obtain tag control information and record the information in the working papers.c. The auditors document their test counts in the working papers to later test the accuracy ofthe final inventory listing.Difficulty: Medium 12-30