Chapter 12

Which of the following should be included as a part of inventory costs of a manufacturing company? Direct Labor: Y/N Raw Materials: Y/N Factory Overhead: Y/N

Yes Yes Yes

The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the: a. Cost Accounting Standards Board. b. Financial Accounting Standards Board. c. Public Company Accounting Oversight Board. d. Securities and Exchange Commission.

a. Cost Accounting Standards Board.

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold? a. Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods. b. Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold. c. Establish that the client includes only inventory on hand at year-end in inventory totals. d. Establish the completeness of inventories.

c. Establish that the client includes only inventory on hand at year-end in inventory totals.

During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to: a. Valuation. b. Completeness. c. Rights. d. Existence.

b. Completeness.

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the: a. Bill of lading. b. Job time shipping. c. Production order. d. Production schedule.

a. Bill of lading.

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: a. Existence. b. Completeness. c. Clarity. d. Presentation.

a. Existence.

From which of the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories? a. Observation of physical inventory counts. b. Written inventory representations from management. c. Confirmation of inventories in a public warehouse. d. Auditor's recomputation of inventory extensions.

a. Observation of physical inventory counts.

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when: a. internal control is weak. b. accurate perpetual inventory records are maintained. c. inventory is slow-moving. d. significant amounts of inventory are held on a consignment basis.

b. accurate perpetual inventory records are maintained.

The receiving department is least likely to be responsible for the: a. Determination of quantities of goods received. b. Detection of damaged or defective merchandise. c. Preparation of a shipping document. d. Transmittal of goods received to the store's department.

c. Preparation of a shipping document.

McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examination, Mullins: a. Can issue an unqualified opinion without disclosing that she did not observe year-end inventories. b. Should comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion. c. Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole. d. Should, if the inventories are material, qualify her opinion.

a. Can issue an unqualified opinion without disclosing that she did not observe year-end inventories.

Which of the following is an effective control that encourages receiving department personnel 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 match item counts on the receiving report with the purchase order. c. Receiving department personnel are expected to match and reconcile the receiving report with the purchase order. d. Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.

a. Quantities ordered are excluded from the receiving department copy of the purchase order.

The auditor's analytical procedures will be facilitated if the client: a. Uses a standard cost system that produces variance reports. b. Segregates obsolete inventory before the physical inventory count. c. Corrects material weaknesses in internal control before the beginning of the audit. d. Reduces inventory balances to the lower of cost or market.

a. Uses a standard cost system that produces variance reports.

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably: a. Want the client to schedule the physical inventory count at the end of the year. b. Insist that the client perform physical counts of inventory items several times during the year. c. Increase the extent of tests for unrecorded liabilities at the end of the year. d. Have to disclaim an opinion on the income statement for that year.

a. Want the client to schedule the physical inventory count at the end of the year.

Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and: a. Well-kept records of perpetual inventory are maintained. b. Inventory is slow-moving. c. Computer error reports are generated for missing prenumbered inventory tickets. d. Obsolete inventory items are segregated and excluded.

a. Well-kept records of perpetual inventory are maintained.

To strengthen the system of internal control over the purchase of merchandise, a company's receiving department should: a. accept merchandise only if a purchase order or approval granted by the purchasing department is on hand. b. accept and count all merchandise received from the usual company vendors. c. rely on shipping documents for the preparation of receiving reports. d. be responsible for the physical handling of merchandise but not the preparation of receiving reports.

a. accept merchandise only if a purchase order or approval granted by the purchasing department is on hand.

Purchase cutoff procedures should be designed to test whether purchases recorded near year-end: a. is owned by the company. 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. is in the possession of the company.

a. is owned by the company.

A client's physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record: a. sales. b. sales returns. c. purchases. d. purchase discounts.

a. sales.

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? a. Compare the physical quantities of slow-moving items with corresponding quantities in the prior year. b. Observe merchandise and raw materials during the client's physical inventory taking. c. Review the management's inventory representations letter for accuracy. d. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.

b. Observe merchandise and raw materials during the client's physical inventory taking.

The primary objective of a CPA's observation of a client's physical inventory count is to: 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 in order to obtain assurance that inventory quantities are reasonably accurate.

b. Obtain direct knowledge that the inventory exists and has been properly counted.

An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that: a. the final inventory is valued at cost. b. all inventory represented by an inventory tag is listed on the inventory sheets. c. all inventory represented by an inventory tag is bona fide. d. inventory sheets do not include untagged inventory items.

b. all inventory represented by an inventory tag is listed on the inventory sheets.

When an auditor tests a client's cost accounting system, the auditors' tests are primarily designed to determine that: a. quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand. b. physical inventories are in substantial agreement with book inventories. c. the system is in accordance with generally accepted accounting principles and is functioning as planned. d. costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

d. costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

An inventory turnover analysis is useful to the auditor because it may detect: a. inadequacies in inventory disclosures. b. methods of avoiding cyclical holding costs. c. the optimum automatic reorder points. d. the existence of obsolete merchandise.

d. the existence of obsolete merchandise.