Chapter 12 Audit Quiz

True or false: Auditors should not review the client's planning of the physical inventory

False

True or false: The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders

False

True or false: The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses

True

True or false: The lower of cost or market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values

True

True or false: The receiving department should accept only goods for which there is an approved purchase order on hand

True

A client uses a perpetual inventory system. Would one expect a credit to which of the following accounts at the point of sale? a) Both sales and inventory b) Sales, but not inventory c) Inventory, but not sales d) Neither sales nor inventory

a) Both sales and inventory

A client uses a periodic inventory system. Would one expect a credit to which of the following accounts at the point of sale? a) Both sales and inventory b) Sales, but not inventory c) Inventory, but not sales d) Neither sales nor inventory

b) Sales, but not inventory

Which of the following is not true relating to the auditors' observation of the client's physical inventory? a) The auditors should evaluate the client's planning of the physical inventory b) The auditors should make certain that consigned items from suppliers are included in physical inventory totals c) The auditors should evaluate the adequacy of the client's counting procedures d) The auditors should take test counts of the client's inventory

b) The auditors should make certain that consigned items from suppliers are included in physical inventory totals

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical 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

b) represented by inventory tags are included in the listing

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all: a) merchandise received b) vendor's invoices c) cancelled checks d) receiving reports

b) vendor's invoices

To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to: a) to the purchase requisition b) the receiving report c) the purchase order d) the voucher

c) the purchase order

Which of the following is not a procedure that typically is used by the auditors in their examination of a client's 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

d) Corresponding with the state agency regarding the authenticity of the public warehouse

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: 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

d) included in the final inventory schedule

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

d) the existence of obsolete merchandise

In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the: a) purchases journal b) purchase requisitions c) purchase orders d) vendors' invoices

d) vendors' invoices

True or false: The use of a tagging system for inventory taking is designed to prevent double counting of goods

True

True or false: 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

True

Which of the following is least likely to be accurate statement concerning characteristics of an audit? a) An analysis of inventory turnover addresses whether the proper method of determining inventory costs - as contrasted to market values - is being applied b) Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed c) The direction of tests for overstatement errors is generally directed from the recorded entry to source documents d) Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end

a) An analysis of inventory turnover addresses whether the proper method of determining inventory costs - as contrasted to market values - is being applied

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 inventory summary sheets. Which assertion does this procedure relate to most directly? a) Completeness b) Existence c) Legality d) Valuation

a) Completeness

The organization established by Congress to narrow the options in cost accounting that are available under GAAP 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 should be included as a part of inventory costs of a manufacturing company? a) Direct labor, raw materials, and factory overhead b) Direct labor, but not raw materials or factory overhead c) Raw materials, but not direct labor or factory overhead d) Not direct labor, raw materials, or factory overhead

a) Direct labor, raw materials, and factory overhead

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 purchasing order

Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper? a) Testing the entity's 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 entity's inventory listing

a) Testing the entity's computation of standard overhead rates

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

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

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

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

Which of the following best describes the reason that the auditors record their inventory test 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 GAAP d) For use in subsequent audits

b) For subsequent comparison with the completed inventory listing

Which of the following is an auditor least likely to consider a departure from generally accepted accounting principles? a) Valuing inventory at cost b) Including an 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

b) Including in inventory items that are consigned out to vendors, but not yet sold

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

Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's 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 dollar amount of the inventory

b) Supervising the taking of the annual physical inventory

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

b) The existence of inventories is inherently difficult to substantiate

Which of the following best describes the reason for the auditors' review of the client's cost accounting system? a) To obtain evidence regarding the quantities of good described as work-in-progress b) To obtain evidence about the valuation of work-in-process, finished goods, and cost of goods sold c) To obtain evidence about the profit margin on specific jobs d) To obtain evidence compliance with Cost Accounting Standards

b) To obtain evidence about the valuation of work-in-process, finished goods, and cost of goods sold

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included 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

b) Tour the manufacturing plant or production facility

To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into: a) net sales b) cost of goods sold c) operating income d) gross sales

b) cost of goods sold

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

To best ascertain that a company has properly included merchandise that it owns in its ending 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

b) purchase cutoff procedures

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

b) receiving department

The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with: a) purchase requisitions b) receiving reports c) purchase orders d) vendor payments

b) receiving reports

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

b) recording as sales items that the company retains as of year-end

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 the 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

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

c) The auditors' observation addresses the existence assertion

Which of the following is an internal control weakness for a company whose inventory of supplies 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

c) The storekeeper is responsible for maintenance of perpetual inventory records

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory 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 company's name

c) holds legal title to the merchandise

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? a) Select and examine receiving reports and ascertain that the related cancelled checks are dated no earlier than the receiving reports b) Select and examine receiving reports and ascertain that the related cancelled checks are dated no later than the receiving parts c) Select and examine cancelled checks and ascertain that the related receiving reports are dated no earlier than the checks d) Select and examine cancelled checks and ascertain that the related receiving reports are dated no later than the checks

d) Select and examine cancelled checks and ascertain that the related receiving reports are dated no later than the checks

Which of the following is not one of the independent auditor's objectives regarding the examination 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

d) Verifying that all inventory owned by the client is on hand at the time of the count

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

False

True or false: Observation of inventories is a generally accepted auditing standard

False

True or false: 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 unqualified opinion on the client's income statement

False

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

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

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: a) cash disbursements b) approved vouchers c) receiving reports d) vendors' invoices

a) cash disbursements

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: 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

a) deliveries for which no purchase order was issued

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to: a) 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

a) observe physical counts of the inventory items

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 of 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

a) owned by the company was recorded

In verifying credits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the: a) shipping documents b) receiving reports c) purchase orders d) vendors' invoices

a) shipping documents

The auditor's analytical procedures will be facilitated if the client: a) uses a standard cost system that produces variance report b) segregates the obsolete inventory before the physical inventory count c) correct 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 report

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 yer 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

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

c) The auditors should evaluate the adequacy of the client's counting procedures

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

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

c) purchases

The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record: a) purchases b) purchase discounts c) sales d) sales discounts

c) sales

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that: a) 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

c) sales billed to customers were actually shipped

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

c) the authority to make purchases of requisitioned materials and services

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product? a) Factory supervisor salary b) Indirect materials c) Miscellaneous expense d) Sales expense

d) Sales expense