Inventory and Fixed Assets
15. Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account? a. Extraordinary repairs have lengthened the life of an asset. b. Prior years' depreciation charges were erroneously understated. c. A reserve for possible loss on retirement has been recorded. d. An asset has been recorded at its fair value.
A
22. Which of the following is not likely a motive for management to manipulate the timing and amount of impaired asset writedowns? a. Steady increases in earnings per share over the past 5 years. b. Income smoothing. c. A "big bath." d. An abnormally unprofitable year.
A
5. For several years, a client's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be deficiencies in internal control that led to the failure to record some a. Purchases returned to vendors. b. Sales returns received. c. Sales discounts allowed. d. Cash purchases.
A
5. When perpetual inventory records are maintained in quantities and in dollars, and internal control procedures over inventory are deficient, 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 that year.
A
6. When perpetual inventory records are maintained in quantities and in dollars, and internal control procedures over inventory are deficient, 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 that year.
A
7. Purchase cutoff procedures should be designed to test whether or not all inventory a. Purchased and received before the year-end was recorded. b. Was carried at the lower of cost or market on the year-end balance sheet. c. Was paid for by the company on the year-end balance sheet. d. Owned by the company is in the possession of the company.
A
1. To strengthen control procedures over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic a. Increase in insurance coverage. b. Inspection of equipment and reconciliation with accounting records. c. Verification of liens, pledges, and collateralizations. d. Accounting for work orders.
B
10. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference? a. Inventory items had been counted, but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets. b. Credit memos for several items returned by customers had not been recorded. c. No journal entry had been made on the retailer's books for several items returned to its suppliers. d. An item purchased "FOB shipping point" had not arrived at the date of the inventory count and had not been reflected in the perpetual records.
B
13. The accuracy of perpetual inventory records may be established, in part, by comparing inventory records with a. Purchase requisitions. b. Receiving reports. c. Purchase orders. d. Vendor payments.
B
25. Which of the following internal control efficiencies relates to factory equipment? a. Checks issued in payment of purchases of equipment are not signed by the controller. b. All purchases of factory equipment are required to be made by the department that needs the equipment. c. Factory equipment replacements are generally made when estimated useful lives have expired. d. Proceeds from sales of fully depreciated equipment are credited to other income.
B
28. Which of the following procedures would least likely lead the auditor to detect unrecorded fixed asset disposals? a. Examine insurance policies. b. Review repairs and maintenance expense. c. Review property tax files. d. Scan invoices for fixed asset additions.
B
3. From the auditor's point of view, inventory counts are more acceptable prior to the year-end, when a. Internal control is deficient. b. Accurate perpetual inventory records are maintained. c. Inventory is slow moving. d. Significant amounts of inventory are held on consignment.
B
3. The objectives of the internal structure for a production cycle are to provide assurance that transactions are properly executed and recorded, and that a. Production orders are prenumbered and signed by a supervisor b. Custody of work in process and of finished goods is properly maintained c. Independent internal verification of activity reports is established d. Transfers to finished goods are documented by a completed production report and a quality control report
B
9. 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
11. 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
16. Which of the following activities is not common to the conversion cycle? a. Maintaining perpetual inventory records. b. Accounting for fixed asset disposals and retirements. c. Implementing a just-in-time order entry system. d. Recording depreciation allocations.
C
2. To improve accountability for fixed asset retirements, management most likely would implement an internal control structure that includes a. Continuous analysis of the repairs and maintenance account. b. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. c. Continuous utilization of serially numbered retirement work orders. d. Periodic inspection of insurance policies by internal auditors.
C
20. When verifying debits to a manufacturing company's perpetual inventory records, an auditor would be most interested in testing a sample of purchase a. Approvals. b. Requisitions. c. Invoices. d. Orders.
C
21. Assets may suffer an impairment in value for a variety of reasons, but not likely as a result of: a. A corporate restructuring. b. Slumping demand for uncompetitive products. c. Significant increases in market share. d. Obsolescence.
C
23. The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a a. Sale in the subsequent period. b. Purchase in the current period. c. Sale in the current period. d. Purchase return in the subsequent period.
C
26. When auditing fixed assets, an auditor attempts to determine all of the following except a. Control risk. b. Property abandoned during the year. c. Adequacy of replacement funds. d. Reasonableness of depreciation.
C
27. Which of the following is the best evidence that an entity owns real estate at the balance sheet date? a. Title insurance policy. b. Original deed. c. Paid real estate tax bills. d. Closing statement. (AICPA ADAPTED)
C
29. The auditor may conclude that depreciation charges are insufficient by noting a. Insured values greatly in excess of book values. b. Large amounts of fully depreciated assets. c. Continuous trade-ins of relatively new assets. d. Excessive recurring losses on assets retired.
C
4. Apex Manufacturing Corporation mass produces eight different products. The controller who is interested in strengthening control procedures over the accounting for materials used in production would be most likely to implement a. An economic order quantity (EOQ) system. b. A job order cost accounting system. c. A perpetual inventory system. d. A separation of duties among production personnel.
C
8. In tests of property, plant, and equipment, the auditor tries to determine all of the following except the a. Adequacy of the internal control. b. Extent of property abandoned during the year. c. Adequacy of replacement funds. d. Reasonableness of depreciation.
C
1. Which of the following policies is an internal control weakness related to the acquisition of factory equipment? a. Advance executive approvals are required for equipment acquisitions. b. Variances between authorized equipment expenditures and actual costs are to be immediately reported to management. c. Depreciation policies are reviewed only once a year. d. Acquisitions are to be made through and approved by the department in need of the equipment.
D
12. The controller of Excello Manufacturing, Inc., wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective? a. Depreciation expense divided by book value of manufacturing equipment. b. Accumulated depreciation divided by book value of manufacturing equipment. c. Repairs and maintenance cost divided by direct labor costs. d. Gross manufacturing equipment cost divided by units produced.
D
14. The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence in support of the audit proposition that all a. Expenditures for plant assets have been recorded in the proper period. b. Capital expenditures have been properly authorized. c. Noncapitalizable expenditures have been properly expensed. d. Expenditures for plant assets have been capitalized.
D
17. When an outside specialist has assumed full responsibility for taking the client's physical inventory, reliance on the specialist's report is acceptable if a. The auditor is satisfied about the specialist's reputation and competence. b. Circumstances make it impracticable or impossible for the auditor either to do the work personally or to observe the specialist's work. c. The auditor performs the same tests and procedures as would have been applicable if the client's employees took the physical inventory. d. The auditor's report assumes full responsibility.
D
18. An auditor's tests of a client's cost accounting system are designed primarily to determine that a. Quantities on hand have been computed based on acceptable methods that reasonably approximate actual quantities on hand. b. Physical inventories substantially agree with book inventories. c. The system complies with generally accepted accounting principles and functions as planned. d. Costs have been assigned properly to finished goods, work in process, and cost of goods sold.
D
19. Sanbor Corporation's parts inventory consists of thousands of different items that are small in value individually, but quite significant in total. Sanbor could establish effective control over the parts by requiring a. An officer's approval of requisitions for inventory parts. b. Maintaining inventory records for all parts included in the inventory. c. Physical counts on a cycle basis rather than at year-end. d. Separation of the storekeeping function from the production and inventory record-keeping functions.
D
2. Which of the following procedures is most likely to ensure that employee job time tickets are accurate? a. Approve the payroll voucher in the accounts payable department. b. Keep employment information in the human resources department. c. Make sure that the number of hours per week on each employee's job time ticket is 40. d. Check the employee check cards against the job time tickets.
D
24. An auditor would be most likely to learn of slow-moving inventory through a. Inquiry of sales personnel. b. Inquiry of stores personnel. c. Physical observation of inventory. d. Review of perpetual inventory records.
D
30. In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. An auditor would most likely detect this when a. Discussing capitalization policies with Lowell's controller. b. Examining maintenance expense accounts. c. Observing that the warehouse had been painted. d. Examining construction work orders that support items capitalized during the year.
D
4. To strengthen control procedures over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic a. Increase in insurance coverage. b. Verification of liens, pledges, and collateralizations. c. Accounting for work orders. d. Inspection of equipment and reconciliation with accounting records.
D
6. Which of the following activities is not common to the conversion cycle? a. Maintaining perpetual inventory records. b. Accounting for fixed asset disposals and retirements. c. Recording depreciation allocations. d. Implementing a just-in-time order entry system.
D
7. An auditor's tests of a client's cost accounting system are designed primarily to determine that a. Quantities on hand have been computed based on acceptable methods that reasonably approximate actual quantities on hand. b. Physical inventories substantially agree with book inventories. c. The system complies with generally accepted accounting principles and functions as planned. d. Costs have been assigned properly to finished goods, work in process, and cost of goods sold.
D
8. An effective internal control procedures covering fixed asset additions should require: a. Classification as investments of those fixed asset additions that are not used in the business. b. Capitalization of the cost of fixed asset addition in excess of a specific peso amount. c. Performance of recurring fixed asset maintenance work solely by company maintenance staff. d. Authorization and approval of major fixed asset additions.
D