chapter 12 inventory

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?

Sales expense.

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

The existence of obsolete merchandise.

Which best describes the reason that the auditors record their inventory test counts in the working papers?

For subsequent comparison with the completed inventory listing

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:

Sales.

To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into:

Cost of good sold.

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:

Observe physical counts of the inventory items.

Purchase cutoff procedures should be designed to test whether all inventory:

Owned by the company was recorded.

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

Sales billed to customers were actually shipped

8. 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.

8. Which would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?

Sales expense.

Auditors should not review the client's planning of the physical inventory.

FALSE

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:

Vendor's invoices.

In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the:

Vendors' invoices.

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

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

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

TRUE

In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the:

Shipping documents

Which of the following is least likely to be accurate statement concerning characteristics of an audit?

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

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:

Cash disbursements.

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?

Completeness

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?

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

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:

Deliveries for which no purchase order was issued

Which of the following is not a part of the auditors' responsibility when a client's count of its inventory?

Determine which counts they will make and which counts the client will make.

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

FALSE

Observation of inventories is a generally accepted auditing standard.

FALSE

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

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

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company:

Holds legal title to the merchandise.

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:

Included in the final inventory schedule.

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

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

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:

Purchases.

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received?

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

The use of a "blind" purchase order is designed to prevent errors by the:

Receiving department

The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with:

Receiving reports.

A "bill and hold" scheme is most likely to include:

Recording as sales items that the company retains as of year-end.

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:

Represented by inventory tags are included in the listing.

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?

Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

In verifying credits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the

Shipping documents.

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

Shipping documents.

. Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories?

Supervising the taking of the annual physical inventory.

The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses.

TRUE

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

The receiving department should accept only goods for which there is an approved purchase order on hand.

TRUE

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 audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper?

Testing the entity's computation of standard overhead rates.

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 auditor should not consider the counts by the company, by themselves, sufficient appropriate audit evidence.

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

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

Which of the following is not true relating to the auditors' observation of the client's physical inventory?

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

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

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.

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

The auditors' observation addresses the existence assertion

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

The auditors' observation addresses the existence assertion.

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

The authority to make purchases of requisitioned materials and services.

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

The existence of inventories is inherently difficult to substantiate

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

The existence of inventories is inherently difficult to substantiate.

To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to:

The purchase order.

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

The storekeeper is responsible for maintenance of perpetual inventory records

Which of the following best describes the reason for the auditors' review of the client's cost accounting system?

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

In auditing a manufacturing entity, which procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

Tour the manufacturing plant or production facility.