Audit 3, Section 12.2 - Inventory

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. Tracing test counts most likely obtained evidence concerning the relevant assertion about

Completeness

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?

Confirmation.

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into

Cost of goods sold.

Which of the following ratios would an engagement partner most likely consider in forming an overall audit conclusion?

Cost of goods sold/average inventory.

When an auditor tests a client's cost accounting system, the auditor's tests are primarily designed to determine that

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

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?

Credit memos for several items returned by customers had not been recorded.

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.

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?

Performing cutoff procedures for shipping and receiving.

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.

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items

Represented by tags were included on the listing

An auditor would be most likely to learn of slow-moving inventory through

Review of perpetual inventory records.

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?

Test the computation of standard overhead rates.

As part of the process of observing a client's physical inventories, an auditor should be alert to

The inclusion of any obsolete or damaged goods.

Which of the following auditing procedures most likely would provide assurance regarding a manufacturing entity's relevant assertions about inventory valuation?

Testing the entity's computation of standard overhead rates.

Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count?

Verification of existence of inventory.

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit?

When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

When auditing inventories, an auditor would least likely verify that

All inventory owned by the client is on hand at the time of the count.

The client asked the auditor to audit financial statements covering the current year. The auditor did not observe at the prior year's physical inventory. Which of the following actions would the auditor most likely take?

Audit the prior year inventory using alternative substantive procedures.

McPherson Corp. does not make an annual physical count of year-end inventories but instead makes test counts on the basis of a statistical plan. During the year, Mullins, CPA, observes such counts as are deemed necessary and is able to become satisfied as to the reliability of the client's procedures. In reporting on the results of the audit, Mullins

Can express an unmodified opinion without disclosing that (s)he did not observe year-end inventories.

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of

Classification and understandability.

Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified?

Examining an analysis of inventory turnover.

An auditor 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 auditor at the time of the physical inventory count are

Included in the final inventory schedule.

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?

Inventory is complete.

In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the purchase

Invoices.

To obtain assurance that items reflected in a client's perpetual inventory records actually exist, an auditor would most likely trace

Items in the inventory perpetual records to inventory tags and the auditor's test counts.

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would vouch

Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.

Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest to the auditor that the client's goods have been shipped on consignment?

Large debits to accounts receivable and small periodic credits.

When outside firms of nonaccountants specializing in the taking of physical inventories are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily

Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions.

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to

Materials requisitions.

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.

If statistical sampling methods are used by a client in the taking of its physical inventory, the auditor must

Observe such test counts as (s)he deems necessary and be satisfied that the sampling plan has statistical validity, that it was properly applied, and that the resulting precision and reliability are reasonable in the circumstances.

The Smith Corporation uses prenumbered receiving reports that are released in numerical order from a locked box. For 2 days before the physical count all receiving reports are stamped "before inventory," and for 2 days after the physical count all receiving reports are stamped "after inventory." The receiving department continues to receive goods after the cutoff time while the physical count is in process. The least effective method for checking the accuracy of the cutoff is to

Observe that the receiving clerk is stamping the receiving reports properly.

The safeguarding of inventory most likely includes

Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count

Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count at year end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?

Perpetual inventory records are maintained

Purchase cutoff procedures should be designed to test whether all inventory

Purchased and whose title has passed before year end was recorded.

If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded

Purchases.

When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the

Quality.

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

Sale in the current period.

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record

Sales returns.

The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

Timing of inventory observation procedures to be performed.

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the relevant assertions regarding inventory, including presentation and disclosure and

Valuation and allocation.

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning relevant assertions about

Valuation and allocation.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support the relevant assertion about

Valuation and allocation.

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of

Valuation.