Audit 460 Chapter 12
A client uses a perpetual inventory system. One would expect a credit to which of the following accounts at the point of sale? Sales Inventory A) Yes Yes B) Yes No C) No Yes D) No No A) Option A B) Option B C) Option C D) Option D
A) Option A
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. Analytical procedures will be facilitated when a client uses a standard cost system that produces variance reports. Such reports will allow the auditors to identify significant deviations from expected values.
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.
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.
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.
Auditors may use statistical sampling for their test counts, but the client should never use statistical sampling to estimate the quantities of goods on hand. True False
False
For good internal control over purchase transactions, purchases should be made from approved vendors by the department needing the goods. True False
False
Goods in transit at the balance sheet date should never be included in the client's inventory. True False
False
The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders. True False
False
The McKesson & Robbins case highlighted the need to directly verify the existence of a client's inventory. True False
True
The auditors should record the details of their test counts in the audit working papers to be used to test the client's completed physical inventory listing. True False
True
The receiving department should accept only goods for which there is an approved purchase order on hand. True False
True
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. A bill of lading acknowledges the receipt of goods and sets forth provisions of the transportation agreement.
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 good sold. C) Operating income. D) Gross sales.
B) Cost of good sold.
To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to: A) 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.
Auditors should not review the client's planning of the physical inventory. True False
False
The receiving department normally sends raw materials received to the production department and obtains a receipt from the supervisor. True False
False
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.
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) Must 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) Must, if the inventories are material, qualify her opinion.
A) Can issue an unqualified opinion without disclosing that she did not observe year-end inventories. Mullins may issue an unqualified opinion as long as she is satisfied that the client's procedures are adequate to provide a reliable inventory balance.
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.
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.
An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and: A) Valuation. B) Existence. C) Completeness. D) Rights.
A) Valuation.
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address: A) Valuation. B) Existence. C) Rights. D) Presentation.
A) Valuation.
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. Since the internal control is described as being weak, the CPAs will generally insist upon a physical count at year-end.
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 professional standards allow auditors to use physical counts prior to year-end when a client has well-kept perpetual (computerized or non-computerized) inventory records.
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) Rights. B) Completeness. C) Valuation. D) Existence.
B) Completeness.
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 generally accepted accounting principles. 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 U.S. generally accepted accounting principles? A) Valuing inventory at cost. B) Including in 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.
A client uses a periodic inventory system. One would expect a credit to which of the following accounts at the point of sale? Sales Inventory A) Yes Yes B) Yes No C) No Yes D) No No A) Option A B) Option B C) Option C D) Option D
B) Option B
The auditors' observation of the taking of a client's physical inventory must be done on, or shortly after the balance sheet date. True False
False
Analytical procedures may reveal conditions indicating that the client has significant amounts of obsolete inventory. True False
True
During the auditors' observation of the physical inventory, they often obtain information that may be used to test the cutoff of the client's purchase transactions. True False
True
Management representations concerning inventories often include representations regarding purchase and sales commitments. True False
True
Perpetual inventory records not only help control theft of inventories, they also generally result in improved production planning. True False
True
Proper presentation of inventories includes disclosure of inventory that is pledged as collateral for loans. True False
True
Serially numbered purchase orders should be issued for purchases of goods. True False
True
Testing the cost accounting system is a major step in determining the appropriate valuation of inventories in a manufacturing business. True False
True
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.
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. True False
False
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.
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.
A client's materials purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to: A) evaluate the reliability of information generated as a result of the purchasing process. B) investigate the physical handling and recording of unusual acquisitions of materials. C) consider the need to be on hand for the annual physical count if this system is not functioning properly. D) ascertain that materials said to be ordered, received, and paid for are on hand.
A) evaluate the reliability of information generated as a result of the purchasing process.
Purchase cutoff procedures should be designed to test whether or not all inventory: 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.
Which of the following is not a part of the auditors' responsibility when a client counts its inventory? A) Evaluate condition of inventory. B) Determine which counts they will make and which counts the client will make. C) Observe compliance with management's instructions for the count. D) Make some test counts.
B) Determine which counts they will make and which counts the client will make.
An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to: A) Valuation. B) Existence. C) Rights. D) Completeness.
B) Existence.
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.
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.
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. Inventory need not be on hand at year-end. For example, purchases in transit on which title has passed to the client should also be included.
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.
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. The shipping department, not the receiving department, is responsible for preparation of a shipping document.
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.
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.
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.
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 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.
An auditor most likely would analyze inventory turnover rates to obtain evidence about: A) Existence. B) Presentation. C) Valuation. D) Rights.
C) Valuation.
An auditor would be least likely to learn of slow-moving inventory through: A) inquiry of sales personnel. B) inquiry of stores personnel. C) vouching of year-end purchases. D) review of perpetual inventory records.
C) vouching of year-end purchases.
To assure that the physical inventory is taken properly, the auditors should prepare and take primary responsibility for the physical inventory instructions. True False
False
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 canceled checks are dated no earlier than the receiving reports. B) Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. C) Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. D) Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.
D) Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.
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.
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.
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.
Factory overhead is normally assigned to work-in-process immediately as overhead expenses are incurred. True False
False
If the auditors are unable to satisfy themselves regarding the fairness of the client's beginning inventories, they will be unable to give an unmodified opinion on any of the financial statements. True False
False
Observation of inventories is a generally accepted auditing standard. True False
False
Since the employees in the purchasing department order inventory items, they should inspect and receive the items when the goods arrive. True False
False
The auditors need never observe inventories stored in legitimate public warehouses. True False
False
The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses. True False
True
The extent of the auditors' test counts of inventory items should be influenced by the inherent risk of the client's inventory and the adequacy of the client's internal control. True False
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 False
True
The use of a tagging system for inventory taking is designed to prevent double counting of goods. True False
True
Which of the following is least likely to be an 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.
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. The Cost Accounting Standards Board was established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles.
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. Of the choices, existence is most directly related to overstated inventory because inclusion of inventory items that do not exist in inventory totals results in an overstated inventory.
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.
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 or 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.
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.
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.
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.
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 with 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 with the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used.
Which of the following should be included as a part of inventory costs of a manufacturing company? Direct Labor Raw Materials Factory Overhead A) Yes Yes Yes B) Yes No No C) No Yes No D) No No No
A) Yes Yes Yes Direct labor, raw materials, and factor overhead are all included in inventory costs of a manufacturing company.
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.
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 best procedure for the discovery of damaged goods is an examination of the condition of the inventory during the auditors' observation of the physical inventory.
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. The primary objective of the CPAs' observation of inventories is to provide sufficient competent evidence as to the existence of the inventory and the controls over the inventory-taking process.
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 of 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 of 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: 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.
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 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? A) The auditor should consider the company a specialist, and follow the procedures outlined for addressing an auditor's specialist. B) The auditor should not consider the counts by the company, by themselves, sufficient appropriate audit evidence. C) The auditor must observe all inventory counts taken by the company. D) The auditor should observe a letter of representation from the company.
B) The auditor should not consider the counts by the company, by themselves, sufficient appropriate audit evidence.
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.
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-process. 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 about 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.
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) Canceled checks. D) Receiving reports.
B) Vendor's invoices.
On June 15, 200X, Ward, CPA, accepted an engagement to perform an audit of the Grant Co. for the year ended December 31,200X. Grant Co. has not previously been audited by a CPA and Ward has been unable to satisfy himself with respect to opening inventories. How should Ward report on his audit? A) He would have to disclaim an opinion or qualify his opinion on the December 31, 200X balance sheet, but could issue an unmodified opinion on the income statement and the statement of cash flows. B) He must disclaim an opinion on the financial statements taken as a whole. C) He could give an unmodified opinion on the financial statements taken as a whole so long as the change in the inventories from the beginning of the year to the end of the year was not material. D) He would have to disclaim an opinion or qualify his opinion on the income statement and the statement of cash flows, but could issue an unmodified opinion on the December 31, 200X balance sheet.
D) He would have to disclaim an opinion or qualify his opinion on the income statement and the statement of cash flows, but could issue an unmodified opinion on the December 31, 200X balance sheet.
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 False
True
Observation of inventory is a generally accepted auditing procedure. True False
True
