Chapter 12 multiple choice

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.

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.

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.

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.

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.

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.

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.

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.

Which of the following is not a part of the auditors' responsibility regarding a client's count of 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.

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.

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. 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 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 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 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 representations form 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 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.

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.

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.

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.

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.

Tracing copies of computer-generated sales invoices to copies of the corresponding computer-generated 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.

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.

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.

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.

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.

A client uses a perpetual inventory system. Would one 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 Option A Option B Option C Option D

Option A

A client uses a periodic inventory system. Would one 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 Option A Option B Option C Option D

Option B

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.

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.

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

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.

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 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 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

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.