Chapter 12 Audit

3. "exceed current market values of the items."

Replace with "equal or are less than current market prices of the items"

Andy Watson, CPA, is a senior auditor on the audit of Carlson, Inc. Andy is reviewing the results of analytical procedures related to inventory. For results (a), (b), and (c), select the explanation that is most likely to be consistent with the change described. Explanations may be used once, more than once, or not at all. (1) Inventory increased as of year-end. (2) Debt outstanding increased. (3) A larger percentage of sales occurred during the last month of 20X8, as compared to 20X7. (4) Interest expense increased during 20X8 due to the acquisition of new debt. (5) The percentage of tax included in the provision for income taxes for 20X8 is less than the percentage used in 20X7. (6) Increases in costs of purchases were not completely passed on to customers through higher selling prices. (7) Owners' equity increased due to retention of profits. (8) Interest expense increased during 20X8. (9) A significant amount of long-term debt became current at the end of 20X8. *** Result a. Inventory turnover (as measured by cost of goods sold/ending inventory) went from 7.95 in 20X7 to 10.52 in 20X8. Which of the explanations is consistent with the change in inventory turnover?

(a) 3 // A larger percentage of sales occurred during the last month of 20X8, as compared to 20X7. *correct because a larger percentage of sales in the last month is likely to result in a lower ending inventory, thus increasing the inventory turnover ratio since the denominator of the fraction becomes smaller.

10. "no changes in shareholders occurred during the year."

Replace with "no stock was issued or repurchased by Keystone during the year."

1. "indicates that the allowance for doubtful accounts seems adequate as of year-end and that no adjusting entry is necessary."

Replace with "should be written off as of year-end with a debit to the allowance for doubtful accounts and a credit to accounts receivable and we should perform further procedures on the adequacy of the allowance for doubtful accounts."

Which of the following should be included as a part of inventory costs of a manufacturing company? Direct Labor Raw Materials Factory Overhead (1) Yes Yes Yes (2) Yes No No (3) No Yes No (4) No No No

(1) Direct Labor Yes / Raw Materials Yes // Factory Overhead Yes

b. Net income increased in 20X8. Which of the explanations is most consistent with the changes in net income?

(5) The percentage of tax included in the provision for income taxes for 20X8 is less than the percentage used in 20X7.

c. The gross profit percentage (gross profit/revenue) changed from .166 in 20X7 to .154 in 20X8. Which of the explanations is consistent with the change in gross profit percentage?

(6) Increases in costs of purchases were not completely passed on to customers through higher selling prices. **is correct because inability to pass on costs will decrease the profit percentage.

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

Shipping documents.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address:

Valuation.

In verifying debits to perpetual inventory records of a nonmanufacturing 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 auditors believe there is a significant risk of obsolescence of inventories for a particular client. Which of the following procedures would be least likely to detect obsolescence?

Vouching purchases of inventory.

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably:

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:

Well-kept records of perpetual inventory are maintained.

5. As a general rule, inventories are carried at the lower of __________ .

cost or market

4. The details of the auditors' __________ made during the observation of the physical inventory should be recorded in their working papers to later check the accuracy of the final inventory listing.

test counts

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

true

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when:

Accurate perpetual inventory records are maintained

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the:

Bill of lading.

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:

Can issue an unqualified opinion without disclosing that she did not observe year-end inventories.

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?

Communicate with the regulatory agency about the legitimacy of the public warehouse.

1. The inventory of a manufacturing client will include direct labor, direct materials, and overhead components.

Correct

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold?

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.

An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to:

Existence.

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is:

Existence.

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.

1. Ordinarily, the auditors will leave a copy of all their counts with the client so the client can correct misstatements.

Incorrect

2. Generally accepted auditing standards require that the auditor be present at each location the client maintains inventory.

Incorrect

5. Inventory items "consigned in" should be included in the client's inventory totals.

Incorrect

Which of the following most likely would be an internal control procedure designed to detect errors and fraud concerning the custody of inventory?

Independent comparisons of finished goods records with counts of goods on hand.

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory?

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:

Obtain direct knowledge that the inventory exists and has been properly counted.

The receiving department is least likely to be responsible for the:

Preparation of a shipping document.

9. "Vouch invoices in support of the change in leasehold improvements. "

Replace with "Consider the reasonableness of amortization of leasehold improvements during the year."

2. "Cash—First National Bank."

Replace with "Line of credit."

5. "We should carefully inspect items for pledging status during the count of inventory."

Replace with "We should examine cash confirmations and debt agreements

8. "It would seem that the client has a policy of making no depreciation entries related to acquisitions or disposals during the year and we should consider the propriety of this policy."

Replace with "We should inquire of the client as to details of this year's depreciation calculation and entry."

4. "we should determine that all "slow moving" items are valued at zero."

Replace with "we should calculate turnover ratios of inventory items.

6. "analyze the client's aging of receivables."

Retain the original text

7. "vouch the cash disbursement."

Retain the original text

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 least likely to be an accurate statement concerning characteristics of an audit?

The direction of tests for understatement errors is generally directed from the recorded entry to source documents.

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

The existence of obsolete merchandise.

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.

1. The auditors observe the inventory taking primarily to obtain evidence of the __________ assertion and to a certain extent the client's rights to the inventories.

existence

Observation of inventories is a required audit procedure under all circumstances.

false

3. To help ensure that the physical inventory is taken accurately and completely, early in the audit the auditors should participate in the __________ of the count of physical inventory.

planning

1. The auditors' review of purchase invoices is generally performed in connection with tests of the __________ of the inventories.

pricing

2. Serially numbered ____________ should be prepared and sent to vendors when goods are ordered.

purchase orders

5. Tracing __________ for several days before and after year-end to recorded purchases is designed to test the proper cutoff of purchase transactions.

receiving documents

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:

Completeness.

4. Auditors' observation of a client's counting of inventories ordinarily addresses the existence of inventory more than its completeness.

Correct

The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the:

Cost Accounting Standards Board.

The auditor's analytical procedures will be facilitated if the client:

Uses a standard cost system that produces variance reports.

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:

Valuation.

An auditor most likely would analyze inventory turnover rates to obtain evidence about:

Valuation.

2. Inventories stored in public warehouses should be __________ with the custodians.

confirmed

3. Auditors' observation of a client's counting of inventories ordinarily addresses the existence of inventory more than its completeness.

correct

3. The inventory of a manufacturing client will include direct labor, direct materials, and overhead components.

correct

5. With strong internal control an inventory count may be performed prior to year-end.

correct

2. Every auditor test count must be documented.

incorrect

4. Auditors must count all inventory items during the inventory count.

incorrect