Chapter 13

Which of the following audit procedures would provide the least reliable evidence that the entity has legal title to inventories?

Analytical review of inventory balances compared to purchasing and sales activities.

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

During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.

An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file? Date of last purchase.

Economic reorder quantity.

Which of the following would most likely be an internal control activity 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 control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions?

Inventory manager does not have ability to record inventory transactions.

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

Observe the condition of merchandise and raw materials during the entity's physical inventory count.

Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory?

Obsolete inventory.

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

Perpetual inventory records are maintained.

For the purpose of determining proper cutoff for inventory, the auditor will select a sample from which of the following for a few days before and after year-end?

Receiving documents.

Which of the following internal control activities is most likely to address the completeness assertion for inventory?

Receiving reports are prenumbered and periodically reconciled.

Which of the following best describes the occurrence assertion for inventory?

Recorded inventory transactions actually happened.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that

all goods owned at year-end are included in the inventory balance.

In an audit of inventories, an auditor would least likely verify that

all inventory owned by the entity is on hand at the time of the count.

Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who:

compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.

The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that:

custody of work in process and finished goods is properly maintained.

Because of its importance and typically high dollar value on the balance sheet of a manufacturing entity, the audit of inventory is important and often high risk. As such, auditors must take additional care when auditing this area due to the capacity for both errors and fraud. When identifying misstatements in testing inventory, it is important to consider the control environment to determine if the misstatements found are indicators of client error or intentional fraud. Tests to help identify the __________ of controls help to evaluate the client's internal control structure. creation

effectiveness

An auditor's tests of controls over the issuance of raw materials to production would most likely include:

examination of materials requisitions and reperformance of entity controls designed to process and record issuances.

Purchase cutoff activities should be designed to test that merchandise is included in the inventory of the entity company if the company

holds legal title to the merchandise.

An auditor generally tests physical security controls over inventory by

inquiry and observation.

Auditors are most likely to ensure that no production activity is scheduled prior to

observing physical inventory.

The safeguarding of inventory most likely includes

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

Failure to record inventory in the proper period can affect all of the following accounts except:

prepaid Expenses.

An entity'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.

Because of its importance and typically high dollar value on the balance sheet of a manufacturing entity, the audit of inventory is important and often high risk. As such, auditors must take additional care when auditing this area due to the capacity for both errors and fraud. When identifying misstatements in testing inventory, it is important to consider the control environment to determine if the misstatements found are indicators of client error or intentional fraud.

records

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 entity maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably:

request that the entity schedule the physical inventory count at the end of the year.

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would

review the entity's description of inventory policies and procedures.

An entity'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

sales.

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

the existence of obsolete merchandise.

Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management's assertion of: presentation.

valuation.