ACCT 311 CH 13 MC

The physical count of inventory of a retailer was higher than shown in its perpetual records. Which of the following could explain the difference? Multiple Choice Inventory items had been counted but tags placed on the items had not been taken off the items and added to the inventory accumulation sheets. Credit memos for several items returned by customers had not been prepared. No journal entry had been made on the retailer's books for several items returned to its suppliers. An item purchased "FOB shipping point" had not arrived at the date of the inventory count and had not been reflected in the perpetual records.

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

Which of the following is not one of the independent auditor's objectives regarding the examination of inventories? Multiple Choice Verifying that inventory counted is owned by the entity. Verifying that the entity has used proper inventory pricing. Ascertaining the physical quantities of inventory on hand. Verifying that all inventory owned by the entity is on hand at the time of the count.

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

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation? Multiple Choice Vouching the raw materials' costs to vendors' invoices. Obtaining confirmation of inventories pledged under loan agreements. Reviewing shipping and receiving cutoff activities for inventories. Tracing test counts to the entity's inventory listing.

Vouching the raw materials' costs to vendors' invoices.

Shipping orders are forwarded from the revenue process to: Multiple Choice the materials requisitions department. finished goods stores. raw materials stores. inventory management

finished goods stores.

Purchase cutoff activities should be designed to test that merchandise is included in the inventory of the entity company if the company: Multiple Choice has paid for the merchandise. has physical possession of the merchandise. holds legal title to the merchandise. holds the shipping documents for the merchandise issued in the company's name.

holds legal title to the merchandise.

Tracing costs used to price inventory to vendors' invoices test which of the following assertions? Multiple Choice Occurrence. Cutoff. Accuracy. Classification.

Accuracy.

Which of the following is a question that the auditor would expect to find on the production process section of an internal control questionnaire? Multiple Choice Are vendors' invoices for raw materials approved for payment by an employee who is independent of the cash disbursements function? Are signed checks for the purchase of raw materials mailed directly after signing without being returned to the person who authorized the invoice processing? Are all releases by storekeepers of raw materials from storage based on approved requisition documents? Are details of individual disbursements for raw materials balanced with the total to be posted to the appropriate general ledger account?

Are all releases by storekeepers of raw materials from storage based on approved requisition documents?

Which assertion for ending inventory is most likely violated if the gross profit percentage is much greater than last year? Multiple Choice Existence. Completeness. Rights and obligations. Valuation and allocation.

Existence.

Which of the following is least likely to be a possible cause of book-to-physical differences in inventory quantities? Multiple Choice Inventory cutoff errors. Misapplication of LIFO. Unreported scrap or spoilage. Theft.

Misapplication of LIFO.

Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory? Multiple Choice Obsolete inventory. New product line where sales exceed production. Manufacturing overhead was not allocated to the production process. Manufacturing salaries were recorded as administrative expenses.

Obsolete inventory.

In a manufacturing company, which one of the following audit procedures would give the least assurance about the valuation of inventory at the audit date? Multiple Choice Testing the computation of standard overhead rates. Examining paid vendors' invoices. Reviewing direct labor rates. Obtaining confirmation of inventories pledged under loan agreements.

Obtaining confirmation of inventories pledged under loan agreements.

Which of the following control activities would most likely be used to maintain accurate perpetual inventory records? Multiple Choice Independent storeroom count of goods received. Periodic independent reconciliation of control and subsidiary records. Periodic independent comparison of records with goods on hands. Independent matching of purchase orders, receiving reports, and vendors' invoices.

Periodic independent comparison of records with goods on hands.

Which one of the following procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity's physical inventories? Multiple Choice Confirmation of goods in the hands of public warehouses. Supervising the annual physical inventory count. Carrying out physical inventory procedures at an interim date. Obtaining written representation from the entity as to the existence, quality, and dollar amount of the inventory.

Supervising the annual physical inventory count.

In an audit of inventories, an auditor would least likely verify that: Multiple Choice all inventory owned by the entity is on hand at the time of the count. the entity has used proper inventory pricing. the financial statement presentation of inventories is appropriate. damaged goods and obsolete items have been properly accounted for.

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

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: Multiple Choice the final inventory is valued at cost. all inventory represented by an inventory tag is listed on the inventory sheets. all inventory represented by an inventory tag is bona fide. inventory sheets do not include untagged inventory items.

all inventory represented by an inventory tag is listed on the inventory sheets.

An auditor selected items for test counts while observing an entity's physical inventory. The auditor then traced the test counts to the entity's inventory listing. This procedure most likely provided evidence concerning management's assertion of: Multiple Choice rights and obligations. completeness. existence. valuation.

completeness.

In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to: Multiple Choice coordinate cutoff tests with physical inventory observation. compare cutoff reports with purchase orders. compare vendors' invoices with vendors' statements. coordinate mailing of confirmations with cutoff tests.

coordinate cutoff tests with physical inventory observation.

Key segregations of duties in the inventory management process include all of the following except separating: Multiple Choice cost accounting from review of variance reports. inventory management from cost accounting. cost accounting from the general ledger function. supervision of physical inventory from inventory management.

cost accounting from review of variance reports.

When an auditor tests an entity's cost accounting system, the auditor's tests are primarily designed to determine that: Multiple Choice quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand. physical inventories are in substantial agreement with book inventories. the system is in accordance with generally accepted accounting principles and is functioning as planned. costs have been properly assigned to work in process, finished goods, and cost of goods sold.

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

Which assertion for ending inventory is most likely violated if the gross profit percentage is much greater than last year? Multiple Choice Existence. Completeness. Rights and obligations. Valuation and allocation.

existence

An approved purchase requisition form authorizes shipment of goods to customers.

false

Inherent risk is typically assessed at a low to moderate level for inventory due to the nature of the asset.

false

Production personnel should ordinarily be responsible for maintaining perpetual inventory records.

false

Sale of finished goods is a part of the inventory management process.

false

When the entity's perpetual inventory master files are inadequate, the auditor will probably choose to test the physical inventory prior to the balance sheet date.

false

Shipping orders are forwarded from the revenue process to: Multiple Choice the materials requisitions department. finished goods stores. raw materials stores. inventory management.

finished goods stores

An auditor will usually trace the details of the test counts made during the observation of the physical inventory count 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: Multiple Choice owned by the entity. not obsolete. physically present at the time of the preparation of the final inventory schedule. included in the final inventory schedule.

included in the final inventory schedule.

Which of the following departments typically approves purchase requisitions? Multiple Choice Raw materials stores. Cost accounting. Inventory management. IT.

inventory management

To gain assurance that all inventory items in an entity's inventory listing schedule are valid, an auditor most likely would trace: Multiple Choice inventory tags noted during the auditor's observation to items listed in the inventory listing schedule. inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. items listed in the inventory listing schedule to inventory tags and the count sheets. items listed in receiving reports and vendors' invoices to the inventory listing schedule.

items listed in the inventory listing schedule to inventory tags and the count sheets.

When outside firms of non-accountants specializing in physical inventory counts 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: Multiple Choice consider the report of the outside inventory firm to be an acceptable alternative procedure to the observation of physical inventories. make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions. increase the extent of work on the physical count of inventory. consider the reduced audit effort with respect to the physical count of inventory as a scope limitation.

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 tracing these quantities to: Multiple Choice cost ledgers. perpetual inventory records. receiving reports. material requisitions.

material requisitions.

Auditors are most likely to ensure that no production activity is scheduled prior to: Multiple Choice determining standard costs. observing physical inventory. completing the book to physical adjustment. determining the amount of consigned inventory.

observing physical inventory.

Failure to record inventory in the proper period can affect all of the following accounts except: Multiple Choice sales. receivables. cost of Goods Sold. prepaid Expenses.

prepaid Expenses.

If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded: Multiple Choice sales. sales discounts. purchases. purchase discounts.

purchases

For several years, an entity's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal controls that led to the failure to record some: Multiple Choice purchases returned to vendors. sales returns received. sales discounts allowed. cash purchases.

purchases returned to vendors.

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: Multiple Choice sales. sales discounts. purchases. purchase returns.

purchases.

The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with: Multiple Choice purchase requisitions. receiving reports. purchase orders.

receiving reports.

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? Multiple Choice Materials requisitions. Production schedules. Receiving documents. Purchase orders.

recieving docs

An auditor generally tests physical security controls over inventory by: Multiple Choice test counts and cutoff procedures. examination and reconciliation. inspection and recomputation. review and observation.

review and observation.

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would: Multiple Choice review the entity's description of inventory policies and procedures. perform test counts of inventory during the entity's physical count. analyze inventory turnover statistics to identify slow-moving and obsolete items. analyze monthly production reports to identify variances and unusual transactions.

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

The audit of year-end physical inventories should include steps to verify that the entity'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: Multiple Choice sale in the subsequent period. purchase in the current period. sale in the current period. purchase return in the subsequent period.

sale in the current period.

While observing an entity'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 entity's perpetual records. This situation could be the result of the entity's failure to record: Multiple Choice purchase discounts. purchase returns. sales. sales returns.

sales returns.

An inventory turnover analysis is useful to the auditor because it may detect: Multiple Choice inadequacies in inventory pricing. methods of avoiding cyclical holding costs. the optimum automatic reorder points. the existence of obsolete merchandise.

the existence of obsolete merchandise.

The audit test of control "Review and test procedures for issuing materials to manufacturing departments" provides assurance mainly for the occurrence assertion for inventory management.

tru

A comparison of the current year's inventory turnover ratio with previous years' may indicate the presence of obsolete inventory.

true

In the audit of inventory, the entity is responsible for actually making and recording the count of physical inventory; the auditor's responsibility is to evaluate and observe the entity's procedures and draw conclusions about the adequacy of the physical inventory.

true

Inventory should be valued using the lower-of-cost-or-market rule.

true

Obsolete inventory should be written down to its current market value.

true

The "cradle-to-grave" cycle for inventory begins when goods are purchased and stored and ends when the finished goods are shipped to customers.

true

The audit test of control "Review and test procedures for issuing materials to manufacturing departments" provides assurance mainly for the occurrence assertion for inventory management.

true

The auditor's observation of inventory is a generally accepted auditing procedure.

true

Once the controls in the inventory system have been tested, the auditor sets the level of control risk.

trye

The major control procedure for preventing fictitious inventory transactions from being recorded is proper segregation of duties.

trye

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 financial statement assertions regarding inventory, including presentation and disclosure, and: Multiple Choice valuation and allocation. completeness. existence. rights and obligations.

valuation and allocation.

When perpetual inventory records are maintained in quantities and in dollars and internal control over inventory is weak, the auditor would probably: Multiple Choice want the entity to schedule the physical inventory count at the end of the year. insist that the entity perform physical counts of inventory items several times during the year. increase the extent of tests for unrecorded liabilities at the end of the year. have to disclaim an opinion on the income statement for that year.

want the entity to schedule the physical inventory count at the end of the year.