Audit 12.2

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 relevant assertions regarding inventory, including presentation and disclosure and A. Valuation and allocation. B. Completeness. C. Occurrence. D. Rights and obligations.

A

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support the relevant assertion about A. Valuation and allocation. B. Rights and obligations. C. Existence. D. Classification and understandability.

A

McPherson Corp. does not make an annual physical count of year-end inventories but instead makes test counts on the basis of a statistical plan. During the year, Mullins, CPA, observes such counts as are deemed necessary and is able to become satisfied as to the reliability of the client's procedures. In reporting on the results of the audit, Mullins A. Can express an unmodified opinion without disclosing that (s)he did not observe year-end inventories. B. Should comment in the auditor's responsibility section as to the inability to observe year-end inventories but can nevertheless express an unmodified opinion. C. Is required to disclaim an opinion if the inventories were material. D. Should qualify the opinion if the inventories were material.

A

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

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods? A. Observation. B. Confirmation. C. Calculation. D. Inspection.

B

The client asked the auditor to audit financial statements covering the current year. The auditor did not observe at the prior year's physical inventory. Which of the following actions would the auditor most likely take? A. Withdraw from the engagement and provide no assurance on the current year's financial statements. B. Rely on management's representation that the prior year's balances are correct. C. Audit the financial statements and express an opinion with a scope limitation. D. Audit the prior year inventory using alternative substantive procedures.

D

tracing ____ to ______

records to supporting documents/evidence

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. Tracing test counts most likely obtained evidence concerning the relevant assertion about A. Rights and obligations. B. Completeness. C. Existence. D. Valuation.

B

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference? A. Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets. B. Credit memos for several items returned by customers had not been recorded. C. No journal entry had been made on the retailer's books for several items returned to its suppliers. D. 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.

B

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into A. Net sales. B. Cost of goods sold. C. Operating income. D. Gross sales.

B

When outside firms of nonaccountants specializing in the taking of physical inventories 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 A. Consider the report of the outside inventory-taking firm to be an acceptable alternative procedure to the observation of physical inventories. B. Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions. C. Not reduce the extent of work on the physical count of inventory. D. Consider the reduced audit effort with respect to the physical count of inventory as a scope limitation.

B

Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count? A. Validation of purchase transactions. B. Verification of existence of inventory. C. Authorization of the manufacturing orders. D. Posting and summarization of inventory transactions.

B

If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded A. Sales. B. Sales discounts. C. Purchases. D. Purchase discounts.

C

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would vouch A. Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule. B. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. C. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets. D. Items listed in receiving reports and vendors' invoices to the inventory listing schedule.

C

Which of the following ratios would an engagement partner most likely consider in forming an overall audit conclusion? A. Total liabilities/net sales. B. Accounts receivable/inventory. C. Cost of goods sold/average inventory. D. Current assets/quick assets.

C

In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the purchase A. Journal. B. Requisitions. C. Orders. D. Invoices.

D

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to A. Cost ledgers. B. Perpetual inventory records. C. Receiving reports. D. Materials requisitions.

D

To obtain assurance that items reflected in a client's perpetual inventory records actually exist, an auditor would most likely trace A. Inventory tags noted during the auditor's test counts to items listed in receiving reports and vendors' invoices. B. Items listed in receiving reports and vendors' invoices to the perpetual inventory records. C. Inventory tags noted during the auditor's test counts to items in the perpetual inventory records. D. Items in the inventory perpetual records to inventory tags and the auditor's test counts.

D

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit? A. When the client maintains periodic inventory records. B. When the auditor finds minimal variations in client records and test counts in prior periods. C. When total inventory has not varied more than 5% in the last 5 years. D. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

D

When an auditor tests a client's cost accounting system, the auditor's 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

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? A. Scanning perpetual inventory, production, and purchasing records. B. Examining paid vendor invoices. C. Tracing inventory items from the tag listing back to the physical inventory quantities. D. Performing cutoff procedures for shipping and receiving.

D