Audit Chapter 12

Which of the following is least likely to be an accurate statement concerning characteristics of an audit? Multiple Choice An analysis of inventory turnover can indicate possible obsolescence of inventory. Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed. The direction of tests for understatement errors is generally directed from the recorded entry to source documents. Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end.

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

Which of the following should be included as a part of inventory costs of a manufacturing company? a) Direct Labor, Raw Materials, Factory Overhead b) Direct Labor only c) Raw Materials only d) None of the above should be included

a) Direct Labor, Raw Materials, Factory Overhead

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: Multiple Choice Net sales. Cost of goods sold. Operating income. Gross sales.

Cost of goods sold.

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) Must 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 statement taken as a whole d) Must, if the inventories are material, qualify her opinion

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

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

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: Multiple Choice Purchases. Purchase discounts. Sales. Sales discounts.

Sales.

Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper? Multiple Choice Testing the entity's computation of standard overhead rates. Obtaining confirmation of inventories pledged under loan agreements. Reviewing a cutoff procedure for inventories. Tracing test counts to the entity's inventory listing.

Testing the entity's computation of standard overhead rates.

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? Multiple Choice Confirmation. Obtaining reports on internal control at the warehouse. Observation. Communicate with the regulatory agency about the legitimacy of the public warehouse.

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

Which of the following is least likely to be performed efficiently using data analytics? Multiple Choice Identification of purchases recorded more than once. Identification of overvalued inventory items based on sales of those items. Identification of defective inventory items. Identification of slow-moving inventory items.

Identification of defective inventory items.

The auditors plan to use data analytics to audit purchases. Which of the following is least likely to be performed efficiently using data analytics? Multiple Choice Identification of unusually large purchases. Identification of purchases from vendors that are not authorized. Identification of purchases of non-standard items. Identification of purchases of goods from related parties that the auditors had not been informed of and were not aware of the relationship.

Identification of purchases of goods from related parties that the auditors had not been informed of and were not aware of the relationship.

The use of a "blind" purchase order is designed to prevent errors by the: Multiple Choice Purchase department. Receiving department. Stores department. Accounting department.

Receiving department.

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

Supervising the taking of the annual physical inventory.

Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has: Multiple Choice The ability to prepare payment vouchers based on the information on a vendor's invoice. The responsibility of reviewing purchase orders issued by user departments. The authority to make purchases of requisitioned materials and services. A direct reporting responsibility to controller of the organization.

The authority to make purchases of requisitioned materials and services.

With strong internal control, may an audit of the client's inventory count be performed during the year rather than at year end?

Yes

In most audits, are auditors more concerned with an under- or overstatement of inventory? a. understatement, because net income would be overstated. b. overstatement, because net income would be understand. c. understatement, because this would indicate that liabilities are likely to be understated. d. overstatement, because net income would be overstated

d. overstatement, because net income would be overstated

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: Multiple Choice Included in the listing have been counted. Represented by inventory tags are included in the listing. Included in the listing are represented by inventory tags. Represented by inventory tags are bonafide.

Represented by inventory tags are included in the listing.

Tracing copies of computer-generated sales invoices to copies of the corresponding computer-generated shipping documents provides evidence that: Multiple Choice Shipments to customers were properly billed. Entries in the accounts receivable subsidiary ledger were for sales actually shipped. Sales billed to customers were actually shipped. No duplicate shipments to customers were made.

Sales billed to customers were actually shipped.

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 client. Verifying that the client has used proper inventory pricing. Ascertaining the physical quantities of inventory on hand. Verifying that all inventory owned by the client is on hand at the time of the count.

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

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: Multiple Choice Cash disbursements. Approved vouchers. Receiving reports. Vendors' invoices.

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? Multiple Choice Completeness. Existence. Legality. Valuation.

Completeness.

Which of the following is true about the auditors' observation of the client's physical inventory? Multiple Choice The count must be made at year-end. The auditors should supervise the client's personnel. The auditors' observation addresses the existence assertion. The auditors should justify any omission of the observation in the audit report.

The auditors' observation addresses the existence assertion.

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

The existence of obsolete merchandise.

To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to: Multiple Choice The purchase requisition. The receiving report. The purchase order. The voucher.

The purchase order.

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

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 d) 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

-Perpetual system -sales and purchases recorded on invoice date -40% gross profit -the physical inventory taken by the company included only those items actually on hand as of 10:00pm on 12/31/17 -the inventory account and the subsidiary records have been adjusted to the physical inventory right before midnight on 12/31/17. Meaning the adjusted entry if needed was made to inventory and COGS Selling $ Invoice Shipping FOB Destination 5,000. 12/29/17. 1/03/13 What adjusting entry for 2017 should be suggested by the auditors for this sales transaction? a. A/R 5,000 Sales revenue 5,000 b. Sales revenue. 5,000 A/R. 5,000 c. Sales revenue. 5,000 Inventory. 5,000 d. Inventory. 5,000 sales revenue. 5,000 e. no adjusting entry needed

b. Sales revenue. 5,000 A/R. 5,000

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

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product? Multiple Choice Factory supervisor salary. Indirect materials. Machine hours. Selling expense.

Selling expense.

In verifying credits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the: Multiple Choice Shipping documents. Receiving reports. Purchase orders. Vendors' invoices.

Shipping documents.

Which of the following is not true relating to the auditors' observation of the client's physical inventory? Multiple Choice The auditors should evaluate the client's planning of the physical inventory. The auditors should supervise the taking of the inventory. The auditors should evaluate the adequacy of the client's counting procedures. The auditors should take test counts of the client's inventory.

The auditors should supervise the taking of the inventory.

Which of the following most likely would be an internal control procedure designed to detect errors and fraud concerning the custody of inventory? Multiple Choice Periodic reconciliation of work in process with job cost sheets. Segregation of functions between general accounting and cost accounting. Independent comparisons of finished goods records with counts of goods on hand. Approval of inventory journal entries by the storekeeper.

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

In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the: Multiple Choice Purchases journal. Purchase requisitions. Purchase orders. Vendors' invoices.

Vendors' invoices.

The organization established by Congress to narrow the options in cost accounting that are available under GAAP is the: a) Cost Accounting Standards Board b) Financial Accounting Standards Board c) Public Company Accounting Oversight Board d) Securities and Exchange Commission

a) Cost Accounting Standards Board

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

which of the following is not a part of the auditors' responsibility during a client's count of its inventory? a. observe compliance with management's instructions for the count. b. evaluate the condition of the inventory c. determine which counts they will make and which counts the client will make. d. make some test counts

c. determine which counts they will make and which counts the client will make

The primary objective of a CPA's observation of a client's physical inventory count is to: a. allow the auditor to supervise the conduct of the count in order to obtain assurance that inventories are valued properly in the financial statements b. Discover whether a client has counted a single particular inventory item. c. obtain direct knowledge that the invert exists and has been properly counted. d. provide an appraisal of the quality of the merchandise on hand on the day of the physical count

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

Which of the following best describes the reason for the auditors' review of the client's cost accounting system? Multiple Choice To obtain evidence regarding the quantities of good described as work in process. To obtain evidence about the valuation of work in process, finished goods, and cost of goods sold. To obtain evidence about the profit margin on specific jobs. To obtain evidence about compliance with Cost Accounting Standards.

To obtain evidence about the valuation of work in process, finished goods, and cost of goods sold.

Which of the following is not a part of the auditors' responsibility regarding a client's count of its inventory? Multiple Choice Evaluate condition of inventory. Determine which counts they will make and which counts the client will make. Observe compliance with management's instructions for the count. Make some test counts.

Determine which counts they will make and which counts the client will make.

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? Multiple Choice Performing analytical procedures. Using data analytics. Vouching purchases of inventory. Inquiries of production personnel.

Vouching purchases of inventory.

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: Multiple Choice Merchandise received. Vendor's invoices. Canceled checks. Receiving reports.

Vendor's invoices.

Must the auditor document all his/her counts in the working papers?

No

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when: Multiple Choice Internal control is weak. Accurate perpetual inventory records are maintained. Inventory is slow-moving. Significant amounts of inventory are held on a consignment basis.

Accurate perpetual inventory records are maintained.

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: Multiple Choice Deliveries for which no purchase order was issued. Unapproved sales orders. Partial deliveries. Deliveries of a greater quantity of items than those ordered.

Deliveries for which no purchase order was issued.

Which of the following best describes the reason that the auditors record their inventory test counts in the working papers? Multiple Choice To document every test count. For subsequent comparison with the completed inventory listing. To document compliance with generally accepted accounting principles. For use in subsequent audits.

For subsequent comparison with the completed inventory listing.

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client 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.

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: Multiple Choice Owned by the client. 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 is an auditor least likely to consider a departure from U.S. generally accepted accounting principles? Multiple Choice Valuing inventory at cost. Including in inventory items that are consigned out to vendors, but not yet sold. Using standard cost as the measure of inventory cost. Including in inventory items shipped subsequent to year-end, but for which valid orders did exist at year-end.

Including in inventory items that are consigned out to vendors, but not yet sold.

At completion of the count, should the auditor leave the audit client personnel with a copy of his/her (the auditor's) inventory test counts to help assurance inventory accuracy?

No

The audit client has inventory at many locations. Do the auditors need to be present for the count at all locations?

No

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: Multiple Choice Observe physical counts of the inventory items. Trace the total on the inventory listing to the general ledger inventory account. Obtain a confirmation from the client indicating inventory ownership. Analytically compare the current-year inventory balance to the prior-year balance.

Observe physical counts of the inventory items.

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 Multiple Choice 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 Multiple Choice Option A Option B Option C Option D

Option B

Purchase cutoff procedures should be designed to test whether all inventory: Multiple Choice Owned by the company was recorded. On the year-end balance sheet was carried at lower-of-cost-or-market. On the year-end balance sheet was paid for by the company. Owned by the company is in the possession of the company.

Owned by the company was recorded.

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the: Multiple Choice Terms of the open purchase orders. Purchase cutoff procedures. Contractual commitments made by the purchasing department. Purchase invoices received on or around year-end.

Purchase cutoff procedures.

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: Multiple Choice Sales. Sales discounts. Purchases. Purchase returns.

Purchases.

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received? Multiple Choice Quantities ordered are excluded from the receiving department copy of the purchase order. Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order. Receiving department personnel are expected to match and reconcile the receiving report with the purchase order. Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.

Quantities ordered are excluded from the receiving department copy of the purchase order.

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. Vendor payments.

Receiving reports.`

A "bill and hold" scheme is most likely to include: Multiple Choice Shipment of items to a customer beyond what the customer has ordered. Recording as sales items that the company retains as of year-end. Billing of items that are held by customers for future revenue production purposes. Selling items at substantial discounts near year-end.

Recording as sales items that the company retains as of year-end.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? Multiple Choice Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

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? Multiple Choice The auditor should consider the company a specialist, and follow the procedures outlined for addressing an auditor's specialist. The auditor should not consider the counts by the company, by themselves, sufficient appropriate audit evidence. The auditor must observe all inventory counts taken by the company. The auditor should observe a letter of representations form the company.

The auditor should not consider the counts by the company, by themselves, sufficient appropriate audit evidence.

Which of the following is true about the auditors' observation of the client's physical inventory? Multiple Choice The auditors should plan the physical inventory. The auditors should segregate damaged and obsolete goods. The auditors should evaluate the condition of the inventory. The auditors should supervise the client's personnel.

The auditors should evaluate the condition of the inventory.

Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory? Multiple Choice The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used. The auditors should qualify their opinion, because the client must perform a complete count of the inventory. The auditors should increase the extent of their test counts to compensate for the use of a statistical technique. The auditors should withdraw from the engagement.

The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used.

Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories? Multiple Choice The determination of inventory valuation directly affects net income. The existence of inventories is inherently difficult to substantiate. Special valuation problems often exist for inventories. Inventories are often the largest current asset of an enterprise.

The existence of inventories is inherently difficult to substantiate.

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? Multiple Choice Supplies of relatively little value are expensed when purchased. The cycle basis is used for physical counts. The storekeeper is responsible for maintenance of perpetual inventory records. Perpetual inventory records are maintained only for items of significant value.

The storekeeper is responsible for maintenance of perpetual inventory records.

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified? Multiple Choice Examine inventory items for dust or rust during observation. Trace tag counts to final inventory listing. Compare inventory balances to anticipated sales volume. Review inventory experience and trends.

Trace tag counts to final inventory listing.

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

An auditor has selected a sample from the inventory count summary sheets in order to vouch back to inventory tags used during the counts. Which assertion does this procedure relate to most direct? a. presentation b. valuation c. completeness d. existence

d. existence