Audit Chapter 12

It was discovered that a number of the items on hand and counted in the inventory were on consignment

Rights and Obligations

The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses.

True

The lower-of-cost-or-market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values.

True

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

True

The use of a tagging system for inventory taking is designed to prevent double counting of goods.

True

When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unmodified (unqualified) opinion on the client's income statement.

False

Some inventory items owned by the company were in transit during the physical inventory.

Completeness

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:

Vendor's invoices.

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?

Completeness.

To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into:

Cost of goods sold.

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:

Included in the final inventory schedule.

The major categories of inventories and their basis of valuation are adequately reported in the financial statements.

Presentation and disclosure; Review drafts of the financial statements.

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?

Sales expense.

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:

Sales.

Establish the completeness of inventories.

Select a sample of items during the physical inventory count and determine that they have been included on count sheets.

Establish that the client has rights to the recorded inventories.

Select a sample of recorded items and examine supporting vendors' invoices and contracts.

Establish the accuracy of cost amounts of inventories.

Select a sample of recorded items and examine supporting vendors' invoices and contracts.

Establish the existence of ending inventory.

Select a sample of recorded items on count sheets during the physical inventory count and determine that items are on hand.

During the physical inventory it was noted that a number of inventory items were damaged.

Valuation and Allocation

A "bill and hold" scheme is most likely to include:

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

In performing a price test of inventory items, you found a number of items priced below cost.

Valuation and Allocation

It appears that the selling price of certain of the company's products has declined significantly.

Valuation and Allocation

Inventories are reduced, when appropriate, to replacement costs or net realizable value.

Valuation and Allocation; Examine current vendors' price lists.

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

Vendors' invoices.

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

False

Cost of inventories is properly calculated.

Rights and Obligations; Select a sample of recorded items and examine supporting vendors' invoices and contracts.

Which of the following is least likely to be an accurate statement concerning characteristics of an audit?

An analysis of inventory turnover addresses whether the proper method of determining inventory costs-as contrasted to market values-is being applied.

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:

Cash disbursements.

The entity has legal title to inventories.

Rights and Obligations; Select a sample of recorded items and examine supporting vendors' invoices and contracts.

Inventory items were stored in three different warehouses and the auditors fear that some items might be in an undisclosed fourth warehouse.

Completeness

Recorded inventory quantities include all products on hand.

Completeness; Select a sample of items during the physical inventory count and determine that they have been included on count sheets.

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?

Corresponding with the state agency regarding the authenticity of the public warehouse.

Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles?

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

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:

Deliveries for which no purchase order was issued.

Auditors should not review the client's planning of the physical inventory

False

For good internal control over purchase transactions, purchases should be made from approved vendors by the department needing the goods.

False

The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders.

False

Which of the following best describes the reason that the auditors record their inventory test counts in the working papers?

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:

Holds legal title to the merchandise.

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:

Purchases.

The use of a "blind" purchase order is designed to prevent errors by the:

Receiving department.

Determine that the presentation and disclosure of inventories and cost of goods sold is adequate.

Review drafts of the financial statements.

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

Shipping documents.

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 of the following is true about the auditors' observation of the client's physical inventory?

The auditors should evaluate the adequacy of the client's counting procedures.

Which of the following is not true relating to the auditors' observation of the client's physical inventory?

The auditors should make certain that consigned items from suppliers are included in physical inventory totals.

Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory?

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 true about the auditors' observation of the client's physical inventory?

The auditors' observation addresses the existence assertion.

Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has:

The authority to make purchases of requisitioned materials and services.

Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories?

The existence of inventories is inherently difficult to substantiate.

To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to:

The purchase order.

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

The storekeeper is responsible for maintenance of perpetual inventory records.

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.

To test the client's cutoff of inventories, the auditors will make a record of the serial number of the final receiving and shipping documents used prior to the taking of the physical inventory.

True