Audit Exam 2 - Chapter 13

Which of the following is not a typical document included in the Inventory Management Process? Multiple Choice Receiving report. Purchase order Inventory status report. Shipping order.

Purchase order

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

Which of the following is not a major function in the inventory management process? Multiple Choice Inventory management. Manufacturing. Receiving. Cost accounting.

Receiving

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 of the selected items Multiple Choice Represented by inventory tags are actual inventory owned by the entity (Rights and obligations). Included on the inventory listing have been counted. Represented by inventory tags are included in the entity's inventory balance (Completeness). Included in the listing are represented by inventory tags (Existence)

Represented by inventory tags are included in entities inventory balance (Completeness)

While observing an entity's annual physical inventory count, an auditor recorded test counts for several inventory items and noticed that certain test counts were higher than recorded quantities in the entity's perpetual records. This situation could be the result of the entity's failure to record Multiple Choice Purchase returns. Sales returns. Sales. Either sales or purchase returns.

Sales Returns

The most effective control for preventing fictitious inventory is Multiple Choice Using a perpetual inventory system. Using a periodic inventory system. Segregation of duties. Periodic review of inventory levels by those in charge of inventory requisitions.

Segregation of duties

Inventory obsolescence relates to Multiple Choice Completeness. Occurrence. Accuracy, Valuation and allocation. Classification.

Accuracy, Valuation, and allocation

An auditor would most likely make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's assertion of Multiple Choice Rights and obligations. Presentation. Existence. Accuracy, Valuation and allocation.

Accuracy, Valuation, and allocation.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of: Multiple Choice accuracy, valuation, and allocation. rights and obligations. existence. completeness.

Accuracy, valuation, and allocation

A decrease in inventory turnover that is not consistent with the change in sales may signal to the auditor Multiple Choice An overstatement of ending inventory. The existence of many open purchase orders. A change from FIFO to LIFO (assume prices are increasing). Duplicate payments on inventory orders.

An overstatement of ending inventory

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 materi

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

ey segregations of duties in the inventory management process include separation of all of the following except: Multiple Choice Inventory management from cost accounting. Cost accounting from the general ledger function. Supervision of physical inventory from perpetual inventory recordkeeping. Cost accounting from review of variance reports.

Cost accounting from review of variance reports

he 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 purcha

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

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? Multiple Choice During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count. Selection of the last few shipping advices used before the physical count and determination of whether the shipments were recorded as sales. Inquiry of management to

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

The Inventory Management Process is not related to which of the following processes? Multiple Choice Purchasing Process. Human Resource Management Process. Financing Process. Revenue Process.

Financing Process

Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions? Multiple Choice Subsidiary ledgers are periodically reconciled with inventory control accounts. Summary of the receiving reports is independently compared to the inventory status report. Inventory is periodically reviewed for slow-moving or obsolete items, which may require a write-down. Inventory manager does not have ability to record inve

Inventory manager does not have the ability to record inventory transactions

Which of the following is not an inherent risk factor in the audit of the inventory management process? Multiple Choice The lack of prenumbered materials requisition forms. Industry competition. The acquisition of raw materials from related parties. Technology changes.

Lack of prenumbered materials requisition forms

Which of the following is not a role of the inventory management function (not the inventory management process as a whole)? Multiple Choice Planning and scheduling manufacturing activities. Maintenance of the cost of manufacturing in cost records. Maintenance of inventory at appropriate levels. Issuance of purchase requisitions.

Maintenance of the cost of manufacturing in cost records

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

Misapplication of LIFO

Which of the following control activities would be most effective in maintaining accurate perpetual inventory records? Multiple Choice Independent matching of purchase orders, receiving reports, and vendor invoices prior to payment. Independent count of goods received by storeroom personnel. Periodic independent reconciliation of inventory control account with the subsidiary detailed records. Periodic independent reconciliation of perpetual records with actual goods on hand.

Periodic independent reconciliation of perpetual records with actual goods on hand

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? Multiple Choice Complete recounts are performed by independent teams. Unit cost records are integrated with production-accounting records. Inventory balances are rarely at low levels. Perpetual inventory records are maintained.

Perpetual inventory records are maintained

ouching the costs used to price inventory to the underlying vendors' invoices tests which of the following assertions? Multiple Choice occurrence cutoff accuracy classification

accuracy

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: Multiple Choice accuracy, valuation, and allocation. Correct completeness. existence. rights and obligations.

accuracy, valuation, and allocation

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that: Multiple Choice all goods purchased before year-end are received before the physical inventory count. no goods held on consignment for customers are included in the inventory balance. all goods owned at year-end are included in the inventory balance. goods observed during the physical count are pledged or sold.

all goods owned at year=end are included in inventory balance

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

ndependent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who: Multiple Choice are independent of issuing production orders update records from completed job cost sheets and production cost reports on a timely basis. obtain receipts for the transfer of completed work to finished goods prepare a completed production report. compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory. iss

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

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

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

The objectives of internal control for the raw material stores function are to provide assurance that: Multiple Choice costs are properly attached to inventory as goods are processed. independent internal verification of activity reports is established. custody of goods received from vendors is properly maintained. production orders are prenumbered and signed by a supervisor.

custody of goods received is properly maintained

An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file? Multiple Choice economic reorder quantity warehouse location date of last purchase quantity sold

econmic reorder quantity

An auditor's tests of controls over the issuance of raw materials to production would most likely include: Multiple Choice reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances. observation that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual. examination of materials requisitions and reperformance of entity controls designed to process and record issuances. inquiry of the cus

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

Observing an entity's inventory held on consignment by others tests the assertion of: Multiple Choice existence. completeness. accuracy, valuation, and allocation. rights and obligations.

existence

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

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

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 would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory? Multiple Choice segregation of functions between general accounting and cost accounting approval of inventory journal entries by the storekeeper independent comparisons of finished goods records with counts of goods on hand periodic reconciliation of work in process with job cost sheets

independent comparisons of finished goods records with a count of goods on hand

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 vouch: 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 vendor

items listed in the inventory 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, an

make or observe some physical counts of the inventory, recompute cartain 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 requistions

Which of the following is the best audit procedure for the discovery of damaged merchandise in an entity's ending inventory? Multiple Choice compare the physical quantities of slow-moving items with corresponding quantities of the prior year observe the condition of merchandise and raw materials during the entity's physical inventory count review the management's inventory representation letter for accuracy test overall fairness of inventory values by comparing the company's turnover ratio

observe the condition of merchandise and raw materials during the entities physical inventory count

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

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

n 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 hand

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

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

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

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

receiving documents

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

Which of the following internal control activities is most likely to address the completeness assertion for inventory? Multiple Choice There is a separation of duties between payroll department and inventory accounting personnel. The work-in-process account is periodically reconciled with subsidiary records. Receiving reports are prenumbered and periodically reconciled. Employees responsible for custody of finished goods do not perform the receiving function.

receiving reports are prenumbered and periodically reconciled

Which of the following best describes the occurrence assertion for inventory? Multiple Choice purchase requisitions initiated by authorized personnel recorded inventory transactions actually happened inventory properly accumulated from journals and ledgers all inventory is recorded

recorded inventory transactions actually happened

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 represented by inventory tags are bona fide. represented by inventory tags are included in the listing. included in the listing are represented by inventory tags. included in the listing have been counted.

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: Multiple Choice insist that the entity perform physical counts of inventory items several times during the year. increase the extent of tests of controls of the inventory system. apply gross profit tests to ascertain the reasonableness of the physical counts. request that the entity schedule the physical inventory count at the end of the y

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

An entity maintains perpetual inventory records in terms of both quantities and dollar amounts. If the assessed level of control risk is high, the auditor would probably Multiple Choice Insist that the entity take a physical count of inventory at least four times a year. Request that the entity take the physical count on or very near year-end. Rely mainly on tests of controls in the inventory and warehousing area. Rely on analytical procedures (i.e., gross profit test and inventory turnover)

request that the entity take the physical count on or very near year end

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 entities 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

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

sales

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

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

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 machinery

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

valuation

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 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 cost to vendors invoices

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.