audit chapter 12 quiz

Which of the following is not a part of the auditors' responsibility when a client counts its inventory?

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

Inventory is understated because warehouse personnel overlooked several racks of parts in taking the physical inventory.

Error

An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to:

Existence

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is:

Existence.

Factory overhead is normally assigned to work-in-process immediately as overhead expenses are incurred.

False

Since the employees in the purchasing department order inventory items, they should inspect and receive the items when the goods arrive.

False

The auditors need never observe inventories stored in legitimate public warehouses.

False

The auditors' observation of the taking of a client's physical inventory must be done on, or shortly after the balance sheet date.

False

Inventory is overstated because management instructed computer personnel to make changes in the file used to price inventories.

Fraud

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.

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory?

Observe merchandise and raw materials during the client's physical inventory taking.

The primary objective of a CPA's observation of a client's physical inventory count is to:

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

Purchase cutoff procedures should be designed to test whether all inventory:

Owned by the company was recorded.

The receiving department is least likely to be responsible for the:

Preparation of a shipping document.

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the:

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:

Purchases

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that:

Sales billed to customers were actually shipped.

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.

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?

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

Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories?

Supervising the taking of the annual physical inventory.

Observation of inventories is a generally accepted auditing standard.

T

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?

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?

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 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.

Analytical procedures may reveal conditions indicating that the client has significant amounts of obsolete inventory.

True

During the auditors' observation of the physical inventory, they often obtain information that may be used to test the cutoff of the client's purchase transactions.

True

Perpetual inventory records not only help control theft of inventories, they also generally result in improved production planning.

True

Testing the cost accounting system is a major step in determining the appropriate valuation of inventories in a manufacturing business.

True

The McKesson & Robbins case highlighted the need to directly verify the existence of a client's inventory.

True

The auditors should record the details of their test counts in the audit working papers to be used to test the client's completed physical inventory listing.

True

The extent of the auditors' test counts of inventory items should be influenced by the inherent risk of the client's inventory and the adequacy of the client's internal control.

True

The auditor's analytical procedures will be facilitated if the client:

Uses a standard cost system that produces variance reports.

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and:

Valuation

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address:

Valuation

An auditor most likely would analyze inventory turnover rates to obtain evidence about:

Valuation.

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.

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

Vendors' 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 physical inventory sheets. The purpose of this procedure is to obtain assurance that:

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

When an auditor tests a client's cost accounting system, the auditors' tests are primarily designed to determine that:

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

A client's materials purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to:

evaluate the reliability of information generated as a result of the purchasing process.

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

f

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

f

Auditors may use statistical sampling for their test counts, but the client should never use statistical sampling to estimate the quantities of goods on hand.

false

Purchase cutoff procedures should be designed to test whether or not all inventory:

is owned by the company.

A client'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:

sales

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

t

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.

t

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 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.

During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to:

Completeness.

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

Cost of good 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.

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold?

Establish that the client includes only inventory on hand at year-end in inventory totals.

Goods in transit at the balance sheet date should never be included in the client's inventory.

False

If the auditors are unable to satisfy themselves regarding the fairness of the client's beginning inventories, they will be unable to give an unmodified opinion on any of the financial statements.

False

The receiving department normally sends raw materials received to the production department and obtains a receipt from the supervisor.

False

To assure that the physical inventory is taken properly, the auditors should prepare and take primary responsibility for the physical inventory instructions.

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.

Inventory is overstated because warehouse personnel included inventory items received subsequent to year-end while recording the purchase in the subsequent year to hide inventory shortages.

Fraud

On June 15, 200X, Ward, CPA, accepted an engagement to perform an audit of the Grant Co. for the year ended December 31,200X. Grant Co. has not previously been audited by a CPA and Ward has been unable to satisfy himself with respect to opening inventories. How should Ward report on his audit?

He would have to disclaim an opinion or qualify his opinion on the income statement and the statement of cash flows, but could issue an unmodified opinion on the December 31, 200X balance sheet.

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.

From which of the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?

Observation of physical inventory counts.

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:

Observe physical counts of the inventory items.

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received?

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

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

Receiving department.

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

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

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:

Represented by inventory tags are included in the listing.

In verifying credits to perpetual inventory records of a non-manufacturing 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 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 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.

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?

Tour the manufacturing plant or production facility.

Management representations concerning inventories often include representations regarding purchase and sales commitments.

True

Observation of inventory is a generally accepted auditing procedure.

True

Proper presentation of inventories includes disclosure of inventory that is pledged as collateral for loans.

True

Serially numbered purchase orders should be issued for purchases of goods.

True

An auditor most likely would analyze inventory turnover rates to obtain evidence about:

Valuation

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and:

Valuation.

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably:

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:

Well-kept records of perpetual inventory are maintained.

To strengthen the system of internal control over the purchase of merchandise, a company's receiving department should:

accept merchandise only if a purchase order or approval granted by the purchasing department is on hand.

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when:

accurate perpetual inventory records are maintained.

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

f

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

f

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 unqualified opinion on the client's income statement.

f

A client uses a perpetual inventory system. One would expect a credit to which of the following accounts at the point of sale?

sales and inventory

A client uses a periodic inventory system. One would expect a credit to which of the following accounts at the point of sale?

sales, not inventory

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

t

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.

t

An inventory turnover analysis is useful to the auditor because it may detect:

the existence of obsolete merchandise.

An auditor would be least likely to learn of slow-moving inventory through:

vouching of year-end purchases.

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the:

Bill of lading.

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:

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

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.

During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to:

Completeness

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.

The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the:

Cost Accounting Standards Board.