Auditing Ch. 12 quiz

A washing machine manufacturer puts bar codes on all boxes containing washing machines. The bar codes are scanned prior to shipping. This is indicative of what type of system? A) A periodic inventory system B) A perpetual inventory system C) A process order costing system D) A just-in-time inventory system

A perpetual inventory system

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. Job time shipping. Production order. Production schedule.

Bill of lading.

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: Existence. Completeness. Clarity. Presentation.

Existence.

When the auditors discover an overstatement of accounts payable, they would most likely also expect to find an overstatement of: A) Accrued liabilities. B) Inventory. C) Retained earnings. D) Revenues.

Inventory.

The receiving department is least likely to be responsible for the: Determination of quantities of goods received. Detection of damaged or defective merchandise. Preparation of a shipping document. Transmittal of goods received to the store's department.

Preparation of a shipping document.

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: A) Sales. B) Sales discounts. C) Purchases. D) Purchase returns.

Purchases.

To adequately provide for the segregation of duties, purchase requisitions should be initiated by which of the following departments? A) Purchasing department B) Sales department C) Stores or warehouse D) Shipping

Stores or warehouse

The auditor's analytical procedures will be facilitated if the client: Uses a standard cost system that produces variance reports. Segregates obsolete inventory before the physical inventory count. Corrects material weaknesses in internal control before the beginning of the audit. Reduces inventory balances to the lower of cost or market.

Uses a standard cost system that produces variance reports.

Which of the following should be included as a part of inventory costs of a manufacturing company? Direct Labor Raw Materials Factory Overhead Yes Yes Yes Yes No No No Yes No No No No

Yes Yes Yes

An auditor is auditing year 20X2 of a new audit client. The auditor did not observe the counting of the year 20X1 ending inventory and has serious question about the validity of the year 20X1 beginning inventory figure. The inventory is material. In this situation the auditor will generally: A) Be able to issue an unqualified opinion on the statements of income and cash flows, but not on the ending balance sheet. B) Be able to issue an unqualified opinion on the ending balance sheet. C) Be required to disclaim an opinion on all financial statements. D) Be required to issue an adverse opinion on the income statement and the statement of cash flows.

Be able to issue an unqualified opinion on the ending balance sheet.

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. Must comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion. Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole. Must, if the inventories are material, qualify her opinion.

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

An auditor has accounted for a sequence of inventory tags and is now tracing information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly? A) Completeness B) Existence C) Presentation D) Valuation

Completeness

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold? Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods. Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold. Establish that the client includes only inventory on hand at year-end in inventory totals. Establish the completeness of inventories.

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

In conjunction with the observation of a client's physical inventory, the auditors should: A) Plan the physical inventory. B) Segregate damaged and obsolete goods. C) Supervise the client's personnel. D) Evaluate the adequacy of the client's counting procedures.

Evaluate the adequacy of the client's counting procedures.

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client when the client: A) Has paid for the merchandise. B) Has physical possession of the merchandise. C) Holds legal title to the merchandise. D) Holds the shipping documents for the merchandise issued in the company's name.

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? Compare the physical quantities of slow-moving items with corresponding quantities in the prior year. Observe merchandise and raw materials during the client's physical inventory taking. Review the management's inventory representations letter for accuracy. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.

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

An inventory turnover analysis is most likely to help the auditors to detect: A) Inadequacies in inventory pricing. B) Methods of avoiding cyclical holding cost. C) Optimum automatic reorder points. D) Obsolete merchandise.

Obsolete merchandise.

The primary objective of a CPA's observation of a client's physical inventory count is to: Discover whether a client has counted a particular inventory item or group of items. Obtain direct knowledge that the inventory exists and has been properly counted. Provide an appraisal of the quality of the merchandise on hand on the day of the physical count. Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are reasonably accurate.

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

In most audits are auditors more concerned with an under- or overstatement of ending inventory, and why? A) Overstatement, because net income would be overstated also. B) Understatement, because net income would be overstated. C) Overstatement, because this would indicate that liabilities are likely to be understated. D) Understatement, because this would indicate that liabilities are likely to be understated.

Overstatement, because net income would be overstated also.

A client's physical count of inventories was lower than the inventory quantities per the perpetual records. This situation could be the result of the failure to record: A) Sales. B) Sales returns. C) Purchases. D) Purchase discounts.

Sales.

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

The storekeeper is responsible for maintenance of perpetual inventory records.

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. Insist that the client 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 client to schedule the physical inventory count at the end of the year.