Ch. 12/14 Quiz/Connect

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

No.

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.

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 analyze inventory turnover rates to obtain evidence about:

Valuation.

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

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.

Is the use of a tagging system for inventory taking designed to prevent double counting of goods?

Yes.

With strong internal control, may Jilco Inc.'s inventory count be performed during the year rather than at year end?

Yes.

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.

Purchase cutoff procedures should be designed to test whether purchases recorded near year-end:

is owned by the company.

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.

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

Yes.

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

vouching of year-end purchases.

Are accounts receivable requests, accounts payable requests, or both mailed by the auditors (as opposed to client personnel)?

Both forms of confirmation requests should be mailed by the auditors to ensure that such requests are not tampered with by client personnel.

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.

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.

On June 15, 20X0, Ward, CPA, accepted an engagement to perform an audit of the Grant Co. for the year ended December 31, 20X0. 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, 20X0 balance sheet.

Am I correct that our observation of the counting of the inventory primarily addresses the existence of inventory, and not the completeness of the count?

No.

Do I need to count all items in the inventory?

No.

Why is the observation of physical inventory a mandatory auditing procedure? Explain.

Observation of physical inventory is generally mandatory because it provides strong evidence as to existence and quality of the client's inventories

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.

In most audits, are auditors more concerned with an under- or overstatement of inventory?

Overstatement, because Cost of Goods Sold would be understated.

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

Preparation of a shipping document.

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.

Many auditors consider the substantiation of the figure for inventory to be a more difficult and challenging task than the verification of most other items on the balance sheet. List several specific factors that support this view.

Substantiation of the figure for inventories is an especially challenging task because of the variety of acceptable methods of valuation. In addition, the variety of materials found in inventories calls for considerable experience and skill to do an efficient job of identifying and test-counting goods on hand. The possibilities of obsolescence and of excessive stocks also create problems. Finally, the relatively large size of inventories and their significance in the determination of net income make purposeful misstatement by the client a possibility that the auditors must guard against.

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

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

Why is the auditors' review of the client's control of inventory tags important during the observation of physical inventory? Explain.

The auditors' review of the client's control for inventory tags is important because of the danger that fictitious inventory tags might be created by dishonest client personnel after the auditors have completed their observation of the physical inventory.

What is the purpose of the auditors' review of cash payments subsequent to the balance sheet date?

The purpose of the auditors' review of cash payments subsequent to the balance sheet date is to disclose any accounts payable which existed at the balance sheet date but were unrecorded. Comparison of the cash payments made after the balance sheet date with the accounts payable trial balance also furnishes evidence of the existence of the recorded payables.

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.

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

the existence of obsolete merchandise.

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.

Which assertion do confirmation results most directly address—existence or completeness?

Confirmations most directly address existence in that they are sent to recorded accounts. They less directly address completeness since accounts may exist of which the auditor may be completely unaware, and therefore, not confirm.

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

Existence.

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

Existence.

At the completion of the count, should I leave Jilco Inc. personnel with a copy of all my inventory test counts to help assure inventory accuracy?

No.

Should Jilco's inventory be valued at the lower of standard cost or market?

No.

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

No.

When I take test counts of items, does this eliminate the need for Jilco Inc. personnel to count those items?

No.

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.

Under what circumstances is observation of physical inventory impossible?

Observation of physical inventory generally is impossible when the independent auditors were not appointed by the client until after the physical inventory had been taken. There may also be conditions where weather conditions, terrains, or some other circumstances make it impossible for the independent auditors to be present at the site of the client's inventory-taking; but such circumstances should be rare.

Is it correct that, since Jilco Inc. manufactures a product, direct labor and overhead ordinarily become a part of inventory costs?

Yes.

Is it safe to assume that any inventory items present as "consigned in" should not be included in the clients' inventory?

Yes.

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.

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.

Is confirmation presumptively required for accounts receivable, accounts payable, or both?

Confirmation of accounts receivable is presumptively required, while confirmation of accounts payable is not.