Audit Procedures and Inventory Management

Which of the following audit procedures probably provides the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventories?

• Trace test counts noted during the entity’s physical count to the entity's summarization of quantities.

• Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

• Select the last few shipping advices used before the physical count and determine whether shipments were recorded as sales.

• Inspect the open purchase order file for significant commitments that should be considered for disclosure.

An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts on the client's inventory listing. This procedure most likely obtained evidence concerning:

• Existence or occurrence.

• Completeness

• Rights and obligations.

• Valuation

A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high, an auditor will probably

• Apply gross profit tests to ascertain the reasonableness of the physical counts

• Increase the extent of test of controls relevant to the inventory cycle

• Request the client to schedule the physical inventory count at the end of the year

• Insist that the client perform physical inventory count several times during the year.

After accounting for a sequential of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items

• Included in the listing have been counted

• Represented by inventory tags are included in the listing

• Included in the listing are represented by inventory tags

• Represented by inventory tags are bona fide

A new average cost is computed each time a purchase is made in the

• Average-cost method

• Moving-average cost method

• Weighted-average cost method

• All of these methods

An auditor most likely to inspect loan agreements under which an entity’s are pledged to support management’s financial statement assertion of

• Existence or occurrence

• Completeness

• Presentation and disclosure

• Valuation or allocation

Which of the following is least likely to be among the auditor’s objectives in the audit of inventories and cost of goods sold?

• Determine that the valuation of inventories and cogs is arrived at by appropriate methods.

• Determine the existence of inventories and the occurrence of transactions affecting cogs.

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

• Establish the completeness of inventories.

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

• Existence

• completeness

• clarity

• presentation

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

• Inventory is slow moving

• Computer error reports are generated for missing prenumbered inventory tickets

• Obsolete inventory items are segregated and excluded

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 is reasonably accurate.