Inventory and Auditing Quiz

Auditors usually test cost accounting records as part of the

• A) acquisition tests.

  
  

• B) payroll tests.

• C) sales tests.

• D) All of the above are correct.

Answer explanation

Auditors usually test cost accounting records as a part of the acquisition, payroll and sales tests to avoid testing the records more than once and to increase audit efficiency.

When determining the sample size for the number of items the auditor should count during the physical inventory

• A) it is easy to quantify the number of items based on a formula developed by the AICPA.

• B) one of the key determinants that must be considered is internal control over the physical count.

• C) one of the key determinants that must be considered is the cost involved.

• D) generally accepted auditing standards require that at least 80% of the dollar value of the inventory should be included in the sample.

Answer explanation

The number of inventory items auditors should count is difficult to specify because auditors concentrate on observing the client’s procedures rather than on selecting items for testing.

Boxes or other containers holding inventory should also be opened during test counts to determine the ________ of the inventory.

True/False Question

"When performing price tests for purchased inventory, the auditor would not be concerned with the most recent vendors' invoices if the client uses the FIFO valuation method."

• True

• False

Answer explanation

The auditor must examine sufficient invoices to account for the entire quantity of inventory for the item being tested, especially for the FIFO valuation method.

Auditors test the quantity of materials charged to work-in-process by tracing these quantities to

• Cost Ledgers

• Perpetual Inventory Records

• Receiving Reports

• Material Requisitions

Answer explanation

Material requisitions are documents that record the withdrawal of raw materials or components from inventory for use in the production process. By comparing the quantities recorded in material requisitions with the actual usage in work-in-process, auditors can verify the accuracy of inventory transactions

In most manufacturing companies, the inventory and warehousing cycle begins with the

• Receipt of a customer's order

• Completion of production of a customer's order

• Initiation of production of a customer's order

• Acquisition of raw materials for production

Answer explanation

Manufacturing companies are companies that transform raw materials into finished goods. The first step in any manufacturing process is to obtain raw materials from suppliers.

Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility of obsolete inventory?

• A) Compare gross margin percentage with that of previous years.

• B) Compare unit costs of inventory with previous years.

• C) Compare inventory turnover ratio with previous years.

• D) Compare current year manufacturing costs with previous years.

Answer explanation

Comparing the current year’s inventory turnover ratio with previous years’ can indeed provide insights into the possibility of obsolete inventory. If a retail company reports a low inventory turnover ratio, it could be an alert that some inventory items are obsolete.

 ________ is normally characterized as a difficult and complex account to audit.

• Property, Plant and Equipment

• Cash

• Inventory

• Prepaid Insurance

Answer explanation

Because inventory is often the largest account on the balance sheet, often in different locations, making physical control and counting difficult, diverse inventory items like jewels, chemicals and electronic parts are often difficult to observe and value. The inventory valuation is also difficult.

Receipt of ordered materials by the receiving department will generate the completion of a form called the

• Bill of Lading

• Receiving Report

• Materials Requisition

• Inventory Acquisition Summary

Answer explanation

The receiving department prepares a receiving report, which often is an electronic notification of the receipt of goods that becomes a part of the documentation before payment is made.

Which of the following is a continuously updated computerized record of inventory items purchased, used, sold, and on hand for merchandise, raw materials, and finished goods?

• Job Cost System

• Standard Cost Records

• Cost Accounting Records

• Perpetual Inventory Master File

Answer explanation

Perpetual inventory master file ensures real-time accuracy by reflecting changes about the units of inventory acquired, sold and on hand, making it an essential tool for effective inventory management.