chap 21

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

• Compare gross margin percentage with that of previous years.

• Compare unit costs of inventory with previous years.

• Compare inventory turnover ratio with previous years.

• Compare current year manufacturing costs with previous years.

One of the auditor's primary concerns in verifying the transfer of inventory from one location to another is that

• recorded transfers exist.

• all actual transfers are recorded.

• the quantity, date, and description of all recorded transfers are accurate.

• all of the above

Which of the following is an accurate statement regarding perpetual inventory master files?

• When perpetual inventory master files are accurate, auditors can test the physical inventory after the balance sheet date.

• It is a difficult procedure for the auditor to test the accuracy of the perpetual inventory master files.

• Auditors test the perpetual records for reductions in finished goods for sale as part of the sales and collection cycle.

• All of the above are accurate statements.

The auditor is concerned with four aspects of cost accounting, including

• documents and records for transferring inventory.

• perpetual inventory master files.

• unit cost records.

• all of the above.

When auditors observe the client counting inventory, they should be careful to do all of the following except

• inquire about items that are likely to be obsolete or damaged.

• calculate the unit cost of the inventory items.

• discuss with management the reasons for excluding any material items.

• observe the counting of the most significant items.

The audit of cost accounting begins with the internal transfer of assets from raw materials to work-in-process to

• manufacturing overhead.

• finished goods inventory.

• the perpetual inventory master files.

• retail sales.

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.

When performing inventory valuation tests, the auditor must be concerned that the method is in accordance with accounting standards.

• TRUE

• FALSE

In the audit of inventory, the auditor and client are jointly responsible for making and recording the count of physical inventory; while the auditor is responsible for drawing conclusions about the adequacy of the physical inventory.

• TRUE

• FALSE

A major difficulty in the verification of inventory cost records for the purpose of inventory valuation is in determining the reasonableness of the

• direct labor costs.

• raw material costs.

• manufacturing overhead costs.

• period costs.