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WorksheetsInventories
Total questions: 104
Worksheet time: 52mins
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.
The audit of ______ is often the most difficult and complex part of an audit.
property, plant and equipment
cash
inventory
prepaid insurance
Inventory is a complex area to audit for all but which of the following reasons?
Inventory is often in different locations.
There are several acceptable valuation methods and some entities use different methods for different types of inventory.
Inventory is often the largest account in working capital.
Inventory valuation includes few estimates.
When labor is a significant part of inventory, verifying the proper accounting of these costs should be tested in the:
inventory and warehousing cycle.
payroll and personnel cycle.
acquisitions and payments cycle.cash cycle
cash cycle
For retail and wholesale businesses, the most important inventory is
merchandise available for sale.
work-in-process.
raw materials.
inventory held on consignmen
The audit procedure “observe the client taking a physical inventory count and test the count” is sufficient to determine all of the following except:
whether recorded inventory actually exists
whether recorded inventory was properly valued by the client.
whether recorded inventory was properly counted by the client.
whether client inventory instruction had properly been followed.
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 of an order
The audit tests to verify that the client is using an inventory method which is generally accepted and to verify that physical counts were correctly summarized are performed during the audit of the
acquisition and payments cycle.
payroll and personnel cycle.
inventory and warehousing cycle
sales and collection cycle.
Which of the following would be an appropriate initiation of a purchase requisition?
One initiated based on a periodic count of raw materials.
One initiateby stockroom personnel as raw materials are needed.
Yes Yes
No No
Yes No
No Yes
Almost all companies need physical controls over their assets to prevent loss. Which of the following is not an example of such a control?
Perpetual inventory master files
Segregated, limited-access storage areas
Custody of assets assigned to specific responsible individuals.
Approved prenumbered documents for authorizing movement of inventory
Which department within a manufacturing company is often responsible for the review of production and scrap reports?
Purchasing.
Accounts Payable
Accounting
Production.
Handling the receipt of ordered goods is a part of the ________ cycle.purchasing
purchasing
acquisition and payment
inventory
inventory and warehousing
_________ accumulate costs by individual jobs as material is issued into production and labor costs are incurred.
Just-in-time production systems
Job order cost systems
Process cost systems
Manufacturing system
There must be a periodic physical count by the client of the inventory items on hand:
only if the client uses the LIFO method.
only if the client uses a lower-of-cost-or-market method
regardless of the client’s inventory valuation method
only if the client uses either the LIFO or FIFO method
With regard to the physical count of inventory, necessary control procedures include:
proper instructions for the physical count.
independent third-party verification of the count
third-party reconciliations of the physical counts with perpetual inventory master files.
counting the inventory only on the year-end date.
If the auditor concludes that physical controls over inventory are so inadequate that the inventory will be difficult to count, the auditor should ordinarily:
withdraw from the engagement.
issue a qualified audit report.
conduct expanded observation tests of physical inventory.
hire a specialist to assist the auditor.
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.
Written inventory representations from management.
Confirmation of inventories in a public warehouse
Auditor’s recomputation of inventory extensions.
Johnson Co.’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.
sales returns.
purchases.purchase discounts.
purchase discounts.
Which of the following is not a function within the inventory and warehousing cycle?
Process the goods.
Store raw materials.
Ship finished goods
Process invoices for shipped goods.
If an auditor were concerned with obtaining evidence about the appropriateness of the value of inventory, which of the following tests would be most appropriate?
Compilation tests
Price tests
Confirmation of inventory held by outside parties.
Physical examination of the inventory.
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 of the prior year.
Observe merchandise and raw materials during the client's physical inventory count.
Review the management’s inventory representation letter for accuracy
Test overall fairness of inventory values by comparing the company’s turnover ratio with the industry average.
Which of the following controls would be appropriate regarding the release of materials from a stockroom?
Production employees request materials be delivered to their work areas as they need them
Stockroom employees deliver materials to work areas throughout the day to maintain acceptable levels of safety stock – no written records are maintained.
Production employees submit approved requisition forms to the stockroom for materials needed.
Production employer in need of materials should personally pick up needed materials from the stockroom
Who should maintain the perpetual inventory master files?
Production personnel.
Inventory storeroom personnel
Inventory receiving personnel.
Accounting department personnel
The inventory and warehousing cycle can be thought of as having two separate but closely related systems, one involving the actual physical flow of goods, and the other the:
related costs.
storage of the goods.
internal control over those goods
prevention of waste, obsolescence, and theft.
In any company involved in manufacturing, an adequate cost accounting internal control system is necessary to indicate the relative profitability of the various products for management planning and control and to:
determine variances from standards
determine variances from budgets.
value inventories for financial statement purposes.
value inventories for audit verification.
Master files, worksheets, and reports that accumulate material, labor, and overhead as the costs are incurred are:
accounting systems.
storeroom documents
cost accounting records.
finished goods inventory records
The main difference between job order and process costing systems is that:
one accumulates costs by materials issued and the other by labor incurred.
one accumulates costs by individual jobs and the other by particular processes.
one emphasizes costs accumulated in completed products and the other emphasizes costs associated with work-in-process.
one emphasizes costs adding value to the product and the other emphasizes costs incurred because of waste, scrap, and obsolescence.
A well-designed computerized system of perpetual inventory master files includes information about the:
units of inventory purchased, sold, and on hand
unit costs of inventory purchased, sold, and on hand
units of raw materials, work-in-process, and finished goods
units and unit costs of inventory purchased, sold, and on hand.
Which of the following is a significant audit concern related to the transfer of inventory from one location to another?
Recorded transfers occurred
Transfers were properly transported
Transfers were properly planned.
Transfers represent efficient movement of assets.
When may auditors observe the physical inventory count?
At an interim date
At year-end
Yes Yes
No No
Yes No
No Yes
Which of the following is not an aspect of concern when auditing the cost accounting system?
Unit cost records
Physical controls over inventory.
Documents and records for transferring inventory.
Safeguarding the raw materials from point of receipt to the storeroom
The auditor’s tests of the adequacy of the physical controls over raw materials, work-in-process, and finished goods must be restricted to:
observation and inquiry.
documentation and observation.
documentation and confirmation.
documentation and inquiry.
It is frequently possible to test the physical inventory prior to the balance sheet date when:
there are accurate perpetual inventory master files.
year-end sales are small.
the internal control system is no better at year-end than at an earlier point in time
the client counts inventory at interim dates.
Tests of the perpetual inventory master files for the purpose of reducing the tests of physical inventory or changing their timing are done through the use of:
inquiry.
observation.
confirmation.
documentation
A major difficulty in the verification of inventory cost records is determining reasonableness of:
direct labor’s hourly rate
raw materials per unit cost
cost allocations.
number of direct labor hours applied.
When auditing the inventory and warehousing cycle, the use of analytical procedures is
not important for this cycle.
less important than for any other cycle.
more important than for any other cycle
as important as their use in any other cycle
Which one of the following analytical procedures would be most helpful in alerting the auditor to the possibility of obsolete inventory?
Compare gross margin percentage with 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’.
Which of the following statements is correct regarding the auditor’s responsibility with respect to the year-end inventory procedures of an audit client?
The auditor is responsible for reconciling the physical count with the perpetual inventory matter files.
The auditor is responsible for taking and compiling the inventory.
The auditor is responsible for observing the physical counting of inventory
Yes No No
No No Yes
Yes No Yes
No Yes No
McKesson & Robbins Company is a well-known audit case involving auditor responsibility. What occurred at the McKesson & Robbins Company to change the way in which auditors audit inventory
The company recorded nonexistent inventory
The auditor did not perform any audit tests of the inventory
The auditor and company colluded to overstate inventory balances.
The company counted inventory three months prior to year-end
When a physical count of inventory is performed at an interim date, the auditor observes it at that time and tests the perpetual records for transactions:
throughout the year
which are a representative sample of the period under audit.
from the date of the count to year-end.
from the date of the count to the end of the audit field work.
When there are no perpetual inventory files and inventory is material:
an audit cannot be performed, so the auditor must issue a disclaime
a physical inventory should be taken by the client near year-end.the auditor will have to perform the inventory count and determine valuation.
the auditor need not observe inventory counts but must do test counts.
Auditor tests of physical controls over raw materials, work-in-process, and finished goods are performed by:
Examination
Observation
Inquiry
Yes No Yes
No Yes No
Yes Yes No
No No Yes
The most important part of the observation of inventory is to determine whether:
all counts are accurate.
the inventory-takers are qualified.
obsolete inventory has been identified
the physical count is being taken in accordance with the client’s instructions
A useful starting point for becoming familiar with the client’s inventory is for the auditor to:
read the AICPA’s Industry Audit Guide
review accounting theory covering special problems, such as gas and oil accounting, or lease-purchase agreements.
read the client’s Accounting Manual.
tour the client’s facility.
A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory item. The audit objective being achieved by this procedure is:
inventory as recorded on tags actually exists (existence).
existing inventory is counted and tagged (completeness).
inventory is counted accurately (accuracy).
inventory is classified correctly (classification).
If a client intends to count inventory at an interim date, the auditor should expect there to be all of the following except:
controls over the preparation and maintenance of perpetual inventory records.
competent personnel assigned to count the inventory.
third-party inventory counting specialists
an adequately designed plan to count the inventory
A common inventory observation procedure is to be alert for items that are damaged, rust- or Arens/Elder/Beasley dust-covered, or located in inappropriate places. The balance-related audit objective being achieved by this procedure is:
classification.
cutoff.
realizable value.
rights
The test of details of balance procedure which requires the auditor to account for unused inventory tag numbers to make sure none have been deleted is associated with the audit objective of:
accuracy.
. existence.
detail tie-in.
completeness.
The test of details of balance procedure which requires the auditor to perform tests of lower-ofcost-or-market, selling price, and obsolescence is an attempt to satisfy the objective o
existence
completeness.
accuracy.
realizable value.
Most of the audit testing of the storage of finished goods as well as the shipment of merchandise takes place during the testing of the:
sales and collection cycle.
payroll and personnel cycle
acquisitions and payments cycle.
inventory and warehousing cycle
The auditor’s main concerns in verifying transfers of inventory do not include whether:
recorded transfers exist.
transfers represent appropriate uses of company resources.
all actual transfers are recorded.
the details of the transfer are accurately recorded.
After accounting for a sequence 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 actually exist
represented by inventory tags are included in the listing
included in the listing are represented by inventory tags.
Auditors test the quantity of materials charged to work-in-process by tracing these quantities to:
cost ledgers.
perpetual inventory records
perpetual inventory records
material requisitions
Which of the following situations would most likely require special audit planning
Inventory consists of precious stones.
Some items of factory and office equipment do not bear identification numbers.
Depreciation methods used on the client’s tax return differ from those used on the books
Assets costing less than $500 are expensed even though their expected life exceeds one year
For several years, a client’s physical inventory count has been lower than what was shown on Arens/Elder/Beasley medium a the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal control that led to the failure to adjust the accounting records for some:
purchases returned to vendors.
sales returns received
sales discounts allowed
cash purchases
The physical counting of inventory may be performed at which of the following times?
Interim dates
On a cycle basis during the year
Yes Yes
No No
Yes No
No Yes
When an auditor observes that personnel who are responsible for physically counting inventory are not following the inventory instructions, the auditor should:
contact a client’s supervisor in an attempt to correct the problem.
modify the client’s physical inventory instructions
not discuss the problem with client’s supervisor in order to maintain independence
assign audit staff to the inventory count
The auditor’s objective during an 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 so as to obtain assurance that inventory quantities are reasonably accurate.
The audit of year-end physical inventories should include steps to verify that the client’s purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a:
sale in the current period.
sale in the subsequent period
purchase in the current period.
purchase return in the subsequent period.
Which one of the following procedures would not be appropriate for an auditor in discharging his responsibilities concerning the client’s physical inventories?
Confirmation of goods in the hands of public warehouses
Supervising the taking of the annual physical inventory
Carrying out physical inventory procedures at an interim date.
Obtaining written representation from the client as to the existence, quality, and dollar amount of the inventory.
Pricing manufactured inventory is difficult. Auditors must evaluate the method of allocating manufacturing overhead for all but which of the following?
reasonableness.
computational correctness
adherence to FASB pronouncement
consistency.
If the perpetual inventory master files show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded:
sales
sales discounts
purchases.
purchase discounts.
Which of the following is not a generally recognized inventory method?
FIFO
LOFO
LIFO
Specific identification
Which of the following control procedures would most likely be used to maintain accurate perpetual inventory records?
Independent storeroom count of goods received.
Periodic independent comparison of records with goods on hand
Periodic independent reconciliation of control and subsidiary records.
Independent matching of purchase orders, receiving reports, and vendors’ invoices.
Cost accounting controls are those related to the physical inventory and the consequent costs from the point at which:
materials are ordered for purchase until the finished product is sold.
the customer’s order is received until the finished product is shipped.
raw materials are requisitioned until the finished product is sent to storage.
raw materials are requisitioned until the finished product is completely manufactured.
In valuing inventory, the auditor must consider all but which of the following factors?
The valuation method must be in accordance with GAAP
The valuation method must be applied on a consistent basis.
The inventory must be valued at the lower of cost or market.
All inventory must be valued using the same valuation method under GAAP.
Controls which provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totaled, and included in the general ledger at the proper amount are known as:
standard cost controls
pricing internal controls
compilation internal controls.
count quantity internal controls.
Assume that the client’s valuation of an inventory item is $10 per unit for 1,000 units, using first-in, first-out (FIFO). If the most recent acquisition of inventory was for 600 units at $10 per unit and the immediately preceding acquisition was for 700 units at $9 per unit, the inventory item is in error and it is:
. understated $400.
understated $300.
overstated $400.
overstated $700
Assume that the client’s valuation of an inventory item is $10 per unit for 1,000 units, using LIFO. If the most recent acquisition of a layer of inventory was for 600 units at $10 per unit and the immediately preceding layer was for 700 units at $9 per unit, the inventory item is in error and it is:
understated $700
understated $300.
overstated $400
overstated $700
When an outside specialist has assumed full responsibility for taking the client’s physical inventory, reliance on the specialist’s report is acceptable if:
the auditor’s report contains a reference to the assumption of full responsibility.
the auditor is satisfied through application of appropriate procedures as to the reputation and competence of the specialist
the auditor conducted the same audit tests and procedures as would have been applicable if the client’s employees took the physical inventory.
circumstances made it impracticable or impossible for the auditor either to do the work personally or observe the work done by the inventory firm
To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the:
terms of the open purchase orders.
purchase cutoff procedures.
contractual commitments made by the purchasing department
purchase invoices received on or around year-end.
Hardy Company mass-produces eight different products. The controller who is interested in strengthening internal controls over the accounting for materials used in production would be most likely to implement a(n):
perpetual inventory system
job order cost accounting system
economic order quantity system
separation of duties among production personne
Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
The cycle basis is used for physical counts.
Supplies of relatively little value are expensed when purchased.
Perpetual inventory records are maintained only for items of significant value.
The storekeeper is responsible for maintenance of perpetual inventory records.
When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing unrecorded liabilities?
Observation of inventory.
Review of outstanding receipts.
Inspection of receiving and issuing procedures.
Confirmation of negotiable receipts with holders
Which of the following would be deducted in the retail portion when calculating the cost ratio under retail method?
Sales discount
Normal spoilage
Purchase discount
Abnormal spoilage
All of the foregoing
Goods in transit shipped CIF (Cost, Insurance & Freight) would be
excluded from the inventory account of the buyer
excluded from the inventory account of the seller
Answer not given
included in the inventory account of the buyer and seller
excluded from the inventory account of the buyer and seller
When an auditor observes that personnel who are responsible for physically counting inventory are not following the inventory instructions, the auditor should:
assign audit staff to the inventory count.
not discuss the problem with client’s supervisor in order to maintain independence.
contact a client’s supervisor in an attempt to correct the problem.
modify the client’s physical inventory instructions.
Costs that are incurred in bringing the inventories to their present location and condition are capitalized as cost of inventories and these include
Abnormal amount of wasted materials, labor and production cost
Cost of designing products for specific customers.
Administrative overheads
Storage cost not necessary in the production process before a further production stage
None of the foregoing
The following items should be excluded from the physical count of inventory, except
Defective goods segregated as ‘return to vendor’
Answer not given
Purchased goods in transit, FOB destination
Ordered goods delivered by the supplier but invoice not yet received
Sold merchandise in transit, FOB shipping point
Cost formula applicable for inventory items that are not interchangeable and goods that are produced and segregated for specific projects
FIFO
Weighted average
Specific identification
Moving average
Consider the following cost:
1) Handling cost related to imports
2) Freight on sales, FOB destination
3) Insurance on factory building
4) Brokerage commission for arranging imports
5) Store supplies used
1, 3, 4, 5
3, 4, 5
1, 4, 5
Answer not given
1, 2, 3
Inventories net realizable value is equal to
sales price minus cost to complete plus cost to sell
Answer not given
sales price minus cost to sell and complete
sales price minus cost to sell minus normal profit margin
sales price minus cost to sell minus cost to complete minus normal profit margin
At the end of the reporting period, inventories are to be reported at
Answer not given
Lower of cost and market value
Lower of replacement cost and net realizable value
Lower of market and net realizable value
Lower of carrying amount and market
If a client intends to count inventory at an interim date, the auditor should expect there to be all of the following except:
an adequately designed plan to count the inventory.
competent personnel assigned to count the inventory.
third-party inventory counting specialists.
controls over the preparation and maintenance of perpetual inventory records.
Inventory is a complex area to audit for all but which of the following reasons?
Inventory valuation includes few estimates.
There are several acceptable valuation methods and some entities use different methods for different types of inventory.
Inventory is often in different locations.
Inventory is often the largest account in working capital.
Which of the following will be added in both the cost and retail portion of goods available for sale when calculating the cost ratio in retail method?
Freight out
Freight in
Departmental transfer in
None of the foregoing
Departmental transfer out
Which of the following will be included in the physical count of inventories of the audit client?
All of the foregoing
Returned merchandise received from customers
Inventories pledged as security for liabilities
Unsold items in the hands of the consignee
Ordered goods received from supplier but invoice not yet received
Freight prepaid journal entry in the books of the buyer would be
debit freight in and credit cash
Answer not given
debit accounts payable and credit cash
debit freight in and credit accounts payable
debit cash and credit accounts pauable
When computing cost of sales under gross profit method, net sales would be
Multiplied by cost ratio when the gross profit is based on cost
Divided by sales ratio when gross profit is based on sales
Multiplied by cost ratio when the gross profit is based on sales
Divided by cost ratio when gross profit is based on cost
When a portion of inventories has been pledged as security on a loan
An equal amount of retained earnings should be appropriated
The value of the portion pledged should be subtracted from the debt.
The cost of the pledged inventories should be transferred from current assets to noncurrent assets.
The fact should be disclosed but the amount of current assets should not be affected.
Which one of the following analytical procedures would be most helpful in alerting the auditor to the possibility of obsolete inventory?
Compare inventory turnover ratio with previous years’.
Compare unit costs of inventory with previous years’
Compare gross margin percentage with previous years’.
Compare current year manufacturing costs with previous years’.
Which of the following would least likely be included as part of inventory cost?
Storage cost
Conversion cost
None of the foregoing
Transport cost
Handling cost
During period of rising prices, a perpetual inventory system would result in the same peso amount of ending inventory as a periodic inventory system under which of the following inventory cost flow method?
LIFO
Standard cost
FIFO
Average method
Goods in transit shipped FOB destination would be
excluded in the inventory account of the seller
ncluded in the inventory account of the buyer and seller
included in the inventory account of the buyer
Answer not given
included in the inventory account of the seller
According to the net method, which of the following items should be included in the cost of inventory?
(1) Freight costs and (2) Purchase discounts not taken
Yes and Yes
No and Yes
No and No
Yes and No
Markdown is ignored in the computation of cost ratio under retail method using
Average approach
LIFO approach
Conservative approach
Both FIFO and conservative approach
FIFO approach
The cost of purchase of inventory does not include
Purchase price
trade discounts, rebates and other similar item
Freight, handling and other costs directly attributable to the acquisition of goods
Import duties and taxes
Johnson Co.’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.
sales returns.
purchases.
purchase discounts.
This cost formula would most likely reflect the current prices of ending inventory at year-end
Standard cost
FIFO
Weighted average
Moving average
Freight collect journal entry in the books of the seller would be
Answer not given
debit freight in and credit accounts payable
debit freight in and credit cash
debit freight out and credit cash
debit freight out and credit accounts receivable
The test of details of balance procedure which requires the auditor to perform tests of lower-of-cost-or-NRV, selling price, and obsolescence is an attempt to satisfy the objective of:
completeness.
valuation.
existence.
presentation
The following are excluded from the scope of PAS 2, except
Merchandise held for sale in the ordinary course of business.
Inventories held for speculation and appr
Stocks in the form of materials or supplies to be consumed in the production process or in the rendering of servi
None of the foregoing
Goods in the process of production for such sale.
It is used for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods.
Any of the foregoing
Standard costing
Gross profit method
Specific identification
Retail method
Which of the following would not be deducted in the cost portion when calculating the cost ratio under average retail method?
Purchase allowance
None of the foregoing
Net markdown
Departmental transfer out
