Worksheetstheories on audit of production cycle
Total questions: 25
Worksheet time: 13mins
which of the following is not one of the independent auditor's objectives regarding the audit of inventories?
verifying that the client has used proper inventory pricing
verifying that inventory counted is owned by the client.
verifying that all inventory owned by the client is on hand at the time of the count.
ascertaining the physical quantities of inventory on hand.
To ascertain whether inventories included in the statement of financial position physically exists, a CPA will ordinarily:
obtain confirmation of pledged inventories
observe physical inventory counts
test client's shipping cutoff procedures.
perform an analytic review of the relationship of the inventory balance to recent sales
a client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high an auditor will probably
increase the extent of tests 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 counts of inventory items several times during the year
apply gross profit tests to ascertain the reasonableness of the physical counts.
the procedure involve in the attendance of physical inventory counting
serve as risk assessment procedures
serve as test of controls
serve as substantive procedures
may serve as test of controls or substantive procedures depending on the auditor's risk assessment, planned approach and the specific procedures carried out.
when inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting unless impracticable. Where attendance is impracticable, due to factors such as the nature and location of the inventory, the auditor should:
take or observe some physical counts on an alternative date and, when necessary, perform tests of intervening transactions.
consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to conclude that the auditor need not make reference to a scope limitation
issue qualified or disclaimer of opinion
issue qualified or adverse opinion
in which of the following cases is attendance at physical inventory counting impracticable?
where inventory is held in a location that may pose threats to the safety of the auditor
where the auditor will be inconvenienced because of the difficulty, time and cost involved in doing the procedures.
both a and b
neither a and b
Which of the following provide sufficient appropriate audit evidence about the existence and condition of inventory if attendance at physical inventory is impracticable?
inspection of documentation of the subsequent sale of specific inventory items purchased prior to the physical inventory counting.
inspection of documentation of the subsequent sale of specific inventory items purchased after the physical counting
both a and b
neither a and
When inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of the inventory by
requesting confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity
performing inspection or other audit procedures appropriate in the circumstances
performing one or both of the procedures in (a) and (b)
relying only on the written representations made by the client's management
an auditor selected items for test counts while observing a client's physical inventory. The auditor then traced test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of
completeness
valuation
rights and obligations
existence or occurrence
The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?
Inventory item has been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.
an item purchased "FOB Shipping point" had not arrived at the date of the inventory count and had not reflected in the perpetual records.
no journal entry had been made on the retailer's books for several items returned to its suppliers
credit memos for several items returned by customers had not been recorded.
The accuracy of perpetual inventory records may be established in part by comparing perpetual inventory records with
purchase requisitions
receiving reports
purchase orders
vendor payments
Which of the following is the best procedure for identifying shortages of specific items in an inventory of raw materials?
estimates inventory quantities by using the gross profit method.
review internal controls for the physical protection of inventories.
compare the results of a physical inventory of raw materials with perpetual inventory records.
compare inventory turnover rates with prevailing rates from previous years.
You were engaged to conduct an annual examination for the fiscal year ended October 31. Because of the expected holiday, you were able to convince your client to take a complete physical inventory, in which you were present on October 15. Perpetual inventory records are kept and the client considers a sale to be made in the period in which goods are shipped. You had a sales cut-off test worksheet prepared. Which items among those listed below will not require an adjusting entry to reconcile the client's detailed inventory record with the physical inventory?
Date goods shipped- Oct 31
Transaction Recorded as sale - Nov 2
Date inventory control Credited - Oct 31.
Date goods shipped- Oct 31
Transaction Recorded as sale - Oct 31
Date inventory control Credited - Oct 31.
Date goods shipped- Oct 14
Transaction Recorded as sale - Oct 16
Date inventory control Credited - Oct 16
Date goods shipped- Oct 10
Transaction Recorded as sale - Oct 19
Date inventory control Credited - Oct 12
In auditing inventories, a major objective relates to the existence assertion. Of the following audit procedure relating to inventories, which does not support the existence assertion?
The auditor reviews the client's inventory-taking instructions for such matters as proper arrangements of goods, separation of consigned goods, and limits on movements of goods during inventory.
the auditor observes the client's inventory and performs test counts as appropriate
the auditor confirms inventories not on the premises
the auditor performs a lower of cost or NRV test for major categories of inventory
Which of the following items should not be included in physical inventory?
materials in transit from vendors
goods in a private warehouse
goods received for repairs under warranty.
consignment to an agent
When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain evidence that
no goods held on consignment for customers are included in the inventory balance
no goods observed during the physical count are pledged or sold
all goods owned at year end are included in the inventory balance
all goods purchased before year end are received before the physical inventory count.
Which of the following audit procedure is not designed primarily to test for the correctness of purchases and sales cutoff?
observe shipping and receiving areas during physical inventory observation and relate goods to the last receipt and shipment for the year. Determine that these are the final entries in the purchases and sales records for the year.
Examine sales and purchases invoices for a few days before and after year end. Compare with dates of receipts and shipment and with freight terms to determine that the transactions were recorded in the proper accounting period.
record last document numbers (sales invoice, voucher, check, receiving report) for the year and relate to goods in shipping and receiving areas at year end.
trace client's unit costs to the auditor's copies of audited price lists.
What form of analytical review might uncover the existence of obsolete merchandise?
decrease in the ratio of gross profit to sales
ratio of inventory to accounts payable
comparison of inventory values to purchase invoices
inventory turnover rates
an auditor would analyze inventory turnover rates to obtain evidence concerning management's assertion about
completeness
valuation and allocation
presentation and disclosure
rights and obligations
when auditing inventories of raw materials, purchased parts, and/or merchandise inventory, the auditor's most effective means for evaluating the valuation assertion is to
Compare purchases with prior year and with industry averages and account for significant flunctuations
trace quantities from tags or count sheets to final inventory listings
examine recent invoices from vendors, along with freight bills and compare with client's unit costs, as adjusted for freight and discounts
scan inventory listings for large extended amounts, and trace related quantities to auditor's copy of the inventory tag or listing.
In a manufacturing company, which of the following audit procedures would give the least assurance of the valuation of inventory at the audit date?
obtaining confirmation of inventories pledged under loan agreements
testing the computation of standard overhead rates
examining paid vendor's invoices
reviewing direct labor rates
For manufacturing inventories, the valuation assertion is best tested by
tracing unit costs appearing on final inventory listing to auditor's copy of audited finished goods unit costs.
testing for purchases and sales cutoff
inquiring as to inventory obsolescence
comparing unit prices with recent vendor's invoices
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?
Tracing test counts to the entity's inventory listing.
testing the entity's computation of standards overhead rates.
obtaining confirmation of inventories pledged under loan agreements.
reviewing shipping and receiving cutoff procedures for inventories
An understatement of a purchase discount would be detected by
comparing purchase invoice terms with disbursement records and checks.
verifying footings and cross footings of purchases and disbursement records.
comparing approved purchase orders to receiving reports
verifying the receipt of items ordered and invoiced.
An auditor most likely to inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of
existence or occurence
presentation and disclosure
valuation or allocation
completeness
