Question 1

Explain why the audit of work in process and finished goods inventory is generally more complex than the audit of purchased inventory.

Accepted Answer

The need to verify the cost of raw materials,direct labor,and manufacturing overhead in pricing work in process and finished goods has the effect of making the audit of work in process and finished goods inventory more complex than the audit of purchased inventory.

Question 2

Which of the following is an accurate statement regarding the audit of pricing and compilation of inventory?

Accepted Answer

A) Inventory compilation tests include all of the tests of the client's unit prices to determine whether they are correct. 
B) The review for obsolete inventory should be performed by the accounting department. 
C) The most important internal control for accurate unit costs is external verification by an outside consultant. 
D) Inventory compilation internal controls are needed to ensure that the physical counts are correctly summarized and priced. 
A) Inventory compilation tests include all of the tests of the client's unit prices to determine whether they are correct. 
B) The review for obsolete inventory should be performed by the accounting department. 
C) The most important internal control for accurate unit costs is external verification by an outside consultant. 
D) Inventory compilation internal controls are needed to ensure that the physical counts are correctly summarized and priced. D

Question 3

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

Accepted Answer

A) receipt of a customer's order. 
B) completion of production of a customer's order. 
C) initiation of production of a customer's order. 
D) acquisition of raw materials for production. 
A) receipt of a customer's order. 
B) completion of production of a customer's order. 
C) initiation of production of a customer's order. 
D) acquisition of raw materials for production. D

Question 4

When the client's perpetual inventory master files are inadequate,the auditor will probably choose to test the physical inventory prior to the balance sheet date.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) recorded transfers exist. 
B) all actual transfers are recorded. 
C) the quantity,date,and description of all recorded transfers are accurate. 
D) all of the above 
A) recorded transfers exist. 
B) all actual transfers are recorded. 
C) the quantity,date,and description of all recorded transfers are accurate. 
D) all of the above

Question 6

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

Accepted Answer

A) understated $400. 
B) understated $300. 
C) overstated $400. 
D) overstated $700. 
A) understated $400. 
B) understated $300. 
C) overstated $400. 
D) overstated $700.

Question 7

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

Accepted Answer

A) When perpetual inventory master files are accurate,auditors can test the physical inventory after the balance sheet date. 
B) It is a difficult procedure for the auditor to test the accuracy of the perpetual inventory master files. 
C) Auditors test the perpetual records for reductions in finished goods for sale as part of the sales and collection cycle. 
D) All of the above are accurate statements. 
A) When perpetual inventory master files are accurate,auditors can test the physical inventory after the balance sheet date. 
B) It is a difficult procedure for the auditor to test the accuracy of the perpetual inventory master files. 
C) Auditors test the perpetual records for reductions in finished goods for sale as part of the sales and collection cycle. 
D) All of the above are accurate statements.

Question 8

A major source of cutoff information for sales and purchases of inventory is

Accepted Answer

A) confirmations from outside parties. 
B) the test of details of balances. 
C) physical observation. 
D) the performance of analytical procedures. 
A) confirmations from outside parties. 
B) the test of details of balances. 
C) physical observation. 
D) the performance of analytical procedures.

Question 9

To best ascertain that a company has properly included merchandise that it owns in its ending inventory,the auditor should review and test the

Accepted Answer

A) terms of the open purchase orders. 
B) purchase cutoff procedures. 
C) contractual commitments made by the purchasing department. 
D) purchase invoices received on or around year-end. 
A) terms of the open purchase orders. 
B) purchase cutoff procedures. 
C) contractual commitments made by the purchasing department. 
D) purchase invoices received on or around year-end.

Question 10

What are the auditor's primary concerns in verifying the transfer of inventory from one location to another?

Accepted Answer

1. Recorded transfers exist.
2

Question 11

The adequacy of internal controls over the physical count of inventory is one of the key determinants of the amount of time needed to test inventory.

Accepted Answer

A) True 
 B)False

Question 12

The audit of the inventory and warehousing cycle consists of five parts.State the five parts and,for each part,identify the cycle in which that part is tested by the auditor.

Accepted Answer

The five parts are:
•Acquire and record

Question 13

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

Accepted Answer

A) cost ledgers. 
B) perpetual inventory records. 
C) receiving reports. 
D) material requisitions. 
A) cost ledgers. 
B) perpetual inventory records. 
C) receiving reports. 
D) material requisitions.

Question 14

Which of the following is an accurate statement regarding inventory and risk?

Accepted Answer

A) Inventory with a high business risk includes products with potential obsolescence. 
B) Auditors often have a greater concern for misstatements when inventory is stored in one warehouse. 
C) Inherent risk is generally set at low for manufacturing companies. 
D) Performance materiality for inventory is determined before assessing client business risk. 
A) Inventory with a high business risk includes products with potential obsolescence. 
B) Auditors often have a greater concern for misstatements when inventory is stored in one warehouse. 
C) Inherent risk is generally set at low for manufacturing companies. 
D) Performance materiality for inventory is determined before assessing client business risk.

Question 15

Management typically allocates overhead using total raw materials as the basis for the allocation.

Accepted Answer

A) True 
 B)False

Question 16

The auditor generally decides whether the inventory count can be taken before year-end primarily on the basis of

Accepted Answer

A) audit efficiency. 
B) accuracy of the perpetual inventory master files. 
C) client convenience. 
D) audit staff availability. 
A) audit efficiency. 
B) accuracy of the perpetual inventory master files. 
C) client convenience. 
D) audit staff availability.

Question 17

Inherent risk is typically assessed at a low level for inventory due to the nature of the asset.

Accepted Answer

A) True 
 B)False

Question 18

Cost of goods sold is generally a residual of beginning inventory less acquisitions plus ending inventory.

Accepted Answer

A) True 
 B)False

Question 19

Auditors usually test cost accounting records as part of the

Accepted Answer

A) acquisition tests. 
B) payroll tests. 
C) sales tests. 
D) All of the above are correct. 
A) acquisition tests. 
B) payroll tests. 
C) sales tests. 
D) All of the above are correct.

Question 20

Which of the following is not a function within the inventory and warehousing cycle?

Accepted Answer

A) process the goods 
B) store raw materials 
C) ship finished goods 
D) process invoices for shipped goods 
A) process the goods 
B) store raw materials 
C) ship finished goods 
D) process invoices for shipped goods

Exam 21: Audit of the Inventory and Warehousing Cycle

Explain why the audit of work in process and finished goods inventory is generally more complex than the audit of purchased inventory.

Which of the following is an accurate statement regarding the audit of pricing and compilation of inventory?

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

When the client's perpetual inventory master files are inadequate,the auditor will probably choose to test the physical inventory prior to the balance sheet date.

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

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

A major source of cutoff information for sales and purchases of inventory is

To best ascertain that a company has properly included merchandise that it owns in its ending inventory,the auditor should review and test the

What are the auditor's primary concerns in verifying the transfer of inventory from one location to another?

The adequacy of internal controls over the physical count of inventory is one of the key determinants of the amount of time needed to test inventory.

The audit of the inventory and warehousing cycle consists of five parts.State the five parts and,for each part,identify the cycle in which that part is tested by the auditor.

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

Which of the following is an accurate statement regarding inventory and risk?

Management typically allocates overhead using total raw materials as the basis for the allocation.

The auditor generally decides whether the inventory count can be taken before year-end primarily on the basis of

Inherent risk is typically assessed at a low level for inventory due to the nature of the asset.

Cost of goods sold is generally a residual of beginning inventory less acquisitions plus ending inventory.

Auditors usually test cost accounting records as part of the

Which of the following is not a function within the inventory and warehousing cycle?

The Demand for Audit and Other Assurance Services

The Cpa Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Fraud Auditing

Internal Control and Coso Framework

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls,

Completing the Tests in the Acquisition and Payment Cycle:

Audit of the Payroll and Personnel Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

Filters