Question 1

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

Accepted Answer

A)  manufacturing overhead. 
B)  finished goods inventory. 
C)  the perpetual inventory master files. 
D)  retail sales. 
A)  manufacturing overhead. 
B)  finished goods inventory. 
C)  the perpetual inventory master files. 
D)  retail sales. B

Question 2

The reliability of perpetual inventory master files affects the timing and ________ of the auditor's physical examination of inventory.

Accepted Answer

A)  cutoff 
B)  accuracy 
C)  nature 
D)  extent 
A)  cutoff 
B)  accuracy 
C)  nature 
D)  extent D

Question 3

To ensure proper segregation of duties, who should maintain the perpetual inventory master files?

Accepted Answer

A)  production personnel 
B)  inventory storeroom personnel 
C)  inventory receiving personnel 
D)  accounting department personnel 
A)  production personnel 
B)  inventory storeroom personnel 
C)  inventory receiving personnel 
D)  accounting department personnel D

Question 4

A common source of business risk for inventory is the reliance on a few key suppliers.

Accepted Answer

A) True 
 B)False

Question 5

In some inventory systems, raw materials can be requisitioned by automated computer software when raw materials reach a predetermined level.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Almost all companies need physical controls over their assets to prevent loss. Which of the following is not an example of such a control?

Accepted Answer

A)  perpetual inventory master files 
B)  segregated, limited-access storage areas 
C)  custody of assets assigned to specific responsible individuals 
D)  approved prenumbered documents for authorizing movement of inventory 
A)  perpetual inventory master files 
B)  segregated, limited-access storage areas 
C)  custody of assets assigned to specific responsible individuals 
D)  approved prenumbered documents for authorizing movement of inventory

Question 8

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

Accepted Answer

A)  accuracy. 
B)  existence. 
C)  detail tie-in. 
D)  completeness. 
A)  accuracy. 
B)  existence. 
C)  detail tie-in. 
D)  completeness.

Question 9

An auditor must inquire about consigned or customer inventory included on the client's premises to satisfy the balance-related audit objective of

Accepted Answer

A)  cutoff. 
B)  classification. 
C)  rights. 
D)  completeness. 
A)  cutoff. 
B)  classification. 
C)  rights. 
D)  completeness.

Question 10

You are auditing the inventory account and are concerned about the possibility of an inventory overstatement. What is the best audit procedure to detect damaged inventory?

Accepted Answer

A)  Observe the condition of inventory during the client's physical count. 
B)  Compare the condition of inventory from the previous year's count to the current year. 
C)  Compare inventory turnover from the previous year's inventory to the current year's inventory. 
D)  Reconcile the inventory counts to the cost accounting records. 
A)  Observe the condition of inventory during the client's physical count. 
B)  Compare the condition of inventory from the previous year's count to the current year. 
C)  Compare inventory turnover from the previous year's inventory to the current year's inventory. 
D)  Reconcile the inventory counts to the cost accounting records.

Question 11

When part of the client's inventory is in a public warehouse or in the possession of other outside custodians, the auditor does not need to observe a physical count of the inventory if a written confirmation is obtained directly from the inventory custodians.

Accepted Answer

A) True 
 B)False

Question 12

When verifying the transfer of inventory from one location to another, the audit objectives with which the auditor is primarily concerned are occurrence of recorded transfers, completeness of recorded transfers, and accuracy of recorded transfers.

Accepted Answer

A) True 
 B)False

Question 13

There must be a periodic physical count by the client of the inventory items on hand

Accepted Answer

A)  only if the client uses the LIFO method. 
B)  only if the client uses a lower-of-cost-or-market method. 
C)  regardless of the client's inventory valuation method. 
D)  only if the client uses either the LIFO or FIFO method. 
A)  only if the client uses the LIFO method. 
B)  only if the client uses a lower-of-cost-or-market method. 
C)  regardless of the client's inventory valuation method. 
D)  only if the client uses either the LIFO or FIFO method.

Question 14

Master files, spreadsheets, and reports that accumulate material, labor, and overhead as the costs are incurred are

Accepted Answer

A)  accounting systems. 
B)  storeroom documents. 
C)  cost accounting records. 
D)  finished goods inventory records. 
A)  accounting systems. 
B)  storeroom documents. 
C)  cost accounting records. 
D)  finished goods inventory records.

Question 15

When auditing manufacturing overhead costs assigned to inventory, auditors should keep in mind that

Accepted Answer

A)  GAAP has strict procedures that must be followed when assigning overhead to work-in-process inventory. 
B)  overhead costs must be allocated to raw materials, work-in-process, and finished goods inventory. 
C)  management typically allocates overhead using total direct labor dollars as the basis for the allocation. 
D)  determining the reasonableness of the allocation method is relatively simple for work-in-process inventory. 
A)  GAAP has strict procedures that must be followed when assigning overhead to work-in-process inventory. 
B)  overhead costs must be allocated to raw materials, work-in-process, and finished goods inventory. 
C)  management typically allocates overhead using total direct labor dollars as the basis for the allocation. 
D)  determining the reasonableness of the allocation method is relatively simple for work-in-process inventory.

Question 16

Audit procedures verifying the costs used to value inventories are called compilation tests.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)  bill of lading. 
B)  receiving report. 
C)  materials requisition. 
D)  inventory acquisition summary. 
A)  bill of lading. 
B)  receiving report. 
C)  materials requisition. 
D)  inventory acquisition summary.

Question 18

The extent and timing of an auditor's physical examination of inventory is significantly influenced by the adequacy of the client's perpetual inventory records.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is correct regarding the audit of inventory cost accounting?

Accepted Answer

A)  Cost accounting systems and controls are the same for all manufacturing companies. 
B)  All companies that have work-in-process must use a perpetual inventory system. 
C)  Auditors test perpetual inventory master files by examining documentation that supports additions and reductions of inventory amounts in the master files. 
D)  Manufacturing companies keep their cost accounting records separate from the production and other accounting records. 
A)  Cost accounting systems and controls are the same for all manufacturing companies. 
B)  All companies that have work-in-process must use a perpetual inventory system. 
C)  Auditors test perpetual inventory master files by examining documentation that supports additions and reductions of inventory amounts in the master files. 
D)  Manufacturing companies keep their cost accounting records separate from the production and other accounting records.

Question 20

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?

Accepted Answer

A)  job cost system 
B)  standard cost records 
C)  cost accounting records 
D)  perpetual inventory master file 
A)  job cost system 
B)  standard cost records 
C)  cost accounting records 
D)  perpetual inventory master file

Exam 21: Audit of the Inventory and Warehousing Cycle

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

The reliability of perpetual inventory master files affects the timing and ________ of the auditor's physical examination of inventory.

To ensure proper segregation of duties, who should maintain the perpetual inventory master files?

A common source of business risk for inventory is the reliance on a few key suppliers.

In some inventory systems, raw materials can be requisitioned by automated computer software when raw materials reach a predetermined level.

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

Almost all companies need physical controls over their assets to prevent loss. Which of the following is not an example of such a control?

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

An auditor must inquire about consigned or customer inventory included on the client's premises to satisfy the balance-related audit objective of

You are auditing the inventory account and are concerned about the possibility of an inventory overstatement. What is the best audit procedure to detect damaged inventory?

When part of the client's inventory is in a public warehouse or in the possession of other outside custodians, the auditor does not need to observe a physical count of the inventory if a written confirmation is obtained directly from the inventory custodians.

When verifying the transfer of inventory from one location to another, the audit objectives with which the auditor is primarily concerned are occurrence of recorded transfers, completeness of recorded transfers, and accuracy of recorded transfers.

There must be a periodic physical count by the client of the inventory items on hand

Master files, spreadsheets, and reports that accumulate material, labor, and overhead as the costs are incurred are

When auditing manufacturing overhead costs assigned to inventory, auditors should keep in mind that

Audit procedures verifying the costs used to value inventories are called compilation tests.

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

The extent and timing of an auditor's physical examination of inventory is significantly influenced by the adequacy of the client's perpetual inventory records.

Which of the following statements is correct regarding the audit of inventory cost accounting?

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?

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 Materiality

Assessing the Risk of Material Misstatement

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, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

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

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