Question 1

Auditing standards recommend that auditors observe physical inventory counts by the client.

Accepted Answer

A) True 
 B)False  False

Question 2

The physical counting of inventory may be performed at which of the following times?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)    A

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 of an order. 
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 of an order. D

Question 4

In job cost systems, costs are accumulated by individual jobs.

Accepted Answer

A) True 
 B)False

Question 5

From which of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?

Accepted Answer

A)  observation of physical inventory counts 
B)  written inventory representations from management 
C)  confirmation of inventories in a public warehouse 
D)  auditor's recomputation of inventory extensions 
A)  observation of physical inventory counts 
B)  written inventory representations from management 
C)  confirmation of inventories in a public warehouse 
D)  auditor's recomputation of inventory extensions

Question 6

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory?

Accepted Answer

A)  Compare the physical quantities of slow-moving items with corresponding quantities of the prior year. 
B)  Observe merchandise and raw materials during the client's physical inventory count. 
C)  Review the management's inventory representation letter for accuracy. 
D)  Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average. 
A)  Compare the physical quantities of slow-moving items with corresponding quantities of the prior year. 
B)  Observe merchandise and raw materials during the client's physical inventory count. 
C)  Review the management's inventory representation letter for accuracy. 
D)  Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.

Question 7

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:

Accepted Answer

A)  inventory as recorded on tags actually exists (existence). 
B)  existing inventory is counted and tagged (completeness). 
C)  inventory is counted accurately (accuracy). 
D)  inventory is classified correctly (classification). 
A)  inventory as recorded on tags actually exists (existence). 
B)  existing inventory is counted and tagged (completeness). 
C)  inventory is counted accurately (accuracy). 
D)  inventory is classified correctly (classification).

Question 8

In process cost systems, costs are accumulated by individual jobs.

Accepted Answer

A) True 
 B)False

Question 9

The first step in verifying the valuation of purchased inventory is in determining the valuation method used by the client. The 2nd step is:

Accepted Answer

A)  determining that all inventory that is purchased is expensed through cost of goods sold. 
B)  determining which costs should be included in the valuation of an item of inventory. 
C)  determining that all inventory on hand reconciles to the perpetual inventory records. 
D)  determining that cut-off procedures have been adhered to prior to counting inventory. 
A)  determining that all inventory that is purchased is expensed through cost of goods sold. 
B)  determining which costs should be included in the valuation of an item of inventory. 
C)  determining that all inventory on hand reconciles to the perpetual inventory records. 
D)  determining that cut-off procedures have been adhered to prior to counting inventory.

Question 10

The test of details of balance procedure which requires the auditor to perform tests of lower-of-cost-or-market, selling price, and obsolescence is an attempt to satisfy the objective of:

Accepted Answer

A)  existence. 
B)  completeness. 
C)  accuracy. 
D)  realizable value. 
A)  existence. 
B)  completeness. 
C)  accuracy. 
D)  realizable value.

Question 11

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 12

You are gathering evidence for the audit objective that existing inventory items are included in the inventory listing schedule. The audit procedure that would provide you with the best evidence to confirm this objective is:

Accepted Answer

A)  trace from inventory tags to the inventory listing schedule and make sure the inventory tag is included. 
B)  trace the inventory totals to the general ledger. 
C)  perform tests of lower-of-cost-or-market. 
D)  account for unused tags shown in the auditor's documentation to make sure no tags have been added. 
A)  trace from inventory tags to the inventory listing schedule and make sure the inventory tag is included. 
B)  trace the inventory totals to the general ledger. 
C)  perform tests of lower-of-cost-or-market. 
D)  account for unused tags shown in the auditor's documentation to make sure no tags have been added.

Question 13

Auditor tests of the physical controls over raw materials, work in process, and finished goods are generally limited to:

Accepted Answer

A)  observation and confirmation. 
B)  observation and inquiry. 
C)  inquiry and reconciliation. 
D)  observation and reconciliation. 
A)  observation and confirmation. 
B)  observation and inquiry. 
C)  inquiry and reconciliation. 
D)  observation and reconciliation.

Question 14

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 15

A well-designed computerized system of perpetual inventory master files includes information about the:

Accepted Answer

A)  units of inventory purchased, sold, and on hand. 
B)  unit costs of inventory purchased, sold, and on hand. 
C)  units of raw materials, work-in-process, and finished goods. 
D)  units and unit costs of inventory purchased, sold, and on hand. 
A)  units of inventory purchased, sold, and on hand. 
B)  unit costs of inventory purchased, sold, and on hand. 
C)  units of raw materials, work-in-process, and finished goods. 
D)  units and unit costs of inventory purchased, sold, and on hand.

Question 16

It is acceptable under generally accepted accounting principles for a company to use different valuation methods for different parts of its inventory.

Accepted Answer

A) True 
 B)False

Question 17

If a client intends to count inventory at an interim date, the auditor should expect there to be all of the following except:

Accepted Answer

A)  controls over the preparation and maintenance of perpetual inventory records. 
B)  competent personnel assigned to count the inventory. 
C)  third-party inventory counting specialists. 
D)  an adequately designed plan to count the inventory. 
A)  controls over the preparation and maintenance of perpetual inventory records. 
B)  competent personnel assigned to count the inventory. 
C)  third-party inventory counting specialists. 
D)  an adequately designed plan to count the inventory.

Question 18

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 19

In pricing inventory, it is necessary to consider whether replacement cost is lower than historical cost. When applying lower of cost or market tests, what basis should auditors use for each of the following categories of inventory:
• Raw materials
• Work-in-process
• Purchased finished goods

Accepted Answer

• Raw materials - the most recent cost a

Question 20

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.

Exam 21: Audit of the Inventory and Warehousing Cycle

Auditing standards recommend that auditors observe physical inventory counts by the client.

The physical counting of inventory may be performed at which of the following times?

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

In job cost systems, costs are accumulated by individual jobs.

From which of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory?

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:

In process cost systems, costs are accumulated by individual jobs.

The first step in verifying the valuation of purchased inventory is in determining the valuation method used by the client. The 2nd step is:

The test of details of balance procedure which requires the auditor to perform tests of lower-of-cost-or-market, selling price, and obsolescence is an attempt to satisfy the objective of:

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.

You are gathering evidence for the audit objective that existing inventory items are included in the inventory listing schedule. The audit procedure that would provide you with the best evidence to confirm this objective is:

Auditor tests of the physical controls over raw materials, work in process, and finished goods are generally limited to:

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

A well-designed computerized system of perpetual inventory master files includes information about the:

It is acceptable under generally accepted accounting principles for a company to use different valuation methods for different parts of its inventory.

If a client intends to count inventory at an interim date, the auditor should expect there to be all of the following except:

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

In pricing inventory, it is necessary to consider whether replacement cost is lower than historical cost. When applying lower of cost or market tests, what basis should auditors use for each of the following categories of inventory: • Raw materials • Work-in-process • Purchased finished goods

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

The CPA Profession

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Section 404 Audits of Internal Control and Control Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Plan and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

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 and Balances

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

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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