Deck 16: Auditing the Production and

Question 1

The production cycle interfaces with the expenditure, personnel services, and revenue cycles.

Answer 1

True

Question 2

The computer file that contains each employee's gross earnings, payroll deductions, and net pay for the year-to-date by pay periods is the employee personnel file.

Answer 2

False

Question 3

The auditor normally performs analytical procedures early in the audit of the personnel services cycle because they are cost effective.

Answer 3

True

Question 4

Generally Accepted Auditing Standards require the auditor to supervise the taking of the client's physical inventory.

Question 5

In making test counts of inventory items, the auditor should record the count and give a complete and accurate description of the item in the working papers.

Question 6

The hiring of employees should be done in the payroll department.

Question 7

Payroll fraud is not a major concern for the auditor.

Question 8

A move ticket is a written authorization from a production department for stores to release materials for use on an approved production order.

Question 9

In automated systems, payroll is frequently processed using a batch approach.

Question 10

Observation of inventory does not provide evidence for rights and obligations.

Question 11

When a significant proportion of inventories is stored in a public warehouse, the auditor may not be satisfied with its existence by merely obtaining a confirmation from the warehouseman.

Question 12

The personnel services cycle is included in the expenditure cycle.

Question 13

It is customary to identify the major inventory categories in the balance sheet and the cost of goods sold in the income statement.

Question 14

The auditor need not inquire of management as to any goods held on consignment.

Question 15

When standard costs are used for manufactured inventories, the auditor's tests should include comparison of the standards with engineering specifications.

Question 16

When the lower of cost or market rule is used to value inventory, only the lower value need be verified.

Question 17

The proper use of statistical sampling may make it possible for the client to eliminate the need to count every item in the inventory on an annual basis.

Question 18

To express an unqualified opinion on the balance sheet, the auditor must observe the beginning and ending inventories.

Question 19

The auditor should review and evaluate the client's inventory-taking plans during the observation of the inventory.

Question 20

A clock card is used to show the hours worked, while the time ticket is used to show the specific jobs worked on during those hours.

Question 21

With a manufacturer, wholesaler, or retailer, however, inherent risk for inventory may be assessed at or near the maximum level for all of the following reasons except:

A) inventories are often stored at multiple sites, adding to the difficulties associated with maintaining physical controls over theft and damages, and properly accounting for goods in transit between sites.
B) the wide diversity of inventory items may present special problems in determining their quality and market value.
C) inventories are vulnerable to spoilage, obsolescence, and other factors such as general economic conditions that may affect demand and salability, and thus the proper valuation of the inventories.
D) inventory may be sold subject to right of return and repurchase agreements.
E) the volume of purchases, manufacturing, and sales transactions that affects these accounts is generally high, decreasing the opportunities for misstatements to occur.

Question 22

The use of the computer to compare production hours to direct labor hours on daily production reports relates to the:

A) valuation or allocation assertion.
B) completeness assertion.
C) rights and obligations assertion.
D) existence or occurrence assertion.
E) presentation or disclosure assertion.

Question 23

During the observation of the inventory, the auditor has no responsibility to:

A) observe the taking of the inventory by client personnel.
B) make some test counts of inventory quantities.
C) supervise the taking of the inventory.
D) make inquiries of the client concerning the inventories.
E) watch for damaged and obsolete inventory items.

Question 24

Which of the following functions is not part of the production cycle?

A) acquisition of raw materials
B) processing goods in production
C) determining and recording manufacturing costs
D) maintaining the correctness of inventory balances
E) protecting inventories

Question 25

When inventories are material and the auditor does not observe the inventory at or near the year-end, professional standards require the auditor to:

A) thoroughly test the accounting records.
B) observe some physical counts of the inventory.
C) disclaim an opinion on the financial statements.
D) resign from the engagement.
E) reperform the entire inventory count.

Question 26

To prevent terminated employees from being paid in subsequent periods, prompt notification of employee terminations should be made by the personnel department.

Question 27

Which one of the following analytical procedures may indicate possible inventory obsolescence problems when ratios are large?

A) inventory turnover
B) finished goods produced to raw material used
C) inventory growth to cost of sales growth
D) finished goods produced to direct labor
E) product defects per million

Question 28

Observation of inventories is a required audit procedure whenever:

A) inventories are material.
B) inventories are material and it is practicable and reasonable.
C) it is practicable and reasonable.
D) the auditor considers it to be necessary.
E) inventories are material and the auditor considers it to be necessary.

Question 29

The production cycle relates to:

A) the conversion of inventory into receivables or cash.
B) activities involving the acquisition of and payment for goods and services.
C) exchanges of goods and services with customers.
D) events and activities that pertain to executive and employee compensation.
E) the conversion of raw materials into finished goods.

Question 30

Most companies structure their stock option plans to meet the requirements of APB No. 25 and use the intrinsic value approach.

Question 31

The risk of underpayment in payroll is minimal because employees will complain when they are underpaid.

Question 32

Auditors are often concerned about the completeness assertion in the payroll cycle.

Question 33

Payroll checks should be signed by authorized personnel in the payroll department.

Question 34

The most significant issue associated with incentive compensation plans relates to adequate disclosures in the financial statements.

Question 35

When statistical sampling methods are used by the client in determining inventories, professional standards require that the auditor ascertain the following except that the:

A) sampling plan has statistical validity.
B) sampling plan has been properly applied.
C) results in terms of reliability are reasonable.
D) appropriate tests of transactions have been applied.
E) results in terms of precision are reasonable.

Question 36

Observation of inventories is a required audit procedure whenever inventories are material.

Question 37

In companies where inventories are at multiple locations, the auditor's observations ordinarily should include:

A) all inventory locations.
B) a random sample of locations.
C) several inventory locations picked by the auditor.
D) a representative sample of locations.
E) all significant inventory locations.

Question 38

The auditor's strategy in performing test counts during the inventory observation is to:

A) concentrate tests on high dollar items and take a representative sample of other items.
B) test all high dollar items.
C) randomly select all test items.
D) concentrate tests in areas where employees seem to be disregarding the inventory instructions.
E) sequentially select all test items.

Question 39

Defined benefit pension plans are normally subject to requirements of the Employee Retirement Income Security Act (ERISA) of 1974, which usually requires a separate audit of the pension plan.

Question 40

The test for terminated employees begins with the selection of termination notices.

Question 41

Which of the following manufacturing functions is not an integral part of inventory production?

A) Issuing raw materials.
B) Maintaining correctness of inventory balances.
C) Processing goods in production.
D) Protecting inventories.
E) Transferring completed work to finished goods.

Question 42

The specific audit objective "factory labor is correctly classified as direct and indirect labor" is derived from the:

A) existence or occurrence assertion.
B) completeness assertion.
C) rights and obligations assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 43

Reviewing data pertaining to inventory quality relates primarily to the:

A) existence or occurrence assertion.
B) completeness assertion.
C) valuation or allocation assertion.
D) rights and obligations assertion.
E) presentation or disclosure assertion.

Question 44

The taking of a physical inventory by a client is normally done according to a plan or a list of instructions. The client's instructions should include the following matters except:

A) date of the counts.
B) names of employees responsible for observing the inventory taking.
C) locations to be counted.
D) segregation or identification of goods not owned.
E) detailed instructions on how the counts are to be made.

Question 45

A company has a policy that all terminated employees must have an "exit interview" with a member of the personnel department, who documents the discussion. This control relates to the:

A) valuation or allocation assertion.
B) completeness assertion.
C) rights and obligations assertion.
D) presentation or disclosure assertion.
E) existence or occurrence assertion.

Question 46

When the weekly payroll edit run rejects an item, follow-up to see that the data is corrected and resubmitted is the responsibility of the:

A) data control department.
B) timekeeping department.
C) payroll department.
D) data entry department.
E) personnel department.

Question 47

Inherent risk for the valuation or allocation assertion will be high in the personnel services cycle when:

A) employee turnover is low.
B) factory workers are paid based on production.
C) payroll checks are drawn from a separate imprest bank account.
D) pay periods are weekly.
E) employee absenteeism is minimal.

Question 48

Which of the following accounts would not be directly affected by transactions in the personnel services cycle?

A) manufacturing overhead
B) commissions expense
C) work in process inventory
D) employee federal income taxes withheld
E) payroll taxes payable

Question 49

Payroll functions include all of the following except:

A) preparing attendance and timekeeping data.
B) terminating employees.
C) authorizing payroll changes.
D) preparing attendance data.
E) paying the payroll.

Question 50

Confirmation of inventories in public warehouses cannot provide evidence concerning the:

A) existence or occurrence assertion.
B) completeness assertion.
C) rights and obligations assertion.
D) presentation or disclosure assertion.
E) valuation or allocation assertion.

Question 51

Testing the inventory pricing relates primarily to the:

A) existence or occurrence assertion.
B) completeness assertion.
C) rights and obligations assertion.
D) presentation or disclosure assertion.
E) valuation or allocation assertion.

Question 52

Completed time tickets and clock cards are sent by:

A) personnel to timekeeping.
B) payroll to timekeeping.
C) timekeeping to payroll.
D) timekeeping to personnel, which forwards them to payroll.
E) timekeeping to payroll, which forwards them to personnel.

Question 53

The request for a change in job classification or a wage rate increase is usually initiated by the:

A) personnel department based on information in the personnel files.
B) employee in question.
C) employee's supervisor.
D) payroll department.
E) personnel manager.

Question 54

Which of the following is a form used by employees to record the hours worked daily during a pay period?

A) Clock card.
B) Time ticket.
C) Labor cost distribution summary.
D) Move ticket.
E) Daily production report.

Question 55

The observation of inventory relates primarily to the:

A) existence or occurrence assertion.
B) completeness assertion.
C) rights and obligations assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 56

A record of the disciplinary actions brought against a particular employee would most likely be found in the:

A) employee personnel file.
B) personnel data master file.
C) employee earnings master file.
D) payroll register.
E) employee earnings transaction file.

Question 57

Responsibility for updating of the personnel data master file should rest with authorized employees in the:

A) payroll department.
B) employee's operating department.
C) controller's department.
D) personnel department.
E) data control department.

Question 58

A programmed routine in the edit run for payroll lists all employees who worked more than 50 hours during the week for review. This is an example of a:

A) validity check.
B) reasonableness check.
C) sequence check.
D) self-checking check.
E) independent check.

Question 59

Payroll functions include all of the following except:

A) planning and controlling production.
B) preparing the payroll.
C) hiring employees.
D) protecting unclaimed wages.
E) recording the payroll.

Question 60

Printed outputs from the payroll computer run that are sent to data control include all of the following except:

A) an exceptions and control report that is reviewed by data control before distributing the other printed output.
B) a copy of the payroll register that is returned along with the clock cards and time tickets to the payroll department for comparison with the original batch transmittal data.
C) a second copy of the payroll register and prenumbered payroll checks that are sent to the treasurer's office.
D) a summary of the payroll checks that is sent to the treasurer's office.
E) a general ledger summary that is sent to accounting showing the payroll entry generated by the payroll program.

Question 61

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the transaction audit objectives with the codes for the assertion categories above.
Inventories included in the balance sheet physically exist.

Question 62

The extent of the auditor's inventory test count would least depend on which of the following?

A) The nature and composition of the inventory.
B) The care exercised by client employees in taking the inventory.
C) The effectiveness of controls pertaining to maintenance of perpetual records.
D) The effectiveness of controls pertaining to the safeguarding of the inventory.
E) The existence of inventory at multiple locations.

Question 63

List, by assertion category, the specific audit objectives for the personnel services cycle.

Question 64

Which if the following is not a component of determining and recording manufacturing costs?

A) Charging direct materials and direct labor to work in process.
B) Transferring costs between production departments.
C) Assigning manufacturing overhead to work in process.
D) Maintaining correctness of inventory balances.
E) Transferring the cost of completed production to finished goods.

Question 65

In assessing control risk in the personnel services cycle, of least concern to the auditor is:

A) payments to fictitious employees.
B) payments to actual employees for hours not worked.
C) failure to pay actual employees for hours worked.
D) payment to actual employees at higher than authorized rates.
E) payments to actual employees for hours worked.

Question 66

The checks that are generated by an automated system are normally sent directly from computer processing to the:

A) data control department, which forwards them to the treasurer.
B) data control department, which forwards them to the payroll department.
C) personnel department.
D) payroll department.
E) treasurer.

Question 67

The Goren Company counts its inventory on October 31, 20X8. As a senior auditor assigned to the engagement, you observe the inventory count on this date. During the inventory observation, you encounter only minor problems, which are cleared up, to your satisfaction. On November 15, 20X8, the controller for the Goren Company informs you that the inventory summary sheets are complete and gives you a copy, part of which is reproduced here: $$\begin{array} { r l c c r } \begin{array} { c } \text { Tag } \\\text { Number }\end{array} & { \text { Description } } & \text { Quantity } & \text { Price } ( \$ ) & \begin{array} { r } \text { Extended } \\\text { Value }\end{array} \\2683 & \text { Metal clips, X104 } & 768 & \$ 1.50 \text { each } & \$ 1,052 \\1888 & \text { Metal strips, 8" } & 1,264 \text { feet } & 0.50 \text { per foot } & 632 \\4822 & \text { Pipe, } 3 ^ { \prime \prime } & 852 \text { feet } & 6.00 \text { per yard } & 1,704 \\43 & \text { Heavy-duty clamps, No. } 4 & 376 & 1.00 \text { each } & 376 \\561 & \text { Heavy-duty pump, } 3 ^ { \prime \prime } & 178 & 4.50 \text { each } & 801 \\2184 & \text { Metal struts, 6" } & 125 & 1.20 \text { each } & 150 \\3421 & \text { Corner braces, No. 107 } & 52 \text { boxes } & 25.00 \text { per box } & 1,300 \\1746 & \text { Rubber inner facing } & \text { 26 dozen } & 15.00 \text { each } & 4,680\end{array}$$ During the inventory observation, you recorded the following inventory tag control information in your working papers:

During the inventory observation, you recorded the following test counts in your working papers:



REQUIRED: List the tag numbers identified above on your answer sheet. If you believe the information pertaining to the tag number is correct, so state. If you believe the information is incorrect, describe the error. The information you recorded during your test counts, of course, was $100 \%$ accurate.

Question 68

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the transaction audit objectives with the codes for the assertion categories above.
The reporting entity has legal title to the inventories at the balance sheet date.

Question 69

For proper control, unclaimed checks should be stored by the:

A) treasurer's department.
B) payroll department.
C) personnel department.
D) data control department.
E) timekeeping department.

Question 70

For each one of the following financial ratios, indicate the formula and identify the audit significance.

Question 71

Place an "X" in the applicable column for each substantive test to identify the assertions to which each test pertains.

Question 72

A common form of employee compensation for many companies involves the use of stock options. The auditor should determine all of the following except:

A) the types of incentive compensation plans used to compensate officers and employees
B) the ranking of officer compensation for the company within its industry, including stock options and all other types of executive compensation
C) how compensation expense is determined
D) how compensation expense is allocated to various accounting periods
E) the adequacy of disclosure related to incentive compensation plans

Question 73

On an SEC engagement, an auditor wishes to determine the officers who receive the greatest total compensation. This objective is related primarily to the:

A) existence or occurrence assertion.
B) rights and obligations assertion.
C) valuation or allocation assertion.
D) presentation or disclosure assertion.
E) completeness assertion.

Question 74

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the transaction audit objectives with the codes for the assertion categories above.
Inventories are properly stated at the lower of cost or market.

Question 75

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the transaction audit objectives with the codes for the assertion categories above.
Inventories and cost of goods sold are properly identified and classified in the financial statements.

Question 76

Shown below is a partial system flowchart of payroll transactions.
REQUIRED: Label the symbols in the partial system flowchart.

Question 77

Following are a number of potential misstatements that might occur in the personnel services cycle. Also listed are a number of necessary controls for this cycle.
REQUIRED: For each potential misstatement, indicate, using the assigned letter, the necessary control that would most likely prevent or detect the misstatement.

Question 78

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the transaction audit objectives with the codes for the assertion categories above.
Inventories include all materials, products, and supplies on hand at the balance sheet date.