Deck 21: Audit of the Inventory and Warehousing Cycle

Question 1

________ accumulate costs by individual jobs as material is issued into production and labor costs are incurred.

A) Just-in-time production systems
B) Job cost systems
C) Process cost systems
D) Manufacturing systems

Answer 1

B

Question 2

The inventory and warehousing cycle ends with the sale of goods in the sales and collection cycle.

Answer 2

True

Question 3

In the flow of inventory and costs, when work-in-progress is credited, ________ is (are) debited.

A) raw materials
B) cost of goods sold
C) finished goods
D) direct labor

Answer 3

C

Question 4

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

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

Question 5

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?

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

Question 6

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

Question 7

It is not allowed under accounting standards to use different inventory valuation methods for different parts of the inventory.

Question 8

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

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

Question 9

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

Question 10

Inventory valuation issues include the estimation of inventory obsolescence and the allocation of manufacturing costs to inventory.

Question 11

The inventory and warehousing cycle is unique because of its close relationship to other transaction cycles.

Question 12

The main difference between job order and process costing systems is that

A) one accumulates costs by materials issued and the other by labor incurred.
B) one accumulates costs by individual jobs and the other by particular processes.
C) one emphasizes costs accumulated in completed products and the other emphasizes costs associated with work-in-process.
D) one emphasizes costs adding value to the product and the other emphasizes costs incurred because of waste, scrap, and obsolescence.

Question 13

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

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

Question 14

Inventory items such as jewels, chemicals, and electronic parts are easy for auditors to observe and to value.

Question 15

The inventory and warehousing cycle can be thought of as having two separate but closely related systems, one involving the actual physical flow of goods, and the other the

A) related costs.
B) storage of the goods.
C) internal control over those goods.
D) prevention of waste, obsolescence, and theft.

Question 16

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

Question 17

Separate perpetual records are likely to be kept only for raw materials inventory.

Question 18

________ is normally characterized as a difficult and complex account to audit.

A) Property, plant and equipment
B) Cash
C) Inventory
D) Prepaid insurance

Question 19

Inventory is a complex area to audit for all except which of the following reasons?

A) Inventory is often in different locations.
B) There are several acceptable valuation methods and some entities use different methods for different types of inventory.
C) Inventory is often the largest account on the balance sheet.
D) Inventory valuation includes few estimates.

Question 20

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

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.

Question 21

The physical observation of the inventory and the acquisition of raw materials are part of the inventory and warehousing cycle.

Question 22

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

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

Question 23

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.

Question 24

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

Question 25

As part of the risk assessment process, the auditor will consider whether any of the identified risks of material misstatement found during the audit of the inventory and warehousing cycle are considered a significant risk.

Question 26

The receiving department prepares a receiving report which often is electronic notification of the receipt of goods that become part of the document before payment is made to the vendor.

Question 27

It is acceptable practice for CPA firms to use drones to evaluate inventories and other assets such as mineral deposits during audits.

Question 28

Handling the receipt of ordered goods is a part of the ________ cycle.

A) purchasing
B) acquisition and payment
C) inventory
D) inventory and warehousing

Question 29

The audit of the inventory and warehousing cycle will be affected by the results from other business processes. Identify the "other" business cycles and how they impact the audit of inventory.

Question 30

The audit tests to verify that the client is using an inventory method which is generally accepted and to verify that physical counts were correctly summarized are performed during the audit of the

A) acquisition and payments cycle.
B) payroll and personnel cycle.
C) inventory and warehousing cycle.
D) sales and collection cycle.

Question 31

Inventory compilation tests are used to verify that the inventory is recorded at the lower of cost or market.

Question 32

An adequate cost accounting system is an important part of the processing of goods function for all manufacturing companies.

Question 33

Inventory is often a significant part of a company's current assets. Because of its importance,

A) auditors are required by auditing standards to observe the client taking a physical inventory count.
B) price tests must be performed to verify whether the physical counts were correctly summarized.
C) companies are required to use perpetual inventory systems.
D) auditors are required by auditing standards to take the physical inventory for the client.

Question 34

What are two factors affecting the complexity of the audit of inventory?

Question 35

Physical examination is an essential type of evidence used to verify the existence and count of inventory.

Question 36

An approved purchase requisition form authorizes shipment of goods to customers.

Question 37

Purchase requisitions are often initiated by stockroom personnel as raw materials are needed.

Question 38

Costs used to value inventory must be tested by the auditor only to determine whether the client has followed an inventory method which is in accordance with generally accepted accounting principles.

Question 39

The pricing and compilation of inventory are audited using substantive analytical procedures and test of details of the balances.

Question 40

The receipt of raw materials is a part of the acquisition and payment cycle.

Question 41

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

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 42

Which of the following is a significant audit concern related to the transfer of inventory from one location to another?

A) Recorded transfers occurred.
B) Transfers were properly transported.
C) Transfers were properly planned.
D) Transfers represent efficient movement of assets.

Question 43

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

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

Question 44

The auditor is concerned with four aspects of cost accounting, including

A) documents and records for transferring inventory.
B) perpetual inventory master files.
C) unit cost records.
D) all of the above.

Question 45

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

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

Question 46

Cost accounting controls are those related to the physical inventory and the consequent costs from the point at which

A) materials are ordered for purchase until the finished product is sold.
B) the customer's order is received until the finished product is shipped.
C) raw materials are requisitioned until the finished product is sent to storage.
D) raw materials are requisitioned until the finished product is completely manufactured.

Question 47

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

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

Question 48

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

Question 49

Auditors usually test cost accounting records as part of the

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

Question 50

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

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

Question 51

Auditor tests of physical controls over raw materials, work-in-process, and finished goods are performed by

A)
B)
C)
D)

Question 52

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

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 53

In order to strengthen controls over cost accounting information, a company should consider implementing

A) perpetual inventory master files.
B) a job order cost accounting system.
C) an accounting system that keeps separate the records of the accounting department from the records of the production department.
D) an economic quantity order system.

Question 54

If the perpetual inventory master files show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded

A) sales.
B) sales discounts.
C) purchases.
D) purchase discounts.

Question 55

When auditing inventory cost accounting, the auditor is concerned with all of the following except for

A) net realizable value.
B) unit cost records.
C) physical controls over inventory.
D) documents and records for transferring inventory.

Question 56

A major difficulty in the verification of inventory cost records for the purpose of inventory valuation is in determining the reasonableness of the

A) direct labor costs.
B) raw material costs.
C) manufacturing overhead costs.
D) period costs.

Question 57

State the six functions that make up the inventory and warehousing cycle and, for each function, identify the related documents that would be used by a manufacturing company.

Question 58

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

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 59

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

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 60

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

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 61

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?

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 62

It is permissible for an auditor to test the entire inventory population for certain types of audit tests in order to eliminate the need for more costly tests involving sampling.

Question 63

Discuss the four aspects of the audit of cost accounting with which the auditor is most concerned.

Question 64

Management may decide to allocate manufacturing overhead based upon machine hours. In this situation, the auditor must test and verify the reasonableness of the use of machine hours to allocate overhead.

Question 65

In evaluating management's overhead cost allocations, the auditor must simply consider the reasonableness of the allocation method and determine if the valuation method complies with generally accepted accounting principles.

Question 66

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.

Question 67

Internal controls over cost accounting records are very similar among companies.

Question 68

Ratios such as the gross margin percentage calculated as part of risk assessment procedures may be performed using aggregate data.

Question 69

Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility of obsolete inventory?

A) Compare gross margin percentage with that of previous years.
B) Compare unit costs of inventory with previous years.
C) Compare inventory turnover ratio with previous years.
D) Compare current year manufacturing costs with previous years.

Question 70

Cost accounting systems and controls are the same for all manufacturing companies.

Question 71

Significant improvements in audit effectiveness and efficiency may be achieved by the use of audit data analytics in the inventory and warehousing cycle.

Question 72

A comparison of the current year's inventory turnover ratio with previous years' may indicate the presence of obsolete inventory.

Question 73

Auditors should design appropriate tests of internal controls over cost accounting records based upon their understanding of those records and the extent they will be relied upon for reducing substantive tests.

Question 74

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

Question 75

Many of the internal controls over inventory and the details of the entire inventory population can be tested using audit software.

Question 76

When determining the sample size for the number of items the auditor should count during the physical inventory,

A) it is easy to quantify the number of items based on a formula developed by the AICPA.
B) one of the key determinants that must be considered is internal control over the physical count.
C) one of the key determinants that must be considered is the cost involved.
D) generally accepted auditing standards require that at least 80% of the dollar value of the inventory should be included in the sample.

Question 77

Given the following information about your audit client, perform analytical procedures and comment on your findings.

Question 78

In addition to performing analytical procedures that examine the relationship of inventory account balances with related financial statement accounts, auditor's will often use nonfinancial measures in determining the reasonableness of inventory balances. List below at least two nonfinancial measures that may be useful to auditors.

Question 79

Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility inventory and cost of goods sold being overstated or understated?

A) Compare extended inventory value with that of previous years.
B) Compare unit costs of inventory with previous years.
C) Compare inventory turnover ratio with previous years.
D) Compare current year manufacturing costs with previous years.

Question 80

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.