Deck 12: Inventories and Cost of Goods Sold

Question 1

The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses.

Answer 1

True

Question 2

Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper?

A) Testing the entity's computation of standard overhead rates.
B) Obtaining confirmation of inventories pledged under loan agreements.
C) Reviewing a cutoff procedure for inventories.
D) Tracing test counts to the entity's inventory listing.

Answer 2

A

Question 3

Observation of inventories is a required audit procedure under all circumstances.

Answer 3

False

Question 4

To test the client's cutoff of inventories, the auditors will make a record of the serial number of the final receiving and shipping documents used prior to the taking of the physical inventory.

Question 5

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?

A) Factory supervisor salary.
B) Indirect materials.
C) Miscellaneous expense.
D) Sales expense.

Question 6

The use of a tagging system for inventory taking is designed to prevent double counting of goods.

Question 7

The lower-of-cost-or-market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values.

Question 8

A client uses a perpetual inventory system. Would one expect a credit to which of the following accounts at the point of sale? $$\begin{array} { | l | c | c | } \hline & \text { Sales } & \text { Inventory } \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

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

Question 9

When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unmodified (unqualified) opinion on the client's income statement.

Question 10

For good internal control over purchase transactions, purchases should be made from approved vendors by the department needing the goods.

Question 11

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all:

A) Cash disbursements.
B) Approved vouchers.
C) Receiving reports.
D) Vendors' invoices.

Question 12

The receiving department should accept only goods for which there is an approved purchase order on hand.

Question 13

Which of the following is not true relating to the auditors' observation of the client's physical inventory?

A) The auditors should evaluate the client's planning of the physical inventory.
B) The auditors should make certain that consigned items from suppliers are included in physical inventory totals.
C) The auditors should evaluate the adequacy of the client's counting procedures.
D) The auditors should take test counts of the client's inventory.

Question 14

Auditors should not review the client's planning of the physical inventory.

Question 15

A "bill and hold" scheme is most likely to include:

A) Shipment of items to a customer beyond what the customer has ordered.
B) Recording as sales items that the company retains as of year-end.
C) Billing of items that are held by customers for future revenue production purposes.
D) Selling items at substantial discounts near year-end.

Question 16

A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect:

A) Deliveries for which no purchase order was issued.
B) Unapproved sales orders.
C) Partial deliveries.
D) Deliveries of a greater quantity of items than those ordered.

Question 17

Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles?

A) Valuing inventory at cost.
B) Including in inventory items that are consigned out to vendors, but not yet sold.
C) Using standard cost as the measure of inventory cost.
D) Including in inventory items shipped subsequent to year-end, but for which valid orders did exist at year-end.

Question 18

To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into:

A) Net sales.
B) Cost of goods sold.
C) Operating income.
D) Gross sales.

Question 19

A client uses a periodic inventory system. Would one expect a credit to which of the following accounts at the point of sale? $$\begin{array} { | l | c | c | } \hline & \text { Sales } & \text { Inventory } \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

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

Question 20

The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders.

Question 21

To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to:

A) The purchase requisition.
B) The receiving report.
C) The purchase order.
D) The voucher.

Question 22

Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has:

A) The ability to prepare payment vouchers based on the information on a vendor's invoice.
B) The responsibility of reviewing purchase orders issued by user departments.
C) The authority to make purchases of requisitioned materials and services.
D) A direct reporting responsibility to controller of the organization.

Question 23

Which of the following is least likely to be an accurate statement concerning characteristics of an audit?

A) An analysis of inventory turnover addresses whether the proper method of determining inventory costs-as contrasted to market values-is being applied.
B) Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed.
C) The direction of tests for overstatement errors is generally directed from the recorded entry to source documents.
D) Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end.

Question 24

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

A) Supplies of relatively little value are expensed when purchased.
B) The cycle basis is used for physical counts.
C) The storekeeper is responsible for maintenance of perpetual inventory records.
D) Perpetual inventory records are maintained only for items of significant value.

Question 25

In verifying credits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the:

A) Shipping documents.
B) Receiving reports.
C) Purchase orders.
D) Vendors' invoices.

Question 26

Which of the following is true about the auditors' observation of the client's physical inventory?

A) The auditors should plan the physical inventory.
B) The auditors should segregate damaged and obsolete goods.
C) The auditors should evaluate the adequacy of the client's counting procedures.
D) The auditors should supervise the client's personnel.

Question 27

The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record:

A) Purchases.
B) Purchase discounts.
C) Sales.
D) Sales discounts.

Question 28

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:

A) Merchandise received.
B) Vendor's invoices.
C) Canceled checks.
D) Receiving reports.

Question 29

Which of the following best describes the reason for the auditors' review of the client's cost accounting system?

A) To obtain evidence regarding the quantities of good described as work in process.
B) To obtain evidence about the valuation of work in process, finished goods, and cost of goods sold.
C) To obtain evidence about the profit margin on specific jobs.
D) To obtain evidence about compliance with Cost Accounting Standards.

Question 30

An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly?

A) Completeness.
B) Existence.
C) Legality.
D) Valuation.

Question 31

In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the:

A) Purchases journal.
B) Purchase requisitions.
C) Purchase orders.
D) Vendors' invoices.

Question 32

Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories?

A) The determination of inventory valuation directly affects net income.
B) The existence of inventories is inherently difficult to substantiate.
C) Special valuation problems often exist for inventories.
D) Inventories are often the largest current asset of an enterprise.

Question 33

Which of the following is not a procedure that typically is used by the auditors in their examination of a client's goods held in the custody of a public warehouse?

A) Confirmation.
B) Obtaining reports on internal control at the warehouse.
C) Observation.
D) Corresponding with the state agency regarding the authenticity of the public warehouse.

Question 34

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

A) Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports.
B) Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports.
C) Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks.
D) Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

Question 35

Which of the following is true about the auditors' observation of the client's physical inventory?

A) The count must be made at year-end.
B) The auditors should supervise the client's personnel.
C) The auditors' observation addresses the existence assertion.
D) The auditors should justify any omission of the observation in the audit report.

Question 36

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company:

A) Has paid for the merchandise.
B) Has physical possession of the merchandise.
C) Holds legal title to the merchandise.
D) Holds the shipping documents for the merchandise issued in the company's name.

Question 37

Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory?

A) The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used.
B) The auditors should qualify their opinion, because the client must perform a complete count of the inventory.
C) The auditors should increase the extent of their test counts to compensate for the use of a statistical technique.
D) The auditors should withdraw from the engagement.

Question 38

Which of the following best describes the reason that the auditors record their inventory test counts in the working papers?

A) To document every test count.
B) For subsequent comparison with the completed inventory listing.
C) To document compliance with generally accepted accounting principles.
D) For use in subsequent audits.

Question 39

The use of a "blind" purchase order is designed to prevent errors by the:

A) Purchase department.
B) Receiving department.
C) Stores department.
D) Accounting department.

Question 40

The auditors will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditors at the time of the physical inventory count are:

A) Owned by the client.
B) Not obsolete.
C) Physically present at the time of the preparation of the final inventory schedule.
D) Included in the final inventory schedule.

Question 41

Your audit client, Wigley, is a retail department store that does not produce any products. You are currently working on the inventory portion of the audit. In obtaining audit evidence in support of financial statement assertions, the auditor develops specific audit objectives in response to those assertions. Audit procedures are then selected to accomplish audit objectives.
For each specific inventory audit objective listed (Audit Objectives tab) select the most closely related account balance financial statement assertion and the most appropriate audit procedure. Financial statement assertions and audit procedures may be selected once, more than once, or not at all.

Question 42

Observation of a client's inventory is a presumptively mandatory audit procedure.
a. What part should the auditors play in planning the physical inventory?
b. Describe the procedures performed by the auditors during their observation of a client's physical inventory.
c. Why do the auditors document their inventory test counts in their working papers?

Question 43

In auditing a client's inventory, the auditors must be concerned with the detection of goods that are both damaged and obsolete.
a. Why are the auditors concerned with detecting damaged and obsolete goods?
b. How do the auditors test for damaged goods in the client's inventory?
c. How do the auditors test for obsolete goods in the client's inventory?

Question 44

The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with:

A) Purchase requisitions.
B) Receiving reports.
C) Purchase orders.
D) Vendor payments.

Question 45

Assume that you have completed your procedures on the audit of Glick Corporation and have found the following audit issues. Indicate the account balance financial statement assertion that is likely to be most impacted by each of the issues, using the following key:
A.Completeness
B.Existence
C.Rights and Obligations
D.Valuation and Allocation

Question 46

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received?

A) Quantities ordered are excluded from the receiving department copy of the purchase order.
B) Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order.
C) Receiving department personnel are expected to match and reconcile the receiving report with the purchase order.
D) Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.

Question 47

Tracing copies of computer-generated sales invoices to copies of the corresponding computer-generated shipping documents provides evidence that:

A) Shipments to customers were properly billed.
B) Entries in the accounts receivable subsidiary ledger were for sales actually shipped.
C) Sales billed to customers were actually shipped.
D) No duplicate shipments to customers were made.

Question 48

Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories?

A) Confirmation of goods in the hands of public warehouses.
B) Supervising the taking of the annual physical inventory.
C) Carrying out physical inventory procedures at an interim date.
D) Obtaining written representation from the client as to the existence, quality, and dollar amount of the inventory.

Question 49

A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record:

A) Sales.
B) Sales discounts.
C) Purchases.
D) Purchase returns.

Question 50

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

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 51

Which of the following is not a part of the auditors' responsibility regarding a client's count of its inventory?

A) Evaluate condition of inventory.
B) Determine which counts they will make and which counts the client will make.
C) Observe compliance with management's instructions for the count.
D) Make some test counts.

Question 52

An inventory turnover analysis is useful to the auditor because it may detect:

A) Inadequacies in inventory pricing.
B) Methods of avoiding cyclical holding cost.
C) The optimum automatic reorder points.
D) The existence of obsolete merchandise.

Question 53

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items:

A) Included in the listing have been counted.
B) Represented by inventory tags are included in the listing.
C) Included in the listing are represented by inventory tags.
D) Represented by inventory tags are bonafide.

Question 54

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

A) Test the computation of standard overhead rates.
B) Tour the manufacturing plant or production facility.
C) Compare inventory balances to anticipated sales volume.
D) Review inventory experience and trends.

Question 55

The auditor determines that each of the following objectives will be part of your audit of Bozington Co., Inc. For each audit objective, select a substantive procedure that would help to achieve that objective. Each of the procedures may be used once, more than once, or not at all.
Audit Objective
1. Establish the completeness of inventories.
2. Establish the accuracy of cost amounts of inventories.
3. Determine that the presentation and disclosure of inventories and cost of goods sold is adequate.
4. Establish that the client has rights to the recorded inventories.
5. Establish the existence of ending inventory.

Question 56

Purchase cutoff procedures should be designed to test whether all inventory:

A) Owned by the company was recorded.
B) On the year-end balance sheet was carried at lower-of-cost-or-market.
C) On the year-end balance sheet was paid for by the company.
D) Owned by the company is in the possession of the company.

Question 57

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:

A) Observe physical counts of the inventory items.
B) Trace the total on the inventory listing to the general ledger inventory account.
C) Obtain a confirmation from the client indicating inventory ownership.
D) Analytically compare the current-year inventory balance to the prior-year balance.

Question 58

Which statement is correct relating to the count of inventory when a company that specializes in taking such counts ("the company") is involved with counting a client's inventory?

A) The auditor should consider the company a specialist, and follow the procedures outlined for addressing an auditor's specialist.
B) The auditor should not consider the counts by the company, by themselves, sufficient appropriate audit evidence.
C) The auditor must observe all inventory counts taken by the company.
D) The auditor should observe a letter of representations form the company.

Question 59

Which of the following is not one of the independent auditor's objectives regarding the examination of inventories?

A) Verifying that inventory counted is owned by the client.
B) Verifying that the client has used proper inventory pricing.
C) Ascertaining the physical quantities of inventory on hand.
D) Verifying that all inventory owned by the client is on hand at the time of the count.