Deck 7: Auditing the Inventory Business Process

Question 1

On the income statement,the inventory process is related to

A)cost of goods sold
B)purchases of inventory
C)accounts payable
D)cash payments

Answer 1

A

Question 2

The auditor must determine whether the inventory process transactions recorded in the revenue and expense accounts during the year

A)have been properly recorded in accordance with GAAS
B)have been recorded in accordance with an applicable financial reporting framework
C)are capable of being transferred to the owners equity account
D)have comparable transactions on the balance sheet

Answer 2

B

Question 3

Management prepares the financial statements and footnotes but the auditor prepares the discussion of the inventory.

Answer 3

False

Question 4

Clients may understate inventory to reduce income tax expense.

Question 5

As with all income statement accounts,the inventory process expense accounts begin the year with

A)a total equal to the amount in accounts payable
B)a total equal to the budgeted estimated expenses for the year
C)ending balance from prior year
D)a zero balance

Question 6

According to FASB Concept Statement No.5,Recognition and Measurement in Financial Statements of Business Enterprises,assets are recorded at the price paid on the date of recognition.

Question 7

Automated inventory systems may be used to maintain control over inventory,but not to keep track of production quantities.

Question 8

The totals in the inventory process balance sheet accounts reflect

A)all the transactions recorded during the year
B)a beginning balance as of the last day of the current year
C)only the amounts in the accounts on the last day of the year
D)the total amount of the transactions recorded during the year
E)the net amount of the transactions recorded during the year
F)both A and B
G)both C and E

Question 9

The cost accounting system determines the cost of the inventory manufactured by the company.

Question 10

For the inventory process,management asserts that inventory exists at the income statement date and that the costs of goods sold transactions recorded in the inventory process occurred during the year.

Question 11

In the inventory process,the auditor typically uses only substantive testing due to the nature of the accounts in the business process.

Question 12

If the inventory count is done at a date other than the end of the year,the auditor does not have to observe the inventory count but should perform his own count at year end.

Question 13

On the balance sheet,the inventory process includes which of the following accounts?

A)cost of goods sold
B)administrative expenses
C)inventory
D)allowance account for LIFO adjustments
E)allowance account for FIFO adjustments
F)both A and B
G)both C and D

Question 14

Because the most likely misstatement in the inventory process is an understatement misstatement,existence and valuation are often identified as relevant assertions for this process.

Question 15

The inventory process involves the balance sheet accounts but not the income statements accounts.

Question 16

In the inventory process,adjustments to the ending inventory balance are always recorded against

A)cost of goods sold
B)selling,general and administrative expenses
C)purchases of inventory
D)accounts payable

Question 17

The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm.If LIFO inventory is greater than FIFO inventory,

A)cost of goods sold is credited
B)cost of goods sold is debited
C)the allowance account is debited
D)the allowance account is credited
E)the LIFO reserve account is debited
F)both A and C
G)both B and D

Question 18

The totals at the end of the year in the inventory process expense accounts reflect

A)all the business conducted during the year
B)only the transactions completed during the year
C)all the transactions recorded during the year
D)only the transactions initiated during the year

Question 19

The auditor is responsible,in the inventory process,for determining

A)only if the ending balance in the balance sheet account is stated in accordance with the applicable financial reporting framework
B)only if the ending balance in the income statement account is stated in accordance with the applicable financial reporting framework
C)only if the beginning balance in the balance sheet account is stated in accordance with the applicable financial reporting framework
D)only if the beginning balance in the income statement account is stated in accordance with the applicable financial reporting framework

Question 20

The inventory physical count gives the company inventory quantities that must be priced to arrive at the ending inventory balance reported on the balance sheet.

Question 21

The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm.If LIFO inventory is greater than FIFO inventory,

A)the loss account for a decline in market value of inventory could be credited rather than debited if the market value had increased from the previous year but was not greater than cost
B)the loss account for a decline in market value of inventory could be debited rather than credited if the market value had decreased from the previous year but was not less than cost
C)the loss account for a decline in market value of inventory could be debited rather than credited if the market value had increased from the previous year but was not greater than cost
D)the loss account for a decline in market value of inventory could be credited rather than debited if the market value had decreased from the previous year but was not greater than cost

Question 22

Management assertions about the accounts in the inventory business process are

A)existence or occurrence - for account balances
B)completeness - for classes of transactions
C)valuation and allocation - for account balances
D)rights and obligations - for classes of transactions
E)accuracy - for both classes of transactions and account balances

Question 23

Management assertions about the accounts in the inventory business process are

A)existence or occurrence - for both classes of transactions and account balances
B)completeness - for account balances
C)valuation and allocation - for both classes of transactions and account balances
D)rights and obligations - for classes of transactions
E)accuracy - for account balances

Question 24

The accounting rule,"lower of cost or market," reflects

A)a logical approach to inventory valuation
B)a rational approach to inventory valuation
C)a conservative approach to inventory valuation
D)an aggressive approach to inventory valuation

Question 25

The accounting rule,"lower of cost or market" could more clearly be stated

A)lower of the cost of inventory when purchased or the sale price of the inventory item at year-end
B)lower of the cost of inventory when purchased or the cost to replace the inventory item at year-end
C)lower of the cost of inventory when sold or the cost to replace the inventory item at year-end
D)lower of the cost of inventory when purchased or the cost to replace the inventory item at mid-year

Question 26

The client may use a variety of methods to overstate inventory.These include

A)inaccurate inventory counts
B)inaccurate inventory expense recording
C)incorrect recognition of customer rebates
D)incorrect FIFO reserve calculations
E)failure to write-off obsolete inventory
F)both A and E
G)both B and D

Question 27

Automated inventory systems may be used to maintain control over inventory

A)in terms of keeping track of production quality
B)in terms of keeping track of production quantities
C)in terms of maintaining correct purchase history balances
D)in terms of maintaining correct inventory balances
E)in terms of maintaining correct shipping balances
F)both A and B
G)both B and D

Question 28

The client may use a variety of methods to overstate inventory.These include

A)inaccurate purchase history
B)inaccurate inventory expense recording
C)incorrect recognition of manufacturer rebates
D)incorrect LIFO reserve calculations
E)writing off obsolete inventory
F)both A and B
G)both C and D

Question 29

When an overstatement misstatement in inventory occurs

A)cost of goods sold is understated
B)net income is overstated
C)inventory is understated
D)cost of goods sold is overstated
E)net income is understated
F)both A and B
G)both C and D

Question 30

Management assertions about the accounts in the inventory business process are

A)existence or occurrence - for account balances
B)completeness - for both classes of transactions and account balances
C)valuation and allocation - for both classes of transactions and account balances
D)rights and obligations - for classes of transactions
E)accuracy - for both classes of transactions and account balances

Question 31

In planning the audit,members of the audit team are required to have a team meeting to discuss the potential for misstatement due to fraud in the inventory process,including

A)the pressure on management to commit fraud
B)the inevitability that fraud will be perpetuated in the company
C)the general tone or environment in the company that may allow management to conceptualize committing fraud
D)the general tone or environment in the company that may allow management to rationalize committing fraud
E)the rationalization for fraud to be perpetrated in the company
F)both A and D
G)both C and E

Question 32

The client may use a variety of methods to overstate inventory.These include

A)inaccurate purchase history
B)inaccurate inventory expense recording
C)incorrect recognition of customer rebates
D)incorrect LIFO reserve calculations
E)failure to write-off obsolete inventory
F)both A and C
G)both D and E

Question 33

IT technology related to inventory can be very useful in maintaining accurate records for inventory balances if

A)the internal controls for the technology are effectively designed to prevent or detect misstatements of purchases
B)the internal controls for the technology are effectively designed to prevent or detect misstatements in the financial statements
C)the internal controls for the technology are effectively designed to prevent or detect misstatements of inventory
D)the internal controls for the technology are effectively designed to prevent or detect misstatements of costs of goods sold

Question 34

When an understatement misstatement in inventory occurs

A)cost of goods sold is understated
B)net income is overstated
C)inventory is overstated
D)cost of goods sold is overstated
E)net income is understated
F)both A and B
G)both D and E

Question 35

Overstatement and understatement misstatements about inventory have what effect on outsiders?

A)outsiders are mislead about the true value of the inventory sold
B)outsiders are mislead about the correct valuation when the inventory is sold
C)outsiders are mislead about the future cash flows when the inventory is sold
D)outsiders are mislead about the future prices when the inventory is sold

Question 36

The client may use a variety of methods to overstate inventory.These include

A)inaccurate inventory counts
B)inaccurate inventory pricing
C)incorrect recognition of customer rebates
D)incorrect FIFO reserve calculations
E)revaluing inventory to market value
F)both A and B
G)both C and E

Question 37

The client may use a variety of methods to overstate inventory.These include

A)inaccurate purchase history
B)inaccurate inventory pricing
C)incorrect recognition of manufacturer rebates
D)incorrect FIFO reserve calculations
E)writing off obsolete inventory
F)both A and B
G)both B and C

Question 38

The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm.If LIFO inventory is greater than FIFO inventory,

A)this would be an unusual situation,but it might occur in a year when the company reduces the quantity of inventory on hand
B)this would be an unusual situation,but it might occur in a year when the company increases the quantity of inventory on hand
C)this would be a normal situation,and usually occurs in a year when the company reduces the quantity of inventory on hand
D)this would be a normal situation,and usually occurs in a year when the company increases the quantity of inventory on hand

Question 39

Once inventory is recorded,it continues to be carried at the amount initially recognized unless

A)the market value increases over the initial cost
B)the market value decreases below the initial cost
C)the market value increases over the initial cost at year-end
D)the cost to replace the inventory at year-end is below the initial cost of the inventory

Question 40

Inventory is recorded at cost when purchased.The cost of the inventory is

A)the purchase price
B)the purchase price less any purchase discounts
C)all expenditures necessary to obtain the inventory
D)the purchase price less any discounts plus any financing charges

Question 41

The transactions audited in the inventory process include

A)determining the correct quality of the inventory
B)internal controls relevant to transactions
C)pricing the inventory according to client standards
D)internal controls relevant to balances
E)valuing the year-end inventory balance

Question 42

Inventory costs are assigned to the manufactured product

A)when the product is transferred to finished goods inventory
B)as it moves through the manufacturing process
C)when the product is moved to work in process
D)as soon as the product is removed from raw materials inventory

Question 43

Substantive audit procedures in the inventory process are

A)inspection of records,documents,or tangible assets
B)monitoring
C)inquiry
D)risk assessment
E)reviewing policies and procedures
F)both A and C
G)both B and D
H)both D and E

Question 44

Substantive audit procedures in the inventory process are

A)reviewing policies and procedures
B)monitoring
C)inquiry
D)recalculation
E)risk assessment
F)both A and C
G)both C and D
H)both D and E

Question 45

The internal controls that determine the accuracy of the perpetual inventory file were tested in the revenue process and the purchase and acquisition process because

A)these processes involve movement of inventory in and out of the perpetual inventory account
B)these processes involve reconciliation of inventory in the perpetual inventory account
C)these processes involve verification of inventory in the perpetual inventory account
D)these processes involve observation of inventory in the perpetual inventory account

Question 46

If the perpetual inventory files are accurate,the auditor can

A)accept the client's inventory valuation as correct
B)assume that the stated quantities are present
C)test the physical inventory before the balance sheet date
D)test the physical inventory by reviewing receiving reports

Question 47

Because the most likely misstatement in the inventory process is an overstatement misstatement,

A)accuracy and valuation are often identified as relevant assertions for this process
B)cutoff and valuation are often identified as relevant assertions for this process
C)classification and valuation are often identified as relevant assertions for this process
D)existence and valuation are often identified as relevant assertions for this process

Question 48

Auditing a cost accounting system will require the auditor to understand

A)the tracking of the costs through the cost accounting system
B)the recording of the costs through the cost accounting system
C)how the quantities of inventory are reflected in the periodic inventory files
D)how the costs of inventory are reflected in the periodic inventory files
E)how only the quantities of inventory are reflected in the perpetual inventory files

Question 49

Substantive audit procedures in the inventory process are

A)reviewing policies and procedures
B)observation
C)monitoring
D)risk assessment
E)confirmation
F)both A and C
G)both B and E
H)both D and E

Question 50

The cost accounting system determines

A)the cost of the inventory purchased by the company
B)the cost of the inventory sold by the company
C)the cost of the inventory shipped by the company
D)the cost of the inventory manufactured by the company

Question 51

The transactions audited in the inventory process include

A)determining the correct quantity of the inventory
B)internal controls relevant to transactions
C)pricing the inventory according to accounting standards
D)internal controls relevant to balances
E)valuing the year-end inventory transactions
F)Both A and C

Question 52

Management assertions about the accounts in the inventory business process are

A)existence or occurrence - for account balances
B)completeness - for classes of transactions
C)valuation and allocation - for classes of transactions
D)rights and obligations - for account balances
E)accuracy - for both classes of transactions and account balances

Question 53

The transactions audited in the inventory process include

A)determining the correct quality of the inventory
B)internal controls relevant to transactions
C)pricing the inventory according to accounting standards
D)internal controls relevant to balances
E)valuing the year-end inventory transactions

Question 54

Substantive audit procedures in the inventory process are

A)inspection of records,documents,or tangible assets
B)reviewing policies and procedures
C)monitoring
D)risk assessment
E)confirmation
F)both A and B
G)both A and E
H)both C and D

Question 55

Management assertions about the accounts in the inventory business process are

A)that the cost of goods sold is accurate
B)that the costs of goods is inaccurate
C)that the cutoff was done in accordance with GAAS
D)that the cost of goods sold is properly classified
E)that the cost of goods is properly classified

Question 56

When the auditor tests the inventory records,

A)he must understand how direct labor is charged
B)he must understand how raw materials are received
C)he must understand how overhead is incurred
D)he must understand the internal controls in the cost accounting system

Question 57

Depending on the controls in the cost accounting system,the auditor may choose

A)to verify raw materials by reviewing purchase orders for raw materials
B)to verify raw materials by reviewing purchase invoices for raw materials
C)to verify direct labor by reviewing department records for direct labor costs
D)to verify direct labor by reviewing payroll budgets for direct labor costs
E)to verify direct labor by reviewing payroll records for direct labor costs
F)both A and C
G)both B and D
Both B and E

Question 58

The perpetual inventory files reflect

A)the inventory valuation at the end of the year
B)all additions and deletions to the inventory
C)the work in process at the beginning of the year
D)the work in process at the end of the year
E)the inventory at the beginning of the year
F)both A and C
G)both B and E
H)both D and E

Question 59

Management assertions about the accounts in the inventory business process are

A)existence or occurrence - for account balances
B)completeness - for classes of transactions
C)valuation and allocation - for both classes of transactions and account balances
D)rights and obligations - for both classes of transactions and account balances
E)accuracy - for classes of transactions

Question 60

Accurate cost data for raw materials,direct labor,and overhead costs are obtained when

A)purchased materials are received
B)direct labor is paid
C)the appropriate overhead rate is calculated
D)direct material and direct labor are added to the product
E)overhead is added to the product
F)both A and C
G)both B and D
Both D and E

Question 61

The perpetual inventory system records additions to inventory as inventory is manufactured or purchased and deletions from inventory as inventory is sold.But it does not record

A)obsolete items
B)one time special purchases
C)inventory shrinkage
D)inventory rebates
E)inventory returns
F)both A and C
G)both B and D
H)both D and E

Question 62

The accounts in the inventory process are

A)inventory
B)purchasing
C)allowance to increase inventory to LIFO value
D)receiving
E)allowance to reduce inventory to market value
F)both A and C
G)both B and D
Both A and E

Question 63

The lower-of-cost-or-market account is

A)a temporary balance sheet account
B)a permanent income statement account
C)a temporary income statement account
D)a permanent balance sheet account

Question 64

If the inventory is material to the financial statements,the auditing standards require the auditor to obtain sufficient appropriate evidence regarding the existence and condition of inventory by

A)observing physical inventory
B)performing audit procedures over the company's final inventory to determine whether they accurately reflect the actual inventory count results
C)performing audit procedures over the company's interim inventory to determine whether they accurately reflect the actual inventory count results
D)performing audit procedures over the company's final inventory to determine whether they accurately reflect the estimated inventory count results
E)taking the physical inventory
F)both A and B
G)both B and D
H)both D and E

Question 65

Market value is determined by

A)what the inventory item can be sold for
B)what a competitor is selling the item for
C)what the advertised price of the item is
D)the cost of replacing the inventory item

Question 66

The auditor performs the following procedures in preparation for attending the physical inventory counting

A)identify the locations of the inventory and amounts of inventory at each location.
B)evaluate whether the audit opinion should be modified.
C)use alternative audit procedures to obtain sufficient appropriate evidence regarding the existence and condition of the inventory.
D)determine that inventory items on hand that are not owned by the client are identified.
E)review the client's plans for taking inventory,including the process to count,control inventory tags or count sheets,the procedures for identifying obsolete items during the count,procedures for controlling the movement of inventory during the count,and the procedures for controlling shipping and receiving during the count.F.both A and E
G)both B and C
H)both D and E

Question 67

The accounts in the inventory process are

A)inventory
B)purchasing
C)allowance to reduce inventory to LIFO value
D)receiving
E)allowance to increase inventory to market value
F)both A and C
G)both B and D
H)both D and E

Question 68

Analytical procedures are used by the auditor to:

A)focus his or her attention on accounts where possible fraud exists
B)focus his or her attention on accounts where the possibility of material misstatements is greatest
C)focus his or her attention on accounts where procedures are inadequate
D)focus his or her attention on accounts with unexpected change in the current year compared to the prior year

Question 69

In the inventory process,the auditor might perform the following analytical procedures

A)Compare inventory transactions by category - raw material,work-in-process,and finished goods - for the current year with the prior year.
B)Compare inventory purchases by category - raw material,work-in-process,and finished goods - for the current year with the prior year.
C)Compute gross margin for the current year and compare with the prior year.Investigate any unexpected changes in the ratio.
D)Compute cost of goods sold with the current year with the prior year.Investigate any unexpected changes in the ratio.
E)Compute inventory turnover.Compare the current year's turnover to the prior year.Investigate any differences.F.both A and C
G)both B and D
Both C and E

Question 70

The accounts in the inventory process are

A)inventory returns
B)purchasing
C)allowance to reduce inventory to LIFO value
D)receiving
E)allowance to reduce inventory to market value
F)both A and B
G)both C and E
H)both D and E

Question 71

Substantive audit procedures in the inventory process are

A)reviewing policies and procedures
B)observation
C)monitoring
D)recalculation
E)risk assessment
F)both A and C
G)both B and D
H)both D and E

Question 72

The perpetual inventory system records additions to inventory as inventory is manufactured or purchased and deletions from inventory as inventory is sold.But they do not record

A)one time special purchases
B)stolen items
C)inventory rebates estimating inventory requirements
D)errors in recording inventory transactions
E)costs in the manufacturing process
F)both A and C
G)both B and D
H)both D and E

Question 73

The auditor performs the following procedures during the physical inventory counting

A)identify the locations of the inventory and amounts of inventory at each location.
B)observe the performance of the count procedures.
C)use alternative audit procedures to obtain sufficient appropriate evidence regarding the existence and condition of the inventory.
D)determine that inventory items on hand that are not owned by the client are identified.
E)review the client's plans for taking inventory,including the process to count,control inventory tags or count sheets,the procedures for identifying obsolete items during the count,procedures for controlling the movement of inventory during the count,and the procedures for controlling shipping and receiving during the count.F.both B and D
G)both C and D
H)both D and E

Question 74

The client determines the cost of inventory at year-end using

A)LIFO,FIFO,or actual cost
B)FIFO,LIFO,or incurred cost
C)FIFO,LIFO,or average cost
D)FIFO,LISH,or average cost

Question 75

The auditor uses substantive tests of balances to gather evidence for

A)income statement accounts in the inventory process
B)income statement transactions in the inventory process
C)balance sheet accounts in the inventory process
D)balance sheet transactions in the inventory process

Question 76

If attendance at physical inventory counting is impracticable,the auditor must

A)identify the locations of the inventory and amounts of inventory at each location.
B)evaluate whether the involvement of specialists is needed.
C)use alternative audit procedures to obtain sufficient appropriate evidence regarding the existence and condition of the inventory.
D)review the client's plans for taking inventory,including the process to count,control inventory tags or count sheets,the procedures for identifying obsolete items during the count,procedures for controlling the movement of inventory during the count,and the procedures for controlling shipping and receiving during the count.

Question 77

The LIFO reserve is

A)the difference between the LIFO inventory cost and the average cost method
B)the difference between the LIFO inventory cost and the FIFO inventory cost
C)the income tax savings from using the LIFO method
D)the reserve set aside for income taxes for the LIFO method

Question 78

In the inventory process,the auditor might perform the following analytical procedures

A)Compare inventory balances by category - raw material,work-in-process,and finished goods - for the current year with the prior year.
B)Compare inventory purchases by category - raw material,work-in-process,and finished goods - for the current year with the prior year.
C)Compute material margin with the current year with the prior year.Investigate any unexpected changes in the ratio.
D)Compute cost of goods sold with the current year with the prior year.Investigate any unexpected changes in the ratio.
E)Compute inventory turnover.Compare the current year's turnover to the prior year.Investigate any differences.F.both A and C
G)both B and D
Both A and E

Question 79

In the inventory process,the auditor might perform the following analytical procedures

A)Compare inventory balances by category - raw material,work-in-process,and finished goods - for the current year with the prior year.
B)Compare inventory purchases by category - raw material,work-in-process,and finished goods - for the current year with the prior year.
C)Compute gross margin for the current year and compare with the prior year.Investigate any unexpected changes in the ratio.
D)Compute cost of goods sold with the current year with the prior year.Investigate any unexpected changes in the ratio.
E)Compute raw material turnover.Compare the current year's turnover to the prior year.Investigate any differences.F.both A and C
G)both B and D
H)both D and E

Question 80

The inventory physical count gives the company

A)inventory quantities that must be priced to arrive at the ending inventory balance reported on the balance sheet
B)inventory quantities that must be priced to arrive at the ending inventory balance reported on the income statement
C)inventory value that must be verified to the ending inventory balance reported on the balance sheet
D)inventory value that must be verified to the ending inventory balance reported on the income statement