Question 1

An inventory observation procedure that compares physical counts with the perpetual inventory master file is an attempt to satisfy the audit objective of

Accepted Answer

A) existence. 
B) completeness. 
C) accuracy. 
D) classification.

Question 2

Outline the key controls relating to compilation and pricing in the inventory cycle.

Accepted Answer

The answer of Outline the key controls relating to compilation...

Question 3

What are the five distinct activities used during the audit of the inventory cycle?

Accepted Answer

The answer of What are the five distinct activities used...

Question 4

Obtaining an adequate understanding of the client's business is important in physical observation of inventory because

Accepted Answer

A) it is required by GAAP. 
B) it will help the auditor in assessing the risk of theft of inventory. 
C) inventory is normally a significant item. 
D) inventory varies significantly for different companies.

Question 5

The existence of an adequate storeroom with a competent custodian in charge results in the orderly storage of inventory and can protect inventory from theft and misuse.How would an auditor assess these controls?

Accepted Answer

A) observation during the audit and inquiry of the accounting staff 
B) inquiry of the accounting staff and inspection of theft statistics 
C) observation during the inventory count and inquiry of inventory personnel 
D) inspection of inventory damage statistics and inquiry of inventory personnel

Question 6

The form used to request the purchasing department to place orders for inventory items is the

Accepted Answer

A) purchase order. 
B) purchase requisition. 
C) materials requisition. 
D) bill of lading.

Question 7

Segregation of duties between production,inventory control,and accounting are important controls in the inventory and distribution cycle.How would the auditor test these controls?

Accepted Answer

A) using inquiry and reperformance 
B) using observation and inquiry 
C) using observation and reperformance 
D) using discussion with management

Question 8

When performing a financial statement audit,auditors are required to explicitly assess the risk of material misstatement due to

Accepted Answer

A) fraud. 
B) audit risk. 
C) illegal acts. 
D) business risks.

Question 9

The auditor has determined that the inventory procedures are highly automated with limited use of a paper or physical trail.Rather than having people count inventory (since all inventory has RFID tags attached),inventory is being read using the wireless mesh network.To provide assurance with respect to ending inventory,the auditor should

Accepted Answer

A) bring in additional audit staff and conduct a high level of test counts,matching these counts to the automated systems. 
B) use dollar-unit sampling to identify all high-dollar inventory items and ask the client to physically count these items using count teams. 
C) test the quality of the controls over the programs in use and over tagging inventory items. 
D) request that the client implement manual rotating counts to test the quality of the automated systems.

Question 10

The test of details of balance procedure that 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) valuation.

Question 11

Which three cycles is the inventory cycle interconnected with in a manufacturing company?

Accepted Answer

The answer of Which three cycles is the inventory cycle...

Question 12

The test of details of balance procedure that requires the auditor to account for unused inventory tag numbers to make sure none have been omitted is an attempt to satisfy the objective of

Accepted Answer

A) allocation. 
B) existence. 
C) completeness. 
D) accuracy.

Question 13

The audit of the inventory and distribution 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 answer of The audit of the inventory and distribution...

Question 14

As part of the audit of valuation,the auditor is conducting pricing tests by comparing to supplier invoices.The auditor is making sure that,for each item tested,sufficient supplier invoices are examined to cover the quantity of inventory that was on hand during the physical inventory count.What type of pricing error could this detect?

Accepted Answer

A) The client valued their inventory on the basis of the most recent invoice only. 
B) The client has used the incorrect accounting method to value its inventory. 
C) Extension errors could occur with numerous different inventory items. 
D) The wrong inventory count quantity could have been recorded on the count sheets.

Question 15

The auditor evaluates the internal transfer of assets and related costs during the

Accepted Answer

A) acquisition and payments cycle. 
B) human resources and payroll cycle. 
C) sales and collection cycle. 
D) inventory and distribution cycle.

Question 16

XYZ Company uses standard costs for allocating costs to work-in-process and finished goods inventory.What internal control is required with respect to these costs to ensure proper valuation of inventory?

Accepted Answer

A) Procedures must be designed to keep the standards updated for changes in production processes and costs. 
B) Computer software should be used to make sure that the standard costs are properly updated into the inventory item master file. 
C) Input edit routines should be used to help detect input data entry errors for the entry of the standard costs. 
D) Standard costs should be used to provide a value for inventory every month by calculating cost times quantity on hand.

Question 17

What is the first step that the auditor takes when auditing the valuation of inventory?

Accepted Answer

A) Conduct analytical review,comparing gross margin for the current year to the prior year. 
B) Do an industry analysis to determine whether there is a potential for technology-induced obsolescence. 
C) Ask the client about the level of obsolete inventory that was on hand and counted during the inventory count. 
D) Clearly establish the valuation method used and how the calculations are being performed.

Question 18

A common inventory observation procedure is to record in the working papers for subsequent follow-up the last shipping document number used at year-end.The audit objective being achieved by this procedure is

Accepted Answer

A) inventory as recorded exists. 
B) existing inventory is counted and tagged. 
C) information is obtained to make sure sales and inventory purchases are recorded in the proper period. 
D) tags are accounted for to make sure none are missing.

Question 19

If the auditor concludes that the physical controls over inventory are so inadequate that inventory will be difficult to count,the auditor should

Accepted Answer

A) inquire of management the additional controls that can be put in place to enable a better count to be carried out. 
B) conduct additional control tests over the pricing and compilation of inventory to obtain a higher degree of accuracy. 
C) rely on the perpetual inventory master files rather than the physical count. 
D) expand the observation of physical inventory tests to ensure that an adequate count is carried out.

Question 20

Analytical procedures applied to management's production cost reports provide evidence for which assertion(s)?

Accepted Answer

A) existence,valuation,and completeness 
B) ownership 
C) physical inspection 
D) auditor's recomputation of inventory extensions

Exam 14: Audit of the Inventory and Distribution Cycle