Question 1

Selecting a sample of job orders from the job cost summary and matching them to bills of material and the schedule of production labour requirements is a procedure designed to test the control objective of

Accepted Answer

A) validity. 
B) accounting. 
C) accuracy. 
D) completeness.

Question 2

You are conducting the audit of Files R Us Inc.(FRI),a family-owned business that manufactures a variety of different wooden and metal file cabinets.In business for over twenty years,FRI has a reputation for providing high-quality products on time or even ahead of schedule.FRI does not sell to the public,but only to fine furniture stores and to a variety of office supply chains.
As of the current year-end,the company has a total of $6.3 million in assets.Inventory information is as follows:
  
File cabinet production is intensely competitive,primarily due to imports from Asia and Mexico.To help manage costs,FRI uses a job-order,standard cost system.Standard costs are assessed quarterly.Each job is costed and compared to standard.Inventory is counted only at the end of the year.There is no perpetual inventory system.
Due to problems with raw material quality and new staff,losses have been incurred in the last six months of the year.Your review of last year's audit file indicated that there were numerous inventory adjustments required last year.
Required:
Using the audit risk model,assess the risks associated with the audit of inventory.

Accepted Answer

The answer of You are conducting the audit of Files...

Question 3

The auditor has determined that the perpetual inventory master files are high quality,assessing control risk related to physical observation of inventory as low.How does this affect audit testing? The auditor may

Accepted Answer

A) reduce the extent of control tests over data entry to the master file. 
B) reduce the extent of the tests of physical inventory. 
C) reduce the extent of control tests with respect to program change controls. 
D) increase assessed inherent risks over the tests of physical inventory.

Question 4

A well-designed computerized system of perpetual inventory data files includes information about the

Accepted Answer

A) units of inventory purchased,sold,and on hand. 
B) unit costs of inventory purchased,sold,and on hand. 
C) units and unit costs of inventory purchased,sold,and on hand. 
D) units of raw materials,work-in-process,and finished goods.

Question 5

A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory.The audit objective being achieved by this procedure is

Accepted Answer

A) inventory as recorded on tags exists (existence). 
B) existing inventory is counted and tagged (completeness). 
C) inventory is counted accurately (accuracy). 
D) inventory is classified correctly (classification).

Question 6

The auditor has evaluated the effectiveness of the client's procedures to count inventory,and has provided constructive suggestions for improvement.However,the client has not implemented the suggestions,so the auditor has concluded that the inventory instructions do not provide adequate controls.This means that the auditor

Accepted Answer

A) must send a management letter informing management of the impact of these weaknesses. 
B) must spend more time ensuring that the physical count is accurate. 
C) should use attribute sampling to select a smaller sample for testing the physical inventory. 
D) should increase the level of price and compilation tests to ensure better quality inventory pricing data.

Question 7

From which of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?

Accepted Answer

A) observation of physical inventory counts 
B) written inventory representations from management 
C) confirmation of inventories in a public warehouse 
D) auditor's recomputation of inventory extensions

Question 8

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

Accepted Answer

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

Question 9

When labour is a significant part of inventory,verifying the proper accounting of these costs should be tested in the

Accepted Answer

A) inventory and distribution cycle. 
B) human resources and payroll cycle. 
C) acquisitions and payments cycle. 
D) cash cycle.

Question 10

Shipping of finished goods is an integral part of the

Accepted Answer

A) acquisitions and payments cycle. 
B) inventory and distribution cycle. 
C) sales and collections cycle. 
D) human resources and payroll cycle.

Question 11

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

Accepted Answer

The answer of State the six functions that make up...

Question 12

CAS for audit procedures for inventory indicate that the auditor

Accepted Answer

A) must count the inventory. 
B) must be present at the inventory count and must receive adequate documentation from the client regarding the effectiveness of inventory-taking. 
C) must be present at the inventory count and evaluate the methods followed in the determination of quantities and values. 
D) need not be present at the count but must review the methods followed in the determination of quantities and values.

Question 13

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

Accepted Answer

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

Question 14

The most important part of the observation of inventory is determining whether

Accepted Answer

A) the inventory-takers are qualified. 
B) the physical count is being taken in accordance with the client's instructions. 
C) the counts are accurate. 
D) obsolete inventory has been identified.

Question 15

Identify three analytical procedures commonly used when auditing accounts in the inventory and distribution cycle.

Accepted Answer

The answer of Identify three analytical procedures commonly used when...

Question 16

The controls over purchase requisitions and the related purchase orders are evaluated and tested as part of the

Accepted Answer

A) inventory and distribution cycle. 
B) acquisitions and payments cycle. 
C) human resources and payroll cycle. 
D) capital acquisitions cycle.

Question 17

A)Discuss the key control procedures relating to the client's physical count of inventory.B)State the primary determinants of the amount of time needed to perform the physical observation of inventory.

Accepted Answer

The answer of A)Discuss the key control procedures relating to...

Question 18

The costs used to value the physical inventory must be tested to determine whether the client has correctly followed an inventory method that is in accordance with an acceptable financial reporting framework and is consistent with previous years.The audit procedures used to verify these costs are referred to as inventory

Accepted Answer

A) price tests. 
B) compilation tests. 
C) cost allocation tests. 
D) consistency tests.

Question 19

What are inventory price tests and inventory compilation tests? Provide an example of each.

Accepted Answer

The answer of What are inventory price tests and inventory...

Question 20

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

Accepted Answer

A) comparing gross margin percentage with previous years 
B) comparing unit costs of inventory with previous years 
C) comparing inventory turnover with previous years 
D) comparing current year manufacturing costs with previous years

Exam 14: Audit of the Inventory and Distribution Cycle