Question 1

The client has a perpetual inventory system, and takes an inventory count of 100 items every two weeks for comparison to the perpetual records. There are no plans to have a complete year-end physical count of inventory. How will the auditor conduct the audit of physical inventory?

Accepted Answer

A)  Select an attribute sample of items to count at the year end for comparison to the perpetual records. 
B)  Select a dollar unit sample of items to count at the year end for comparison to the perpetual records. 
C)  Use roll-forwards to carry forward the inventory records from the cyclical counts for an attribute sample of inventory items. 
D)  Conduct test counts and compare the perpetual records with a cyclical count during the interim audit.

Question 2

The overall objective in the audit of the inventory and distribution cycle is to determine that

Accepted Answer

A)  costs of goods sold and gross profit are correctly stated on the income statement. 
B)  inventory items on the balance sheet are neither fraudulent nor materially in error. 
C)  gross profit and inventory are fairly presented on the financial statements. 
D)  inventory and cost of goods sold are fairly stated on the financial statements.

Question 3

To detect an overstatement or understatement of inventory and cost of goods sold, the auditor may perform an analytical procedure such as comparing

Accepted Answer

A)  gross margin percentage with previous years. 
B)  inventory turnover with previous years. 
C)  current year manufacturing costs with previous years. 
D)  extended inventory value with previous years.

Question 4

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 5

Controls that provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totalled, and included in the general ledger at the proper amount are known as

Accepted Answer

A)  standard cost records. 
B)  pricing internal controls. 
C)  compilation internal controls. 
D)  count quantity internal controls.

Question 6

When a physical count of inventory is permitted at an interim date, the auditor observes it at that time, and also tests the perpetual inventory for transactions

Accepted Answer

A)  throughout the year. 
B)  which are a representative sample of the period under audit. 
C)  from the date of the count to year-end. 
D)  from the date of the count to the end of the audit field work.

Question 7

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 8

When considering pricing of inventory, three things are important. The first two are that the method must be in accordance with an acceptable financial accounting framework, and the application of the method must be consistent from year to year. What is the third?

Accepted Answer

A)  The input edits over the data entry of prices must be robust. 
B)  The cutoff testing for the use of supplier invoices should be carefully done. 
C)  The cost versus market value must be considered. 
D)  The freight should always be included in the cost of the inventory.

Question 9

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 10

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 11

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 12

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 13

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 14

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 15

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 16

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 17

To protect the inventory, Globus Corp wants to assign the custody of inventory to a specific responsible individual. Globus can accomplish this by

Accepted Answer

A)  having a designated employee to authorize movement of inventory. 
B)  requiring employees to have photo id cards. 
C)  having restricted access to the production facility. 
D)  performing frequent inventory counts.

Question 18

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 19

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 20

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.

Exam 14: Audit of the Inventory and Distribution Cycle