Question 1

Auditors are responsible for setting up procedures for a physical inventory count that will be observed by management

Accepted Answer

A) True 
 B)False  False

Question 2

Analytical procedures can help an auditor assess the reasonableness of the inventory balances by highlighting changes that:

Accepted Answer

A)   suggest slow-moving inventory for possible obsolescence.
B)   address whether inventory includes operating costs that should be expensed rather than capitalized.
C)   compare the reasonableness of inventory balances with purchases and cost of goods sold.
D)   All of the above. D

Question 3

Which of the following is the method of allocating costs to individual residential units in the land development and home building industry?

Accepted Answer

A)   Variable costing.
B)   Job order costing.
C)   Historical costing.
D)   Acquisition costing. B

Question 4

What estimates are included in the cost of inventory in the land development and home building industry? Specifically, what past costs are allocated? What future amounts must be predicted? What future amounts must be predicted and allocated? Distinguish

Accepted Answer

The answer of What estimates are included in the cost...

Question 5

Which of the following is the most appropriate test for auditing inventory in the land development and home building industry?

Accepted Answer

A)   Examine subsequent invoices received in support of estimates of the cost of sales for individual units sold just before year end.
B)   Calculate estimated ending inventory using standards and variance information.
C)   Review sales contracts for bill-and-hold transactions.
D)   All of the above tests are common in the land development and home building industry.

Question 6

Which of the following statements is true regarding the complex nature of inventory accounting in the land development and home building industry?

Accepted Answer

A)   Common costs, such as capitalized interest, often require complex calculations.
B)   The size and type of units to which costs must be allocated for a single parcel of land may vary considerably.
C)   Costs associated with zoning applications and legal fees may occur in periods prior to the land acquisition.
D)   All of the above are true.

Question 7

Observation is the form of audit evidence typically used for testing the operating effectiveness of many of the physical controls over inventory.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is not a control concern for inventory?

Accepted Answer

A)   Inventory records are adjusted to reflect the inventory that has been verified through a physical count.
B)   Any decrement in inventory value is properly reflected in the amounts.
C)   Inventory is safeguarded through all stages of movement and the production process.
D)   Reported inventory amounts are properly estimated through management authorization of completeness.

Question 9

Explain how auditing inventory of a company with a standard cost system requires an audit of estimates.What are the estimates? What procedures would the auditor perform related to variances produced by the system at year end? Why?

Accepted Answer

The answer of Explain how auditing inventory of a company...

Question 10

Land development and home building companies provide warranties for:

Accepted Answer

A)   impaired assets.
B)   manufacturer's defects and latent defects.
C)   amenities.
D)   obsolete or slow-moving items.

Question 11

In accounting for inventory, the quality of estimates made by a client's management is directly related to:

Accepted Answer

A)   the likelihood of error in the allocation of common costs.
B)   the strength of internal controls of the inventory process.
C)   the degree of sophistication of the client's automated inventory processes.
D)   the number of tags or count sheets used in the client's physical inventory count.

Question 12

One method for testing cutoff and in-transit inventory is for the auditor to examine shipping documents for a few days before and after year-end and determine whether the inventory records properly reflect the transaction in the correct period.

Accepted Answer

A) True 
 B)False

Question 13

Over- and underapplied overhead variances are typically allocated among:

Accepted Answer

A)   direct materials, direct labor, and manufacturing overhead.
B)   raw materials, work-in-process, and finished goods inventory.
C)   the inventory accounts and cost of goods sold.
D)   the inventory and human resources-related accounts.

Question 14

While auditing a client's inventory processes, an auditor computes the gross profit margin ratio and compares it to prior years and budgeted amounts. If the result indicates that the gross profit margin has increased since the prior year and exceeds the budget, it is likely that:

Accepted Answer

A)   ending inventory is overstated and cost of goods sold is understated.
B)   both inventory and cost of goods sold is overstated.
C)   both inventory and cost of goods sold is understated.
D)   ending inventory is understated and cost of goods sold is overstated.

Question 15

Which of the following is an appropriate substantive test of details of account balances for the inventory cycle for the verification of an accurate cutoff?

Accepted Answer

A)   Test movements between raw materials, work-in-process, and finished goods by selecting transactions from the inventory records and examining supporting documents.
B)   Reperform calculations testing mathematical accuracy including total extensions of price and quantity and unit or batch aggregations.
C)   Examine shipping documents for a few days before and after year end and trace to inventory records, agreeing for proper inclusion and exclusion.
D)   Review and recalculate client's analysis supporting adjustments resulting from the physical inventory count.

Question 16

Which of the following is not an acceptable manner of testing an audit client's estimates?

Accepted Answer

A)   Compare subsequent actual amounts to the accounting estimates.
B)   Recalculate accounting estimates using management's process.
C)   Prepare an independent estimate and compare with management's result.
D)   Observe management's process of calculating estimates.

Question 17

At the end of the accounting period, adjustments for under- or overapplied overhead are simply posted to the inventory accounts.

Accepted Answer

A) True 
 B)False

Question 18

A construction problem that is not immediately evident is referred to as a latent defect.

Accepted Answer

A) True 
 B)False

Question 19

Physical controls over inventory are typically tested for operating effectiveness by:

Accepted Answer

A)   confirmation.
B)   observation.
C)   walkthrough.
D)   reconciliation.

Question 20

Match between columns
                        Premises: _____ Inspect documentation and reperform calculations of inventory value to identify and evaluation declines in value.
_____ Review management's policies for making estimates for reasonableness of underlying assumptions, relevant factors, and process.
_____ Select samples from each category of inventory records and inspect the goods for physical existence and consistency with the category of inventory records.
_____ Select a sample of work-in-process inventory and trace to the inventory records and supporting documents from purchasing and payroll.
_____ Evaluate whether management's inventory count controls and procedures are appropriate and observe inventory counting to assess whether the procedures are being followed.
_____ Select a sample of inventory for which production is complete and examine physical and documentary evidence showing that the items were transferred.
_____ Test the mathematical accuracy of any calculations performed on the results of the inventory count.
_____ Tour the storage and production facilities and observe the security procedures being used for inventory.

Accepted Answer

The Answer of To ensure that cost accounting procedures are is...

Exam 14: Auditing Inventory Processes: Tracking and Costing Products in the Land Development and Home Building Industry

Auditors are responsible for setting up procedures for a physical inventory count that will be observed by management

Analytical procedures can help an auditor assess the reasonableness of the inventory balances by highlighting changes that:

Which of the following is the method of allocating costs to individual residential units in the land development and home building industry?

What estimates are included in the cost of inventory in the land development and home building industry? Specifically, what past costs are allocated? What future amounts must be predicted? What future amounts must be predicted and allocated? Distinguish

Which of the following is the most appropriate test for auditing inventory in the land development and home building industry?

Which of the following statements is true regarding the complex nature of inventory accounting in the land development and home building industry?

Observation is the form of audit evidence typically used for testing the operating effectiveness of many of the physical controls over inventory.

Which of the following is not a control concern for inventory?

Explain how auditing inventory of a company with a standard cost system requires an audit of estimates.What are the estimates? What procedures would the auditor perform related to variances produced by the system at year end? Why?

Land development and home building companies provide warranties for:

In accounting for inventory, the quality of estimates made by a client's management is directly related to:

One method for testing cutoff and in-transit inventory is for the auditor to examine shipping documents for a few days before and after year-end and determine whether the inventory records properly reflect the transaction in the correct period.

Over- and underapplied overhead variances are typically allocated among:

While auditing a client's inventory processes, an auditor computes the gross profit margin ratio and compares it to prior years and budgeted amounts. If the result indicates that the gross profit margin has increased since the prior year and exceeds the budget, it is likely that:

Which of the following is an appropriate substantive test of details of account balances for the inventory cycle for the verification of an accurate cutoff?

Which of the following is not an acceptable manner of testing an audit client's estimates?

At the end of the accounting period, adjustments for under- or overapplied overhead are simply posted to the inventory accounts.

A construction problem that is not immediately evident is referred to as a latent defect.

Physical controls over inventory are typically tested for operating effectiveness by:

Match the following control objectives below with the appropriate test of controls.