Question 1

In order for an auditor to test ownership of a client's inventories, each of the following substantive tests of details of account balances are appropriate except:

Accepted Answer

A)  review loan agreements for inventory that has been pledged or assigned. 
B)  review sales agreements for bill-and-hold arrangements. 
C)  review contracts for inventory held on consignment. 
D)  review policy for asset impairment write-downs.

Question 2

Which types of inventory transactions are not likely to create variable interest entities that would require consolidation?

Accepted Answer

A)  Land purchase contracts. 
B)  Joint ventures. 
C)  Percentage of completion contracts. 
D)  Options for future land purchases.

Question 3

Ballpark Distributors, Inc. is a large public company with a calendar year end that distributes sports memorabilia to various retailers. Ballpark conducted an inventory count on November 30 of the year being audited. Instead of conducting another inventory count at year end, the company decided to estimate the year-end inventory using a sample of the year-end inventory on hand. The company uses a perpetual inventory system and feels that sampling to estimate the year-end inventory will produce a reliable financial statement amount.
Required:
Assume that the auditor observed and tested Ballpark's physical inventory count on
November 30, and was satisfied that the count and resulting adjustments produced
an appropriate inventory account balance on November 30.
(a)What roll-forward procedures between the inventory count date and year end
might the auditor perform?
(b)What additional tests of details of balances can the auditor perform?

Accepted Answer

The answer of Ballpark Distributors, Inc. is a large public...

Question 4

Direct tracing is a cost accounting technique for tracking individual costs associated with a manufactured product or production process.

Accepted Answer

A) True 
 B)False

Question 5

When using the percentage of completion method, the amount of revenue recognized in the current period is calculated using the proportion of total expected product costs relative to costs incurred to date.

Accepted Answer

A) True 
 B)False

Question 6

Overhead costs are also known as:

Accepted Answer

A)  direct costs. 
B)  work-in-process costs. 
C)  tracked costs. 
D)  indirect costs.

Question 7

To ensure that a client's raw materials, work-in-process, and finished goods inventories are physically protected from theft or damage, an auditor could perform a test of controls such as:

Accepted Answer

A)  selecting a sample of inventory items from the inventory records and inspecting them for consistency with the category of records. 
B)  reviewing the company's inventory policies for adherence to GAAP. 
C)  observing the client's physical inventory count to assess whether the company's procedures are being followed. 
D)  touring the storage and production facilities and observe the security procedures in place.

Question 8

Which of the following business functions or activities is unique to the manufacturing industry with respect to the production of finished goods from raw materials?

Accepted Answer

A)  An effective cost accounting function. 
B)  An effective inventory stores function. 
C)  The requirement for a physical inventory count at year-end. 
D)  The consideration of impairment losses.

Question 9

In a manufacturing environment using a backflush system, a typical trigger for posting inventory transactions is the company's vulnerability to shrinkage losses.

Accepted Answer

A) True 
 B)False

Question 10

In the land development and home building industry, materials costs are typically added to the inventory cost of a specific unit based on actual purchases prices except when:

Accepted Answer

A)  subcontractors are used, in which case the costs cannot be directly traced to plan specifications. 
B)  multifamily residences are constructed, in which case it is necessary to allocate common costs. 
C)  job order costing is used, in which case the specific identification method cannot be applied. 
D)  large quantities of building materials are purchased that cannot be tracked to individual units.

Question 11

Manufacturing entities using standard costing systems should avoid the use of accounting estimates in order to reduce the likelihood of audit adjustments.

Accepted Answer

A) True 
 B)False

Question 12

The purpose of a materials requisition form is to:

Accepted Answer

A)  track work-in process inventory so the appropriate percentage of completion proportion can be computed. 
B)  authorize the release of raw materials into work-in-process. 
C)  trigger the accounting entry to reduce raw materials inventory records and increase finished goods. 
D)  update the general ledger for the movement of materials into finished goods.

Question 13

Controls in the inventory cycle that support proper records of units and costs cannot be effective unless the documentation and controls for purchasing, payroll, and sales are also effective.

Accepted Answer

A) True 
 B)False

Question 14

For planned communities, common costs can be allocated to individual residential units using the:

Accepted Answer

A)  relative interest allocation method. 
B)  relative capitalization of costs method. 
C)  relative area or relative sales value allocation method. 
D)  relative impact estimation process.

Question 15

When ICFR and the quality of perpetual inventory records justify relying on an inventory count by the company at other than fiscal year end, the auditor's testing should include each of the following except:

Accepted Answer

A)  verification of inventory purchases occurring during the period between the time of the physical count and year end. 
B)  tests of controls performed during the period between the time of the physical count and year end. 
C)  reconciliation of the count result to the final inventory balances in the financial statements. 
D)  verification of sales transactions during the period between the time of the physical count and year end.

Question 16

When a company's cost accounting system uses process costing, work-in-process is accumulated based on:

Accepted Answer

A)  batches. 
B)  specific inventory projects. 
C)  raw materials less shrinkage. 
D)  periodic labor charts.

Question 17

In order to obtain audit evidence about account balances, many tests of controls may be enhanced by the added activity of tracing the sampled items from the inventory compilation report and verifying that the compilation amounts agree with the general ledger. This enhanced test would be considered a:

Accepted Answer

A)  substantive procedure. 
B)  dual-purpose test. 
C)  walkthrough. 
D)  physical inventory count.

Question 18

Management may estimate costs of material, labor, and overhead for each unit of inventory based upon experience and/or engineering specifications.

Accepted Answer

A) True 
 B)False

Question 19

A test of controls can be modified to be performed as a dual purpose test if the modification provides evidence about the related account balances. Describe a substantive procedure that can be added to a test of controls in order make it a dual purpose test. The substantive procedure you identify must be one that could be added to most any test of controls involving a sample selection or mathematical verification.

Accepted Answer

The answer of A test of controls can be modified...

Question 20

If a client company performs its physical inventory counts on a date other than year-end, auditors must verify that:

Accepted Answer

A)  no shrinkage results. 
B)  there are no discrepancies between accounting records and goods on hand as of the date of the physical count. 
C)  the count data is rolled forward or rolled back to the financial statements based on transaction data between the dates of the physical count and year-end. 
D)  authorization controls applied during the period were sufficient to prevent losses between the dates of the physical count and year-end.

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

In order for an auditor to test ownership of a client's inventories, each of the following substantive tests of details of account balances are appropriate except:

Which types of inventory transactions are not likely to create variable interest entities that would require consolidation?

Direct tracing is a cost accounting technique for tracking individual costs associated with a manufactured product or production process.

When using the percentage of completion method, the amount of revenue recognized in the current period is calculated using the proportion of total expected product costs relative to costs incurred to date.

Overhead costs are also known as:

To ensure that a client's raw materials, work-in-process, and finished goods inventories are physically protected from theft or damage, an auditor could perform a test of controls such as:

Which of the following business functions or activities is unique to the manufacturing industry with respect to the production of finished goods from raw materials?

In a manufacturing environment using a backflush system, a typical trigger for posting inventory transactions is the company's vulnerability to shrinkage losses.

In the land development and home building industry, materials costs are typically added to the inventory cost of a specific unit based on actual purchases prices except when:

Manufacturing entities using standard costing systems should avoid the use of accounting estimates in order to reduce the likelihood of audit adjustments.

The purpose of a materials requisition form is to:

Controls in the inventory cycle that support proper records of units and costs cannot be effective unless the documentation and controls for purchasing, payroll, and sales are also effective.

For planned communities, common costs can be allocated to individual residential units using the:

When ICFR and the quality of perpetual inventory records justify relying on an inventory count by the company at other than fiscal year end, the auditor's testing should include each of the following except:

When a company's cost accounting system uses process costing, work-in-process is accumulated based on:

Management may estimate costs of material, labor, and overhead for each unit of inventory based upon experience and/or engineering specifications.

If a client company performs its physical inventory counts on a date other than year-end, auditors must verify that: