Question 1

Match between columns
                        Premises: _____ Materials requisition
_____ Cost accounting records
_____ Raw materials inventory files
_____ Finished goods inventory files

Accepted Answer

The Answer of Place materials into production and Process the is...

Question 2

Which of the following audit steps for observing a client's inventory count are to be performed after the physical count is complete?

Accepted Answer

A)  Obtain the number of the receiving report and shipping document for the last item of the period and check to see that the inventory is properly included or excluded. 
B)  Inquire of client's management about whether any inventory owned by others is held on consignment. 
C)  Trace items selected and included in audit test recounts into the client's inventory records. 
D)  Check for the sequential numbering of tags used in the physical counts, including identification of all used and unused numbers.

Question 3

In the land development and home building industry, the cost of a parcel of land must be allocated to the various residential units and other facilities in a community.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following measures is not a good example of a substantive analytical procedure for inventory activities and related accounts?

Accepted Answer

A)  The inventory turnover ratio. 
B)  Gross profit margin ratio. 
C)  Current ratio. 
D)  Number of days sales in inventory.

Question 5

An inventory posting method which uses "triggers" to indicate when inventory has passed through a manufacturing stage is:

Accepted Answer

A)  perpetual. 
B)  periodic. 
C)  weighted average. 
D)  backflush.

Question 6

For which of the following circumstances would it be appropriate for an auditor to examine the inventory records for evidence of adjustment based on results of the physical count?

Accepted Answer

A)  To ensure that the process for the physical count of inventory includes proper procedures. 
B)  To ensure that the correct result of the physical count, in conjunction with cost information, is used to update the accounting records. 
C)  To ensure that the policies for assessing inventory valuation are appropriate. 
D)  To ensure that the inventory records are updated for physical movement of items within the production process.

Question 7

A manufacturer's definition of raw materials would be:

Accepted Answer

A)  natural goods that have never been processed. 
B)  inputs to production. 
C)  outputs from production. 
D)  processed goods that await inventory recordkeeping.

Question 8

Which of the following is true regarding perpetual inventory systems?

Accepted Answer

A)  Detailed accounting records must be maintained so that changes in inventory accounts can be posted when the transactions occur. 
B)  An end-of period physical inventory count is required to determine the changes in inventory accounts. 
C)  Detailed accounting records must be maintained so that changes in inventory accounts can be posted in a purchases account. 
D)  More accounting time is required at the end of the period to update the inventory accounts for the period's changes.

Question 9

Physical controls over inventories are important in a manufacturing environment because they enhance management's ability to:

Accepted Answer

A)  produce credible financial reports. 
B)  prevent "in-house" losses such as theft and damage of inventory. 
C)  detect inefficient or ineffective manufacturing operations. 
D)  correct errors resulting from the physical inventory count.

Question 10

Which of the following is true regarding an auditor's assessment of management estimates for calculations related to inventory valuation in the land development and home building industry?

Accepted Answer

A)  Greater uncertainty exists regarding estimates of future cash flows when development and construction are still in the early stages. 
B)  Since prospective buyers can cancel the contracts, management estimates expected cancellations using current engineering specifications. 
C)  If an auditor assessed the company's process and underlying assumptions in a prior period, the assessment does not need to be updated for subsequent audits unless there is a change in the underlying assumptions. 
D)  Auditors typically engage a specialist to perform detailed calculations of discounted cash flows expected from inventory.

Question 11

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

Accepted Answer

A)  using computer-assisted auditing techniques, reperform calculations testing the mathematical accuracy of report extensions and batch aggregations. 
B)  reperform calculations supporting decisions about inventory write-downs or write-offs. 
C)  obtain documentation supporting amounts of obsolete or slow-moving inventory items. 
D)  evaluate any changes made to the client's impairment policies in light of engineering and production information or other underlying assumptions.

Question 12

Dual purpose tests performed in the planning stages of the audit inform the auditor regarding changes in the inventory that will influence the audit procedures required by this cycle.

Accepted Answer

A) True 
 B)False

Question 13

GAAP requires the use of _______ costing for accumulating all direct and allocated costs to inventory units.

Accepted Answer

A)  job order 
B)  absorption 
C)  backflush 
D)  fair value

Question 14

Which of the following tests should be performed by an auditor to ensure that all completed inventory is physically moved to finished goods and that the inventory records are updated concurrent with the physical movement?

Accepted Answer

A)  Evaluate whether management's inventory count controls and procedures are appropriate and observe inventory counting to assess whether the procedures are being followed. 
B)  Inspect the inventory records for evidence that they have been properly adjusted based on the results of the physical counts. 
C)  For a sample of finished goods inventory items, agree the increase in the finished goods inventory records to a corresponding decrease in work-in-process for the same date. 
D)  For a sample of finished goods inventory items, agree the increase in the finished goods inventory records to a corresponding decrease in raw materials, purchasing, and payroll.

Question 15

Which of the following documents is most likely to provide evidence to support the validity of estimates used in a client's standard costing system?

Accepted Answer

A)  Variance reports. 
B)  Consignment confirmations. 
C)  Materials requisitions. 
D)  Purchase orders.

Question 16

An auditor may select a sample of items from the inventory records and inspect them for consistency with the category of the records. The purpose of this test of controls is to ensure that:

Accepted Answer

A)  recorded inventory exists. 
B)  inventories are physically protected from theft or damage. 
C)  policies for assessing inventory valuation are appropriate. 
D)  proper procedures are followed for the process of the physical count.

Question 17

You are assigned to the audit of Hopewell Homebuilders, Inc., a new audit client. Hopewell uses a standard costing system for inventory accounting. What audit procedures are appropriate for evaluating the reasonableness of management's estimates and underlying assumptions used in a standard costing system?

Accepted Answer

The answer of You are assigned to the audit of...

Question 18

FSAS 151 requires that abnormal overhead costs be allocated to products based on excess capacity of the facilities.

Accepted Answer

A) True 
 B)False

Question 19

When applying the percentage of completion method, companies in the land development and home building industry must first:

Accepted Answer

A)  estimate the actual costs to be incurred in the current period. 
B)  calculate a percentage to designate for inventory costing. 
C)  trace costs incurred to date for each residential unit to the inventory accounting records. 
D)  estimate the proportion of actual costs incurred relative to total expected costs.

Question 20

An auditor generally concludes that a client's estimate is appropriate if:

Accepted Answer

A)  it is consistent with a prior year amount. 
B)  the underlying amount is not known with certainty. 
C)  it is within a range of acceptable amounts. 
D)  the underlying assumptions are subjective.

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

Match the following business activities with the related documents used during that activity. You will need to use some activities more than once, and some documents may have more than one related activity.

Which of the following audit steps for observing a client's inventory count are to be performed after the physical count is complete?

In the land development and home building industry, the cost of a parcel of land must be allocated to the various residential units and other facilities in a community.

Which of the following measures is not a good example of a substantive analytical procedure for inventory activities and related accounts?

An inventory posting method which uses "triggers" to indicate when inventory has passed through a manufacturing stage is:

For which of the following circumstances would it be appropriate for an auditor to examine the inventory records for evidence of adjustment based on results of the physical count?

A manufacturer's definition of raw materials would be:

Which of the following is true regarding perpetual inventory systems?

Physical controls over inventories are important in a manufacturing environment because they enhance management's ability to:

Which of the following is true regarding an auditor's assessment of management estimates for calculations related to inventory valuation in the land development and home building industry?

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

Dual purpose tests performed in the planning stages of the audit inform the auditor regarding changes in the inventory that will influence the audit procedures required by this cycle.

GAAP requires the use of _______ costing for accumulating all direct and allocated costs to inventory units.

Which of the following tests should be performed by an auditor to ensure that all completed inventory is physically moved to finished goods and that the inventory records are updated concurrent with the physical movement?

Which of the following documents is most likely to provide evidence to support the validity of estimates used in a client's standard costing system?

An auditor may select a sample of items from the inventory records and inspect them for consistency with the category of the records. The purpose of this test of controls is to ensure that:

FSAS 151 requires that abnormal overhead costs be allocated to products based on excess capacity of the facilities.

When applying the percentage of completion method, companies in the land development and home building industry must first:

An auditor generally concludes that a client's estimate is appropriate if: