Deck 11: Auditing Inventories and PPE

Question 1

If the auditor was testing inventory pricing the audit objective being fulfilled would be

A) completeness.
B) rights and obligations.
C) existence.
D) accuracy, valuation, and allocation.

Answer 1

D

Question 2

Ensuring that inventory transactions are recorded in the correct accounts is an example of
the completeness assertion.

Answer 2

False

Question 3

Reviewing data pertaining to inventory quality relates primarily to the

A) occurrence assertion.
B) completeness assertion.
C) rights and obligations assertion.
D) accuracy, valuation, and allocation

Answer 3

D

Question 4

In tracing opening inventory balances to working papers for the previous year, the auditor
should make certain that any audit adjustments, agreed on in the previous year, were
recorded.

Question 5

The key issue in auditing inventories is to ensure the inventories actually exist, are owned,
and are properly valued.

Question 6

Ensuring that additions and disposals of property, plant, and equipment before the period end are recorded in the current period and those after the period end are included in the next accounting period is an example of the classification assertion.

Question 7

A capital asset sub-ledger details individual items of plant and equipment and records
the cost of each asset and of any additions or alterations, and the accumulated depreciation
charged against it.

Question 8

The key issues in auditing property, plant, and equipment are ensuring that the property,
plant, and equipment actually exist, are owned, and are properly valued with adequate
provision for depreciation.

Question 9

Specialized inventories may require the assistance of experts in determining either the
quantity (as in the case of aerial measurement of stockpiles) or value (as in the case of
antiques).

Question 10

Which of the following is not a function of maintaining inventory records?

A) physically comparing inventory with inventory records
B) recording the movement of goods into inventory
C) ordering goods
D) recording the movement of goods from inventory

Question 11

As existence of property, plant, and equipment is the key audit assertion, the auditor
does not need to obtain evidence of sales, disposals, and trade-ins.

Question 12

Close to the end of the reporting period, the auditor needs to consider the extent of test
counts relative to total inventory and needs to review the recorded differences between test counts and inventory records over the year as well as the explanations of those differences.

Question 13

When costing manufactured inventory all of the following procedures are necessary except

A) determining the cost of materials entered into raw materials.
B) determining the cost of raw materials transferred to work in process.
C) recording costs of direct labour applied to work in process.
D) determine the cost of purchases.

Question 14

With respect to property, plant, and equipment, in the first audit engagement, evidence
must be obtained as to the fairness of the opening balances and the ownership of the assets
making up the balances, whereas in a recurring engagement, the auditor concentrates on
the current year's transactions.

Question 15

Perpetual inventory records need to be compared with actual inventory at regular
intervals.

Question 16

All companies are required by Canadian Auditing Standards to maintain a perpetual
inventory system.

Question 17

Inventories received before the period-end are recorded as current purchases and those received after the period end are included in the next period. What assertion is being described?

A) cut-off
B) checking
C) counting
D) preparation

Question 18

The application of analytical procedures to inventories is not used very extensively since
each company has its own inventory policies and procedures which make industry
comparison somewhat useless.

Question 19

An important procedure for the conduct of a physical inventory count is to maintain control over the count systems. Which of the following is not a common count system?

A) use of pre-printed inventory count sheets
B) use of blank inventory tags
C) use of blank, pre-numbered inventory count sheets
D) use of pre-numbered, three-part inventory tags

Question 20

The transactions relating to property, plant, and equipment are quite often few and each usually material.

Question 21

Verifying the accuracy and valuation assertion for inventory involves which of the following?

A) verifying the cost of inventory
B) verifying the net realizable value of inventory
C) verifying the basis used by management in determining the value of each item of inventory
D) all of the above

Question 22

Confirmation of inventories in public warehouses cannot provide evidence concerning the

A) existence assertion.
B) completeness assertion.
C) accuracy, valuation and allocation assertion.
D) it cannot provide evidence concerning any of the listed assertions.

Question 23

In companies where inventories are at multiple locations, the auditor's observations ordinarily should include

A) all inventory locations.
B) a variation of locations attended each year.
C) a five minute visit to each location.
D) all significant inventory locations.

Question 24

Which statement is most correct?

A) In observing physical inventory, the auditor has a responsibility to both take and supervise the taking of inventory.
B) In observing physical inventory, the auditor has no responsibility to take or supervise the taking of inventory.
C) In observing physical inventory, the auditor is only responsible for supervising the taking of inventory.
D) In observing physical inventory, the auditor is responsible for the taking of inventory.

Question 25

Which of these procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity's physical inventories, assuming that the inventory is held at one location?

A) obtaining written representation from the entity as to the existence, quality, and dollar amount of the inventory
B) relying on the internal auditor to observe the total inventory count
C) confirming the goods in the hands of public warehouses
D) none of the procedures would be appropriate

Question 26

In the event that the audit client has multiple locations and the auditor is not able to be present at all of them on the date of the physical inventory count, the auditor can rely

A) totally on the internal auditor to observe the physical inventory count.
B) on the internal auditor subject to the requirements of CAS 610.
C) totally on the records prepared as part of the client periodic inventory system.
D) none of the above

Question 27

Which of these would not cause the net realizable value of inventory to be below its cost?

A) a rise in the selling price
B) physical deterioration
C) a decision to sell at a loss
D) All of the above would cause the net realizable value of inventory to be below its cost.

Question 28

Which of these factors contributes least to the risk of misstatement of inventories?

A) the volume of transactions
B) location at a large single site
C) vulnerability to spoilage or damage
D) All of the above factors listed contribute equally to the risk of misstatement of inventories.

Question 29

When the client engages an inventory specialist to take the inventory, the impact on the audit in this area is

A) to eliminate the need to perform test counts.
B) to eliminate the need to observe the inventory.
C) minimal because the specialists are considered independent auditors.
D) minimal because the specialists are considered audit employees.

Question 30

ABC Ltd is a retailer who is planning to undertake a full inventory count at year-end. Control risk over inventory records for this entity is deemed to be

A) important due to the timing of the inventory count.
B) important due to the nature of the business.
C) unimportant due to the timing of the inventory count.
D) none of the above

Question 31

The auditor's strategy in performing test counts during the inventory observation is to

A) test all large-dollar items.
B) randomly select all test items.
C) concentrate tests on high dollar items with random selection of other items.
D) concentrate tests in areas where employees seem to be disregarding the inventory instructions.

Question 32

Ensuring inventories include all materials, products and supplies on hand at the end of the reporting period derives from the audit assertion of

A) completeness.
B) accuracy, valuation, and allocation.
C) existence.
D) rights and obligations.

Question 33

The timing of a physical count of inventory is negotiated between the auditor and management. If the assessed level of control risk is high, an auditor would probably

A) insist that the entity performs physical counts of inventory several times during the year.
B) apply gross profit tests to ascertain the reasonableness of the physical counts.
C) increase the extent of tests of control of the inventory cycle.
D) request the entity to schedule the physical count at the end of the year.

Question 34

Goods held on consignment are

A) goods held at locations outside the entity.
B) goods held by the firm but belonging to customers.
C) HYPERLINK "http://www.businessdictionary.com/definition/goods.html" goods sent to an entity by the seller where the seller is only paid when the goods are HYPERLINK "http://www.investorwords.com/7717/sold.html" sold.
D) goods pledged as security for a loan.

Question 35

Cyclical inventory counts differ from full inventory counts in which way?

A) cyclical inventory counts are performed at balance date
B) cyclical inventory counts are only performed by internal audit
C) cyclical inventory counts may involve counting only a portion of inventory items
D) They differ in all of the above ways.

Question 36

What should an auditor do to ensure that inventory is stated at the lower of cost and net realizable value?

A) Select a sample of inventory purchases made during the year and check the associated invoice to ensure they are not recorded at more than that value
B) review and test the process used by management, use an independent estimate and review subsequent events
C) ensure that all inventory items on hand at year-end have been properly recorded at cost when purchased.
D) ensure that inventory that is not saleable is disclosed separately in the financial report

Question 37

The action that is not part of verifying the valuation of inventory is

A) observing the inventory count.
B) determining which items need to be written down in price.
C) checking the cost of inventory.
D) All of the above are part of verifying the value of inventory.

Question 38

Observation of inventory counts is a required audit procedure whenever

A) inventories are material.
B) it is practicable to do so.
C) inventories are material and it is practicable to do so.
D) inventories are material and the auditor considers it to be necessary.

Question 39

During the observation of the inventory count, the auditor has no responsibility to

A) watch for damaged and obsolete inventory items.
B) make some test counts of inventory quantities.
C) supervise the taking of the inventory.
D) The auditor has responsibility for all of the above.

Question 40

The audit strategy that would be the most appropriate when an auditor has assessed a predominantly substantive approach is to determine inventory quantity is by

A) physical count at or within a few days of balance date.
B) physical count near balance date, adjusted by reference to perpetual records.
C) reference to perpetual records, without a physical count at or near balance date.
D) none of the above

Question 41

The statement about audit strategy for property, plant, and equipment that is inaccurate is

A) for depreciation and accumulated depreciation inherent risk is affected by the difficulty in estimating both useful lives and residual value.
B) although material, verification of PPE typically involves significantly less time and cost than verification of current assets.
C) unlike current asset accounts, control risk assessments for PPE asset balances are less dependent on controls over major transaction classes.
D) None of the above statements is inaccurate.

Question 42

Entities frequently maintain a capital asset register as a subsidiary ledger detailing individual items of PPE. Which of the following would an auditor not expect to find in a capital asset register?

A) cost and accumulated depreciation
B) the date of previous audit inspections
C) serial number and supplier
D) insurance cover

Question 43

Which of these is not true regarding substantive procedures for property, plant, and equipment in an initial audit

A) the auditor concentrates on the current year's transactions only.
B) evidence must be obtained as to the fairness of the opening balances.
C) evidence must be obtained as to the ownership of the assets.
D) All of the above are untrue.

Question 44

Matters that should be considered by the auditor before reaching a conclusion about the reliability of an inventory count include all of the following except

A) the type of accounting package used by the firm.
B) the general condition of the inventory.
C) departures from the entity's inventory count.
D) All of the above should be considered.

Question 45

When an asset is shown on the financial statements other than at cost, which of the following is not required to be disclosed?

A) the evidence gathered to support the valuation
B) the year and basis of valuation
C) whether it is an internal or independent valuation
D) the name of the valuer

Question 46

The statement about inherent risk assessments for property, plant, and equipment that is inaccurate is

A) inherent risk is normally low for the classification and presentation assertions for PPE assets acquired under finance leases.
B) inherent risk is normally low for the existence assertion in a merchandising entity because PPE assets are not generally vulnerable to theft.
C) inherent risk is normally moderate to high for the existence assertion in a manufacturing entity because scrapped or retired PPE assets may not be written off the books.
D) inherent risk is normally low for the accuracy, valuation and allocation assertion when PPE assets are purchased for cash.

Question 47

The auditor identifies the specific audit objective: "determine that property, plant and equipment (PPE) assets represent productive assets that are in use at balance date". This objective is derived from the

A) existence assertion.
B) completeness assertion.
C) presentation assertion.
D) rights and obligations assertion.

Question 48

The application of analytical procedures to the audit of inventories is often

A) not very useful.
B) the only procedure necessary.
C) a requirement of the standards.
D) used extensively.

Question 49

Analytical procedures are not widely used in the audit of property, plant, and equipment. Which of the following is not a valid comment about the use of analytical procedures in the audit of PPE?

A) compare the annual depreciation charge with the cost of an asset to approximate the depreciation rate
B) a substantial asset balance variation can be caused by one or a few transactions of which the auditor is likely to already be aware
C) comparison of repairs expense with prior years may indicate capitalisation in error
D) None of the above is invalid.

Question 50

Substantiating asset disposals with supporting documentation is a test of details of transactions. Which assertion is most likely satisfied?

A) existence
B) completeness
C) accuracy, valuation, and allocation
D) all of the above

Question 51

In a typical audit, verification of the ownership of plant and equipment is least likely to involve examination of

A) the physical characteristics of the items.
B) "paid invoices".
C) registration certificates.
D) property tax bills.

Question 52

In auditing property, plant, and equipment (PPE), why might the auditor decide to assess control risk at the maximum and perform predominantly substantive testing?

A) The number of additions to/disposals of PPE is usually not a material number. Therefore, it is not of concern to the auditor.
B) PPE in total is material. All material balances should be tested using a substantive approach.
C) The controls over PPE for most companies are usually poor.
D) Because transactions relating to property, plant, and equipment are few and usually individually material, assessment of control risk relating to these transactions is usually assumed to be the maximum.

Question 53

In the audit of property, plant, and equipment, the principal accuracy and valuation assertion is that

A) they should be stated at cost or a valuation less accumulated depreciation.
B) the entity has rights to all recorded property, plant, and equipment.
C) all additions that have occurred during the period have been recorded.
D) both a and c

Question 54

The auditor is least likely to discover unrecorded retirements of property, plant and equipment assets by

A) analyzing the miscellaneous revenue account.
B) investigating the disposition of facilities associated with discontinued product lines.
C) selecting retirement work orders from the accounting records and verifying their accuracy.
D) reviewing insurance policies for termination or reductions of coverage.

Question 55

The auditor is concerned that the client has committed a number of errors in the capital/repair expenditures distinction. In selecting items from the repairs expense account for investigation, the most appropriate audit procedure would involve

A) random selection.
B) systematic selection.
C) tracing.
D) scanning.

Question 56

When substantiating disposals of property, plant, and equipment, the auditor should be able to find evidence using all of the following except

A) cash remittance advices.
B) written authorisations.
C) supplier invoices.
D) sales agreements.

Question 57

When the auditor receives the client-prepared schedules for property, plant, and equipment assets, in order to determine that they booked the adjustments proposed by the auditor at the conclusion of the prior audit, the auditor should

A) inquire of management.
B) examine the general journal for the first month of the current year.
C) inquire of accounting personnel.
D) compare beginning balances with prior year's working papers.

Question 58

When equipment items are purchased for cash

A) the inherent risk in the accuracy, valuation and allocation assertions are not affected.
B) the inherent risk in the existence and occurrence and allocation assertions is high.
C) the inherent risk in the accuracy, valuation and allocation assertions objectivity is low.
D) the inherent risk in the accuracy, valuation and allocation assertions is zero.

Question 59

Which of the following is not an income statement account related to property, plant, and equipment?

A) depreciation
B) accumulated depreciation
C) loss on disposal of plant
D) rent on operating leases

Question 60

When reviewing accumulated depreciation, the auditor seeks evidence as to the reasonableness, consistency and accuracy of depreciation charges. The substantive procedures performed seek to provide evidence for which assertion?

A) accuracy and valuation
B) completeness
C) rights and obligations
D) presentation

Question 61

Describe the audit process for inventory transactions, indicating the audit risks that need to addressed and the mitigating controls that can be implemented.

Question 62

What are the three audit strategy options that an auditor has for verifying the existence (and completeness) of inventories and what is the implication of each strategy for control risk?

Question 63

List the four separate functions of maintaining inventory records.
Identify the documentation used in each function to prevent inventory records from being manipulated.

Question 64

When performing tests of details of balances for property, plant, and equipment, it is necessary for the auditor to review accumulated depreciation. Discuss what this review entails.

Question 65

List the procedures that should be adopted in a physical inventory count.

Question 66

Describe the audit process for property, plant, and equipment transactions, indicating the audit risks that need to addressed and the mitigating controls that can be implemented.

Question 67

For each of the following potential misstatements for inventories, identify a necessary control:
1. Failure to record goods received
2. Unreliable count procedures during a physical inventory count
3. Inappropriate basis for determining inventory costs
4. Unauthorized removal of goods from inventory
5. Insufficient extent of comparison between physical inventory count and inventory records
6. Inadequate investigation and correction of differences between inventory count and inventory records

Question 68

Identify the appropriate account balance audit objectives applicable to inventories for the assertion categories of:
-existence
-completeness
-rights and obligations
-accuracy, valuation and allocation
-presentation.

Question 69

There are numerous factors that contribute to the risk of misstatement in the assertions for inventories and cost of sales. List four of these factors.
1. Because transactions relating to property, plant, and equipment are few and usually individually material, assessment of control risk relating to these transactions is rarely necessary.
2. Property, plant, and equipment is often the largest category of assets on the balance sheet and therefore expenses associated with this account are material factors in the determination of profit.
3. There may be significant variation in the inherent risk assessments for assertions relating to different property, plant, and equipment accounts. Inherent risk may be assessed as low under one assertion but high under another. Factors that impact on the assessment of inherent risk include the nature of the business and the form of purchase or lease of the asset.

Question 70

When conducting tests of details of transactions for property, plant, and equipment, there are three types of transactions that need to be substantiated. These transactions are additions, disposals and repairs and maintenance. Briefly describe what is involved with substantiating each of these types of transactions.

Question 71

Evidence concerning the pledging of property, plant, and equipment assets is likely to be obtained through

A) review of the board minutes.
B) confirmation of debt agreements.
C) inquiries of management.
D) all of the above