7) It is frequently possible to test the physical inventory prior to the balance sheet date when
A) the perpetual inventory records are accurate and related controls operate effectively.
B) year-end sales are small.
C) the internal control system is no better at year-end than at an earlier point in time.
D) the client counts inventory at interim dates.
8) Comparing the physical counts with the perpetual inventory master files satisfies the balance-
related audit objective of
A) classification.
B) observation.
C) completeness.
D) accuracy.
9) Which of the following statements is correct regarding the auditor’s responsibility with respect
to the year-end inventory procedures of an audit client?
A)
The auditor is responsible
for setting up the
procedures for taking an
accurate physical
inventory.
The auditor is responsible
for taking and compiling
the inventory.
The auditor is responsible
for observing the physical
counting of inventory.
Yes
No
No
B)
The auditor is responsible
for setting up the
procedures for taking an
accurate physical
inventory.
The auditor is responsible
for taking and compiling
the inventory.
The auditor is responsible
for observing the physical
counting of inventory.
No
No
Yes
C)
The auditor is responsible
for setting up the
procedures for taking an
accurate physical
inventory.
The auditor is responsible
for taking and compiling
the inventory.
The auditor is responsible
for observing the physical
counting of inventory.
Yes
No
Yes
D)
The auditor is responsible
for setting up the
procedures for taking an
accurate physical
inventory.
The auditor is responsible
for taking and compiling
the inventory.
The auditor is responsible
for observing the physical
counting of inventory.
No
Yes
No
10) McKesson & Robbins Company is a well-known audit case involving auditor responsibility.
What occurred at the McKesson & Robbins Company to change the way in which auditors audit
inventory?
A) The company recorded nonexistent inventory.
B) The auditor did not perform any audit tests of the inventory.
C) The auditor and company colluded to overstate inventory balances.
D) The company counted inventory three months prior to year-end.
11) When a physical count of inventory is performed at an interim date, the auditor observes it at
that time and tests the perpetual records for transactions
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.
12) When there are no perpetual inventory files and inventory is material,
A) an audit cannot be performed, so the auditor must issue a disclaimer.
B) a physical inventory should be taken by the client near the end of the accounting period.
C) the auditor will have to perform the inventory count and determine valuation.
D) the auditor need not observe inventory counts but must do test counts.
13) The most important part of the observation of inventory is to determine whether
A) all counts are accurate.
B) the inventory-takers are qualified.
C) obsolete inventory has been identified.
D) the physical count is being taken in accordance with the client’s instructions.
14) A useful starting point for becoming familiar with the client’s inventory is for the auditor to
A) read the AICPA’s Industry Audit Guide.
B) review accounting theory covering special inventory problems.
C) read the client’s accounting manual.
D) tour the client’s facility.
15) A common inventory observation procedure is to select a random sample of tag numbers and
identify the tag with that number attached to the actual inventory item. The audit objective being
achieved by this procedure is
A) inventory as recorded on tags actually exists (existence).
B) existing inventory is counted and tagged (completeness).
C) inventory is counted accurately (accuracy).
D) inventory is classified correctly (classification).
16) If a client intends to count inventory at an interim date, the auditor should expect there to be
all of the following except
A) controls over the preparation and maintenance of perpetual inventory records.
B) competent personnel assigned to count the inventory.
C) third-party inventory counting specialists.
D) an adequately designed plan to count the inventory.
17) A common inventory observation procedure is to be alert for items that are damaged, rust- or
dust-covered, or located in inappropriate places. The balance-related audit objective being
achieved by this procedure is
A) classification.
B) cutoff.
C) realizable value.
D) rights.
18) The test of details of balance procedure which requires the auditor to account for unused
inventory tag numbers to make sure none have been deleted is associated with the audit objective
of
A) accuracy.
B) existence.
C) detail tie-in.
D) completeness.
19) Which of the following is an accurate statement regarding inventory and risk?
A) Inventory with a high business risk includes products with potential obsolescence.
B) Auditors often have a greater concern for misstatements when inventory is stored in one
warehouse.
C) Inherent risk is generally set at low for manufacturing companies.
D) Performance materiality for inventory is determined before assessing client business risk.
20) The auditor’s tour of the client’s inventory facilities should be led by
A) a member of the audit committee.
B) the CFO.
C) a plant supervisor.
D) the company president.
21) The physical counting of inventory may be performed at which of the following times?
A)
Interim dates
On a cycle basis during the
year
Yes
Yes
B)
Interim dates
On a cycle basis during the
year
No
No
C)
Interim dates
On a cycle basis during the
year
Yes
No
D)
Interim dates
On a cycle basis during the
year
No
Yes
22) When an auditor observes that personnel who are responsible for physically counting
inventory are not following the inventory instructions, the auditor should
A) contact a client’s supervisor to correct the problem.
B) modify the client’s physical inventory instructions.
C) not discuss the problem with client’s supervisor in order to maintain independence.
D) assign audit staff to the inventory count.
23) Auditors need to understand the client’s physical inventory count controls before the count of
the inventory begins so that
A) the auditors can accurately count and tag the inventory for the client.
B) the auditors can make constructive suggestions as to the adequacy of the procedures.
C) the client will be informed on exactly what items the auditor intends to test count.
D) the auditor can communicate any weaknesses directly to the audit committee.
24) The audit of year-end physical inventories should include steps to verify that the client’s
purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether
merchandise included in the physical count at year-end was not recorded as a
A) sale in the current period.
B) sale in the subsequent period.
C) purchase in the current period.
D) purchase return in the subsequent period.
25) Which one of the following procedures would not be appropriate for an auditor in
discharging his responsibilities concerning the client’s physical inventories?
A) confirmation of goods in the hands of public warehouses
B) supervising the taking of the annual physical inventory
C) carrying out physical inventory procedures at an interim date
D) obtaining written representation from the client as to the existence, quality, and dollar amount
of the inventory
26) The auditor generally decides whether the inventory count can be taken before year-end
primarily on the basis of
A) audit efficiency.
B) accuracy of the perpetual inventory master files.
C) client convenience.
D) audit staff availability.
27) An auditor selects a random sampling of tag numbers and identifies the tag with that number
attached to the actual inventory. The purpose of the procedure is to
A) obtain proper cutoff information.
B) uncover the inclusion of nonexistent items as inventory.
C) determine if the client has adequately priced the inventory item.
D) verify that the client has not changed the recorded counts after the auditor left the premises.
28) An auditor must inquire about consigned or customer inventory included on the client’s
premises to satisfy the balance-related audit objective of
A) cutoff.
B) classification.
C) rights.
D) completeness.
29) To best ascertain that a company has properly included merchandise that it owns in its
ending inventory, the auditor should review and test the
A) terms of the open purchase orders.
B) purchase cutoff procedures.
C) contractual commitments made by the purchasing department.
D) purchase invoices received on or around year-end.
30) Boxes or other containers holding inventory should also be opened during test counts to
determine the ________ of the inventory.
A) classification
B) detail tie-in
C) existence
D) realizable value
31) When may auditors observe the physical inventory count?
A)
At an interim date
At year-end
Yes
Yes
B)
At an interim date
At year-end
No
No
C)
At an interim date
At year-end
Yes
No
D)
At an interim date
At year-end
No
Yes
32) Discuss the auditor’s responsibilities for inventory maintained in public warehouses or with
other outside custodians.
33) Discuss the key control procedures relating to the client’s physical count of inventory.
34) Auditing standards require that auditors satisfy themselves about the effectiveness of the
client’s methods of counting inventory and the reliance they can place on the client’s
representations about the quantities and physical condition of the inventories. To meet this
requirement, auditors must perform four activities. List them below.
35) Auditing standards recommend that auditors observe physical inventory counts by the client.
36) In the audit of inventory, the auditor and client are jointly responsible for making and
recording the count of physical inventory; while the auditor is responsible for drawing
conclusions about the adequacy of the physical inventory.
37) A common source of business risk for inventory is the reliance on a few key suppliers.
38) To test for proper sales cutoff, an auditor would obtain the number of the last bill of lading
issued during the period under audit and verify that the item shipped had been excluded from the
inventory listing.
39) When the client’s perpetual inventory master files are inadequate, the auditor will probably
choose to test the physical inventory prior to the balance sheet date.
40) When part of the client’s inventory is in a public warehouse or in the possession of other
outside custodians, the auditor does not need to observe a physical count of the inventory if a
written confirmation is obtained directly from the inventory custodians.
41) The adequacy of internal controls over the physical count of inventory is one of the key
determinants of the amount of time needed to test inventory.
42) Inherent risk is typically assessed at a low level for inventory due to the nature of the asset.
21.6 Learning Objective 21-6
1) If an auditor were concerned with obtaining evidence about the appropriateness of the value of
inventory, which of the following tests would be most appropriate?
A) compilation tests
B) price tests
C) confirmation of inventory held by outside parties
D) physical examination of the inventory
2) The first step in verifying the valuation of purchased inventory is in determining the valuation
method used by the client. The next step is
A) determining that all inventory that is purchased is expensed through cost of goods sold.
B) determining which costs should be included in the valuation of an item of inventory.
C) determining that all inventory on hand reconciles to the perpetual inventory records.
D) determining that cut-off procedures have been adhered to prior to counting inventory.
3) You are gathering evidence for the audit objective that existing inventory items are included
in the inventory listing schedule. The audit procedure that would provide you with the best
evidence to confirm this objective is
A) trace from inventory tags to the inventory listing schedule and make sure the inventory on the
tags is included.
B) trace the inventory totals to the general ledger.
C) perform tests of lower-of-cost-or-market.
D) account for unused tags shown in the auditor’s documentation to make sure no tags have been
added.
4) The test of details of balance procedure which requires the auditor to perform tests of lower of
cost or market, selling price, and obsolescence is an attempt to satisfy the objective of
A) existence.
B) completeness.
C) accuracy.
D) realizable value.
5) A major source of cutoff information for sales and purchases of inventory is
A) confirmations from outside parties.
B) the test of details of balances.
C) physical observation.
D) the performance of analytical procedures.
6) Pricing manufactured inventory is difficult. Auditors must evaluate the method of allocating
manufacturing overhead for all but which of the following?
A) reasonableness
B) computational correctness
C) compliance with generally accepted auditing standards
D) consistency
7) Controls which provide a means of ensuring that the physical counts are properly summarized,
priced at the same amount as the unit records, correctly extended and totaled, and included in the
general ledger at the proper amount are known as
A) standard cost controls.
B) pricing internal controls.
C) compilation internal controls.
D) count quantity internal controls.
8) Assume that the client’s valuation of an inventory item is $10 per unit for 1,000 units, using
first-in, first-out (FIFO). If the most recent acquisition of inventory was for 600 units at $10 per
unit and the immediately preceding acquisition was for 700 units at $9 per unit, the inventory
item is in error and it is
A) understated $400.
B) understated $300.
C) overstated $400.
D) overstated $700.
9) The auditor traces inventory tags identified as non-owned during the physical observation to
the inventory listing schedule to make sure these have not been included. This test satisfies the
balance-related audit objective of
A) cutoff.
B) rights.
C) accuracy.
D) existence.
10) Which of the following is an accurate statement regarding the audit of pricing and
compilation of inventory?
A) Inventory compilation tests include all of the tests of the client’s unit prices to determine
whether they are correct.
B) The review for obsolete inventory should be performed by the accounting department.
C) The most important internal control for accurate unit costs is external verification by an
outside consultant.
D) Inventory compilation internal controls are needed to ensure that the physical counts are
correctly summarized and priced.
11) In valuing inventory, the auditor must consider all but which of the following factors?
A) The valuation method must be in accordance with GAAP.
B) The valuation method must be applied on a consistent basis.
C) The inventory must be valued at the lower of cost or market.
D) LIFO must be used for work-in-process inventory.
12) Explain why the audit of work in process and finished goods inventory is generally more
complex than the audit of purchased inventory.
13) In pricing raw materials in manufactured products, auditors must consider both the unit cost
of the raw materials and the number of units required to manufacture a unit of output.
14) The audit procedure “Perform tests of lower-of-cost-or-market, selling price, and
obsolescence” provides assurance mainly for the realizable value objective for inventory pricing
and compilation.
15) When performing price tests for purchased inventory, the auditor would not be concerned
with the most recent vendors’ invoices if the client uses the FIFO valuation method.
16) When a client has standard cost records, an efficient and useful method of determining
valuation is to review and analyze variances.
17) Inventory price tests include testing the client’s summarization of the inventory counts.
18) The audit procedure “Foot the inventory listing schedules for raw materials, work-in-process,
and finished goods” provides assurance mainly for the accuracy objective for inventory pricing
and compilation.
19) When performing inventory valuation tests, the auditor must be concerned that the method is
in accordance with accounting standards.
21.7 Learning Objective 21-7
1) When labor is a significant part of inventory, verifying the proper accounting of these costs
should be tested in the
A) inventory and warehousing cycle.
B) payroll and personnel cycle.
C) acquisitions and payments cycle.
D) cash cycle.
2) The design of tests of details of balances for inventory is affected by audit results from
multiple cycles. Identify the cycles, other than the inventory and warehousing cycle that affect
the audit of inventory.
3) Accounting standards require disclosure of inventory valuation methods.
4) Cost of goods sold is generally a residual of beginning inventory less acquisitions plus ending
inventory.