Chapter 13 – Auditing the Inventory Management Process
1. The “cradle-to-grave” cycle for inventory begins when goods are purchased and stored and
ends when the finished goods are shipped to customers.
2. A receiving report records the shipment of goods to customers.
3. Sale of finished goods is a part of the inventory management process.
Chapter 13 – Auditing the Inventory Management Process
4. Once the controls in the inventory system have been tested, the auditor sets the level of
control risk.
5. The major control procedure for preventing fictitious inventory transactions from being
recorded is proper segregation of duties.
6. Inventory should be valued using the lower-of-cost-or-market rule.
Chapter 13 – Auditing the Inventory Management Process
7. A high inventory turnover ratio normally indicates inefficient inventory policies.
8. The three components that make up the cost of producing a product include materials, direct
labor, and indirect labor.
9. The auditor’s observation of inventory is a generally accepted auditing procedure.
10. Obsolete inventory should be written down to its current market value.
Chapter 13 – Auditing the Inventory Management Process
11. In the audit of inventory, the client is responsible for actually making and recording the
count of physical inventory; the auditor’s responsibility is to evaluate and observe the client’s
procedures and draw conclusions about the adequacy of the physical inventory.
12. An approved purchase requisition form authorizes shipment of goods to customers.
13. A comparison of the current year’s inventory turnover ratio with previous years’ may
indicate the presence of obsolete inventory.
Chapter 13 – Auditing the Inventory Management Process
14. 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.
15. The audit test of control “Review and test procedures for issuing materials to manufacturing
departments” provides assurance mainly for the occurrence assertion for inventory
management.
16. Production personnel should ordinarily be responsible for maintaining perpetual inventory
records.
Chapter 13 – Auditing the Inventory Management Process
17. Inherent risk is typically assessed at a low to moderate level for inventory due to the nature
of the asset.
18. Shipping orders are forwarded from the revenue process to
Chapter 13 – Auditing the Inventory Management Process
19. Which of the following departments typically approves purchase requisitions?
20. Which of the following best describes the occurrence assertion for inventory?
Chapter 13 – Auditing the Inventory Management Process
21. Auditors are most likely to ensure that no production activity is scheduled prior to
22. The safeguarding of inventory most likely includes
Chapter 13 – Auditing the Inventory Management Process
23. Which of the following is not a misstatement related to the occurrence assertion for
inventory?
24. Failure to record inventory in the proper period can affect all of the following accounts
Chapter 13 – Auditing the Inventory Management Process
25. Which of the following audit procedures would provide the least reliable evidence that the
client has legal title to inventories?
26. 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
Chapter 13 – Auditing the Inventory Management Process
27. For the purpose of determining proper cutoff for inventory, the auditor will select a sample
from which of the following for a few days before and after year-end?
28. Which of the following auditing procedures most likely would provide assurance about a
manufacturing entity’s inventory valuation?
Chapter 13 – Auditing the Inventory Management Process
29. An auditor will usually trace the details of the test counts made during the observation of the
physical inventory count to a final inventory schedule. This audit procedure is undertaken to
provide evidence that items physically present and observed by the auditor at the time of the
physical inventory count are
30. A client’s physical count of inventories was lower than the inventory quantities shown in its
perpetual records. This situation could be the result of the failure to record
Chapter 13 – Auditing the Inventory Management Process
31. An auditor has accounted for a sequence of inventory tags and is now going to trace
information on a representative number of tags to the physical inventory sheets. The purpose of
this procedure is to obtain assurance that
32. A client’s physical count of inventories was higher than the inventory quantities per the
perpetual records. This situation could be the result of the failure to record
Chapter 13 – Auditing the Inventory Management Process
33. If the perpetual inventory records show lower quantities of inventory than the physical
count, an explanation of the difference might be unrecorded
34. An auditor selected items for test counts while observing a client’s physical inventory. The
auditor then traced the test counts to the client’s inventory listing. This procedure most likely
provided evidence concerning management’s assertion of
Chapter 13 – Auditing the Inventory Management Process
35. While observing a client’s annual physical inventory, an auditor recorded test counts for
several items and noticed that certain test counts were higher than the recorded quantities in the
client’s perpetual records. This situation could be the result of the client’s failure to record
36. In a manufacturing company, which one of the following audit procedures would give the
least assurance about the valuation of inventory at the audit date?
Chapter 13 – Auditing the Inventory Management Process
37. Which of the following is least likely to be a possible cause of book-to-physical differences
in inventory quantities?
38. An auditor most likely would make inquiries of production and sales personnel concerning
possible obsolete or slow-moving inventory to support management’s financial statement
assertion of
Chapter 13 – Auditing the Inventory Management Process
39. Which of the following is a plausible explanation for a large increase in the number of days
outstanding in inventory?
40. Key segregations of duties in the inventory management process include all of the
following except separating:
41. An auditor generally tests physical security controls over inventory by
Chapter 13 – Auditing the Inventory Management Process
42. When perpetual inventory records are maintained in quantities and in dollars and internal
control over inventory is weak, the auditor would probably
43. A client maintains perpetual inventory records in both quantities and dollars. If the assessed
level of control risk is high, an auditor would probably