4) The auditor has determined that the inventory procedures are highly automated, with limited
use of a paper or physical trail. Rather than having people count inventory (since all inventory
has RFID tags attached), inventory is being read using the wireless mesh network. To provide
assurance with respect to ending inventory, the auditor should
A) bring in additional audit staff, and conduct a high level of test counts, matching these counts
to the automated systems.
B) use dollar unit sampling to identify all high dollar inventory items, and ask the client to
physically count these items using count teams.
C) test the quality of the controls over the programs in use, and over tagging inventory items.
D) request that the client implement manual rotating counts to test the quality of the automated
systems.
5) When a physical count of inventory is permitted at an interim date, the auditor observes it at
that time, and also tests the perpetual inventory 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.
6) The client has a perpetual inventory system, and takes an inventory count of 100 items every
two weeks, for comparison to the perpetual records. There are no plans to have a complete year
end physical count of inventory. How will the auditor conduct the audit of physical inventory?
A) select an attribute sample of items to count at the year end for comparison to the perpetual
records
B) select a dollar unit sample of items to count at the year end for comparison to the perpetual
records
C) use roll-forwards to carry forward the inventory records from the cyclical counts for an
attribute sample of inventory items
D) conduct test counts and compare the perpetual records with a cyclical count during the intern
audit
7) Sample size in physical observation of inventory is
A) determined using attributes sampling.
B) determined using variables sampling.
C) determined using dollar-unit sampling.
D) difficult to specify because the emphasis is on observing client’s procedures.
8) The most important part of the observation of inventory is determining whether
A) the inventory-takers are qualified.
B) the physical count is being taken in accordance with the client’s instructions.
C) the counts are accurate.
D) obsolete inventory has been identified.
9) A public accountant observes his client’s physical inventory count on December 31. There are
eight inventory-taking teams, and a tag system is used. The public accountant’s observation
normally may be expected to result in detection of which of the following inventory errors?
A) The inventory takers forgot to count all the items in one room of the warehouse.
B) An error is made in the count of one inventory item.
C) Some of the items included in the inventory had been received on consignment.
D) The inventory omits items on consignment to wholesalers.
10) A useful starting point for becoming familiar with the client’s inventory is for the auditor to
A) obtain and review industry ratios.
B) review accounting theory covering special problems, such as gas and oil accounting, or lease-
purchase agreements.
C) read client’s Accounting Manual.
D) tour the client’s facility.
11) XYZ Company uses standard costs for allocating costs to work-in-process and finished
goods inventory. What internal control is required with respect to these costs to ensure proper
valuation of inventory?
A) procedures must be designed to keep the standards updated for changes in production
processes and costs
B) computer software should be used to make sure that the standard costs are properly updated
into the inventory item master file
C) input edit routines should be used to help detect input data entry errors for the entry of the
standard costs
D) standard costs should be used to provide a value for inventory every month by calculating
cost times quantity on hand
12) XYZ Company uses standard costs for allocating costs to work-in-process and finished
goods inventory. For the last few months, there have been high variances between total standard
costs and actual costs. What is one of the likely reasons for this variance?
A) the accounting department has been developing the costs
B) production quantities are different than expected
C) there is an increase in inventory quantities on hand
D) receiving department has been stockpiling raw materials
13) 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. The audit objective being
achieved by this procedure is
A) inventory as recorded on tags exists (existence).
B) existing inventory is counted and tagged (completeness).
C) inventory is counted accurately (accuracy).
D) inventory is classified correctly (classification).
14) From which of the following evidence-gathering audit procedures would an auditor obtain
most assurance concerning the existence of inventories?
A) observation of physical inventory counts
B) written inventory representations from management
C) confirmation of inventories in a public warehouse
D) auditor’s recomputation of inventory extensions
15) The test of details of balance procedure which requires the auditor to review contracts with
suppliers and customers and inquire of management for the possibility of the inclusion of
consigned or other non-owned inventory is an attempt to satisfy the objective of
A) existence.
B) completeness.
C) realizable value.
D) rights and obligations.
16) The test of details of balance procedure which requires the auditor to account for unused
inventory tag numbers to make sure none have been omitted is an attempt to satisfy the objective
of
A) allocation.
B) existence.
C) completeness.
D) accuracy.
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) valuation.
D) rights.
18) An inventory observation procedure which compares physical counts with the perpetual
inventory master file is an attempt to satisfy the audit objective of
A) existence.
B) completeness.
C) accuracy.
D) classification.
19) A common inventory observation procedure is to record in the working papers for
subsequent follow-up the last shipping document number used at year-end. The audit objective
being achieved by this procedure is
A) inventory as recorded exists.
B) existing inventory is counted and tagged.
C) information is obtained to make sure sales and inventory purchases are recorded in the proper
period.
D) tags are accounted for to make sure none is missing.
20) When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff
test to obtain evidence that
A) all goods purchased before year-end are received before the physical inventory count.
B) no goods held on consignment for customers are included in the inventory balance.
C) no goods observed during the physical count are pledged or sold.
D) all goods owned at year-end are included in the current period inventory balance.
21) 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 totalled, and
included in the general ledger at the proper amount are known as
A) standard cost records.
B) pricing internal controls.
C) compilation internal controls.
D) count quantity internal controls.
22) When considering pricing of inventory, three things are important. The first two are that the
method must be in accordance with an acceptable financial accounting framework, and the
application of the method must be consistent from year to year. What is the third? The
A) input edits over the data entry of prices must be robust.
B) cut-off testing for the use of supplier invoices should be carefully done.
C) cost versus market value must be considered.
D) freight should always be included in the cost of the inventory.
23) What is the first step that the auditor takes when auditing the valuation of inventory?
A) conduct analytical review, comparing gross margin for the current year to the prior year
B) do an industry analysis to determine whether there is a potential for technology-induced
obsolescence
C) ask the client about the level of obsolete inventory that was on hand and counted during the
inventory count
D) establish clearly the valuation method used and how the calculations are being performed
24) The auditor is determining which specific inventory items should be selected for pricing
tests. The auditor has selected a representative sample, and those items that have a large dollar
amount. In addition, the auditor should select those items that
A) are prone to breakage or theft.
B) have wide fluctuations in price.
C) are stored in multiple locations.
D) are likely to have been miscounted during the inventory count.
25) As part of the audit of valuation, the auditor is conducting pricing tests by comparison to
supplier invoices. The auditor is making sure that, for each item tested, sufficient supplier
invoices are examined to cover the quantity of inventory that was on hand during the physical
inventory count. What type of pricing error could this detect?
A) clients value their inventory on the basis of the most recent invoice only
B) the client has used the incorrect accounting method to value its inventory
C) extension errors could occur with numerous different inventory items
D) the wrong inventory count quantity could have been recorded on the count sheets
26) 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) valuation.
27) Identify three analytical procedures commonly used when auditing accounts in the inventory
and distribution cycle.
28) A) Discuss the key control procedures relating to the client’s physical count of inventory.
B) State the primary determinants of the amount of time needed to perform the physical
observation of inventory.
29) State five specific balance-related audit objectives for physical inventory observation and,
for each objective, describe one common test of details of balances related to that objective.
30) A) State five specific balance-related audit objectives for inventory pricing and compilation
and, for each objective, describe one common test of details of balances related to that objective.
B) Explain why the audit of work-in-process and finished goods inventory is generally more
complex than the audit of purchased inventory.
31) You are conducting the audit of Files R Us Inc. (FRI), a family-owned business that
manufactures a variety of different types of wooden and metal file cabinets. In business for over
twenty years, FRI has a reputation for providing high quality products on time or even ahead of
schedule. FRI does not sell to the public, but only to fine furniture stores and to a variety of
office supply chains.
As of the current year end, the company has a total of $6.3 million in assets. Inventory
information is as follows:
Raw materials (metals and supplies) $ 400,000
Raw materials (wood products) 450,000
Work in progress 1,350,000
Finished goods 250,000
$2,450,000
Finished goods consists of:
Material 48%
Direct labour 22
Overhead 30
100%
File cabinet production is intensely competitive, primarily due to imports from Asia and Mexico.
To help manage costs, FRI uses a job-order, standard cost system. Standard costs are assessed
quarterly. Each job is costed and compared to standard. Inventory is counted only at the end of
the year. There is no perpetual inventory system.
Due to problems with raw material quality and new staff, losses have been incurred in the last six
months of the year. Your review of last year’s audit file indicated that there were numerous
inventory adjustments required last year.
Required:
Using the audit risk model, assess the risks associated with the audit of inventory.
