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Auditing Chapter 12
Audit Exam 3
| Question | Answer |
|---|---|
| The McKesson & Robbins case highlighted the need to directly verify the existence of a client's inventory. | True |
| Since the employees in the purchasing department order inventory items, they should inspect and receive the items when the goods arrive. | False |
| Serially numbered purchase orders should be issued for purchases of goods. | True |
| The receiving department normally sends raw materials received to the production department and obtains a receipt from the supervisor. | False |
| Factory overhead is normally assigned to work‑in‑process immediately as specific overhead expenses are incurred. | False |
| Perpetual inventory records not only help control theft of inventories, they also generally result in improved production planning. | True |
| Testing the cost accounting system is a major step in determining the appropriate valuation of inventories in a manufacturing business. | True |
| To assure that the physical inventory is taken properly, the auditors should prepare and take primary responsibility for the physical inventory instructions. | False |
| CPAs’ observation of inventory is an auditing procedure that is not required on every audit. | True |
| An auditors' observation of the taking of a client's physical inventory must be done on, or shortly after the balance sheet date. | False |
| The extent of the auditors' test counts of inventory items should be influenced by the inherent risk of the client's inventory and the adequacy of the client's internal control. | True |
| The auditors should record the details of their test counts in the audit working papers, which are used to test the client's completed physical inventory listing. | True |
| The auditors need never observe inventories stored in legitimate public warehouses. | False |
| Management representations concerning inventories often include representations regarding purchase and sales commitments. | True |
| If the auditors are unable to satisfy themselves regarding the fairness of the client's beginning inventories, they will be unable to give an unmodified opinion on any of the financial statements. | False |
| Analytical procedures may reveal conditions indicating that the client has significant amounts of obsolete inventory. | True |
| Under certain circumstances goods in transit at the balance sheet date should be included in the client's inventory. | True |
| During the auditors' observation of the physical inventory, they often obtain information that may be used to test the cutoff of the client's purchase transactions. | True |
| Auditors may use statistical sampling for their test counts, but the client should never use statistical sampling to estimate the quantities of goods on hand. | False |
| Proper presentation of inventories includes disclosure of inventory that is pledged as collateral for loans. | True |
| On June 15, 20X0, Ward, CPA, accepted an engagement for an audit for the year ended 12/31/20X0. Grant Company has not previously been audited by a CPA and Ward has been unable to satisfy himself with to opening inventories. How should Ward report? | He would have to disclaim an opinion or qualify his opinion on the income statement and the statement of cash flows, but could issue an unmodified opinion on the December 31, 20X0 balance sheet. |
| From which of the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories? | Observation of physical inventory accounts. |
| 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: | sales. |
| An inventory turnover analysis is useful to the auditor because it may detect: | the existence of obsolete merchandise. |
| When an auditor tests a client's cost accounting system, the auditors' tests are primarily designed to determine that: | costs have been properly assigned to finished goods, work-in-process, and cost of goods sold. |
| An auditor would be least likely to learn of slow‑moving inventory through: | vouching of year-end purchases. |
| 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: | all inventory represented by an inventory tag is listed on the inventory sheets. |
| From the auditor's point of view, inventory counts are more acceptable prior to the year‑end when: | accurate perpetual inventory records are maintained. |
| Purchase cutoff procedures should be designed to test whether purchases recorded near year-end: | are owned by the company. |
| Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received? | Quantities ordered are excluded from the receiving department copy of the purchase order. |
| To strengthen the system of internal control over the purchase of merchandise, a company's receiving department should: | accept merchandise only if a purchase order or approval granted by the purchasing department is on hand. |
| A client's materials purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to: | evaluate the reliability of information generated as a result of the purchasing process. |
| Inventory items “consigned in” should be included in the client’s inventory totals. | Incorrect |
| With strong internal control an inventory count may be performed prior to year-end. | Correct |
| Generally accepted auditing standards require that the auditor be present at each location the client maintains inventory. | Incorrect |
| Auditors must count all inventory items during the inventory count. | Incorrect |
| The inventory of a manufacturing client will include direct labor, direct materials, and overhead components. | Correct |
| Inventory is ordinarily valued at the lower of cost or market. | Correct |
| Ordinarily, the auditors will leave a copy of all their counts with the client so the client can correct misstatements. | Incorrect |
| Auditor counts of all inventory items ordinarily should be taken. | Incorrect |
| Auditors’ observation of a client’s counting of inventories ordinarily addresses the existence of inventory more than its completeness. | Correct |
| The client need not count every item. | Correct |
| Which of the following is least likely to be among the auditors’ objectives in the audit of inventories and cost of goods sold? | Establish that the client includes only inventory on hand at year-end in inventory totals. |
| The receiving department is least likely to be responsible for the: | Preparation of a shipping document. |
| The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the: | Bill of lading. |
| Which of the following should be included as a part of inventory costs of a manufacturing company? | Direct Labor: Yes, Raw Materials: Yes, Factory Overhead: Yes |
| The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the: | Cost Accounting Standards Board. |
| When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: | Existence. |
| Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and: | Well-kept records of perpetual inventory are maintained. |
| The auditor’s analytical procedures will be facilitated if the client: | Uses a standard cost system that produces variance reports. |
| When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably: | Want the client to schedule the physical inventory count at the end of the year. |
| Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending inventory? | Observe merchandise and raw materials during the client’s physical inventory taking. |
| McPherson does not make an count of inventories, but weekly counts on the basis of a stat plan. During year, Mullins, CPA, observes counts and is able to satisfy herself to reliability of client procedures. In reporting on the results, Mullins: | Can issue an unqualified opinion without disclosing that she did not observe year-end inventories. |
| The primary objective of a CPA’s observation of a client’s physical inventory count is to: | Obtain direct knowledge that the inventory exists and has been properly counted. |
| During the physical inventory count, the auditor asked the client to open various boxes of inventory items so she was able to assess the quality of the item. | Inspection of tangible assets |
| During a site visit to a construction site, the auditor determined that all employees were wearing proper safety equipment. | Observation |
| The auditor obtained a purchase order from the purchase order file and compared it to the authorized supplier list to determine that the related goods had been purchased from an approved supplier. | Reperformance |
| The auditor calculated the accounts receivable turnover for the year. | Analytical Procedure |
| The auditor obtained a copy of the company’s accounting manual and read the section on inventory to prepare for the physical inventory observation. | Inspection of Records/Docs |
| The auditing firm’s computer-assisted audit specialist obtained an electronic inventory file from the company and checked the accuracy of the extensions and footings. | Recalculation |
| The auditor asked the warehouse manager about whether certain inventory items were becoming obsolete. | Inquiry |
| Sales orders for a textbook distributor have increased 100% over the last year. Additionally, the company’s inventory turnover has doubled since the previous year. | Volume - Overstatement |
| Gold Miner Inc. has gold mines in a number of states. To hedge the price of its gold inventory, Gold Miner purchases gold futures contracts. The fair value of gold has declined significantly in the last few months. | Complexity - Overstatement |
| Metal Inc. supplies copper pipes to home builders. During year 1, copper prices doubled. At any given time, a significant amount of inventory is in transit or located at job sites. | Susceptibility of Asset to Theft - Overstatement |
| Joe’s Computers provides three-year money-back warranties on all laptops. During year 1, warranty claims decreased significantly and the company has not reduced the warranty reserve. | Estimates - Understatement |
| Global Co. imports most of its products from a foreign supplier. During year 1, a new technology made part of the Global Co. inventory obsolete. | Industry Circumstances - Overstatement |
| An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address: | Valuation |
| An auditor selects items from the client’s inventory listing and identifies the items in the warehouse. This procedure is most likely related to: | Existence |
| An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and: | Valuation |
| During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to: | Completeness |
| An auditor most likely would analyze inventory turnover rates to obtain evidence about: | Valuation |
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