To test the client's cutoff of inventories, the auditors will make a record of the serial number of the final receiving and shipping documents used prior to the taking of the physical in
Trang 1Inventories and Cost of Goods Sold
True / False Questions
1 Observation of inventories is a generally accepted auditing standard
True False
2 The receiving department should accept only goods for which there is an approved
purchase order on hand
6 The lower of cost or market test by the auditors is generally designed to assure that
inventories are not valued above their net realizable values
True False
7 When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unqualified opinion on the client's income statement
Trang 28 To test the client's cutoff of inventories, the auditors will make a record of the serial
number of the final receiving and shipping documents used prior to the taking of the physical inventory
True False
9 The use of a tagging system for inventory taking is designed to prevent double counting of goods
True False
10 The examination of warehouse receipts is not sufficient verification of a material amount
of goods stored in public warehouses
True False
Multiple Choice Questions
11 An auditor suspects that certain client employees are ordering merchandise for themselvesover the Internet without recording the purchase or receipt of the merchandise When vendors'invoices arrive, one of the employees approves the invoices for payment After the invoices are paid, the employee destroys the invoices and the related vouchers In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all
A The auditors should evaluate the client's planning of the physical inventory
B The auditors should make certain that consigned items from suppliers are included in physical inventory totals
C The auditors should evaluate the adequacy of the client's counting procedures
D The auditors should take test counts of the client's inventory
Trang 313 A receiving department compares inventory items received with copies of purchase
orders The purchase orders list the name of the vendor and do not list the quantities of the
material ordered Using the purchase orders, the receiving department is most likely to detect:
A Deliveries for which no purchase order was issued
B Unapproved sales orders
C Partial deliveries
D Deliveries of a greater quantity of items than those ordered
14 To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into:
A Testing the entity's computation of standard overhead rates
B Obtaining confirmation of inventories pledged under loan agreements
C Reviewing a cutoff procedure for inventories
D Tracing test counts to the entity's inventory listing
16 A client uses a periodic inventory system Would one expect a credit to which of the following accounts at the point of sale?
Trang 417 A client uses a perpetual inventory system Would one expect a credit to which of the following accounts at the point of sale?
19 A "bill and hold" scheme is most likely to include:
A Shipment of items to a customer beyond what the customer has ordered
B Recording as sales items that the company retains as of year-end
C Billing of items that are held by customers for future revenue production purposes
D Selling items at substantial discounts near year-end
20 Which of the following is an auditor least likely to consider a departure from generally
accepted accounting principles?
A Valuing inventory at cost
B Including in inventory items that are consigned out to vendors, but not yet sold
C Using standard cost as the measure of inventory cost
D Including in inventory items shipped subsequent to year-end, but for which valid orders did exist at year-end
Trang 521 Which of the following is least likely to be accurate statement concerning characteristics
of an audit?
A An analysis of inventory turnover addresses whether the proper method of determining inventory costs as contrasted to market values is being applied
B Characteristics of the double entry bookkeeping system make it possible to test for
overstated sales when tests of accounts receivable are being performed
C The direction of tests for overstatement errors is generally directed from the recorded entry
to source documents
D Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end
22 Which of the following is not a reason for the special significance attached by the auditors
to the verification of inventories?
A The determination of inventory valuation directly affects net income
B The existence of inventories is inherently difficult to substantiate
C Special valuation problems often exist for inventories
D Inventories are often the largest current asset of an enterprise
23 Which of the following is true about the auditors' observation of the client's physical inventory?
A The count must be made at year-end
B The auditors should supervise the client's personnel
C The auditors' observation addresses the existence assertion
D The auditors should justify any omission of the observation in the audit report
24 In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditorwould be most interested in examining the:
A Purchases journal
B Purchase requisitions
C Purchase orders
D Vendors' invoices
Trang 625 In verifying credits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the:
Trang 730 To assure that all purchases are authorized before payment is made, accounting
department personnel should match the vendor's invoice to:
A The purchase requisition
B The receiving report
C The purchase order
D The voucher
31 Which of the following is true about the auditors' observation of the client's physical inventory?
A The auditors should plan the physical inventory
B The auditors should segregate damaged and obsolete goods
C The auditors should evaluate the adequacy of the client's counting procedures
D The auditors should supervise the client's personnel
32 Which of the following is not a procedure that typically is used by the auditors in their
examination of a client's goods held in the custody of a public warehouse?
A Confirmation
B Obtaining reports on internal control at the warehouse
C Observation
D Corresponding with the state agency regarding the authenticity of the public warehouse
33 Which of the following best describes the reason that the auditors record their inventory test counts in the working papers?
A To document every test count
B For subsequent comparison with the completed inventory listing
C To document compliance with generally accepted accounting principles
D For use in subsequent audits
Trang 834 Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory?
A The auditors should satisfy themselves as to the statistical validity of the technique, and thereasonableness of the allowance for sampling risk and sampling error used
B The auditors should qualify their opinion, because the client must perform a complete count of the inventory
C The auditors should increase the extent of their test counts to compensate for the use of a statistical technique
D The auditors should withdraw from the engagement
35 Which of the following best describes the reason for the auditors' review of the client's cost accounting system?
A To obtain evidence regarding the quantities of good described as work-in-process
B To obtain evidence about the valuation of work-in-process, finished goods, and cost of goods sold
C To obtain evidence about the profit margin on specific jobs
D To obtain evidence about compliance with Cost Accounting Standards.
36 Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has:
A The ability to prepare payment vouchers based on the information on a vendor's invoice
B The responsibility of reviewing purchase orders issued by user departments
C The authority to make purchases of requisitioned materials and services
D A direct reporting responsibility to controller of the organization
37 Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company:
A Has paid for the merchandise
B Has physical possession of the merchandise
C Holds legal title to the merchandise
D Holds the shipping documents for the merchandise issued in the company's name
Trang 938 Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
A Supplies of relatively little value are expensed when purchased
B The cycle basis is used for physical counts
C The storekeeper is responsible for maintenance of perpetual inventory records
D Perpetual inventory records are maintained only for items of significant value
39 The auditors will usually trace the details of the test counts made during the observation ofthe physical inventory taking to a final inventory schedule This audit procedure is undertaken
to provide evidence that items physically present and observed by the auditors at the time of the physical inventory count are:
A Owned by the client
B Not obsolete
C Physically present at the time of the preparation of the final inventory schedule
D Included in the final inventory schedule
40 An internal control questionnaire indicates that an approved receiving report is required toaccompany every check request for payment of merchandise Which of the following
procedures provides the greatest assurance that this control is operating effectively?
A Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports
B Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports
C Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks
D Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks
41 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:
A Sales
B Sales discounts
C Purchases
D Purchase returns
Trang 1042 Which one of the following procedures would not be appropriate for the auditors in
discharging their 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
43 To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors 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
44 Which of the following is not one of the independent auditor's objectives regarding the
examination of inventories?
A Verifying that inventory counted is owned by the client
B Verifying that the client has used proper inventory pricing
C Ascertaining the physical quantities of inventory on hand
D Verifying that all inventory owned by the client is on hand at the time of the count
45 Purchase cutoff procedures should be designed to test whether all inventory:
A Owned by the company was recorded
B On the year end balance sheet was carried at lower of cost or market
C On the year end balance sheet was paid for by the company
D Owned by the company is in the possession of the company
Trang 1146 Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received?
A Quantities ordered are excluded from the receiving department copy of the purchase order
B Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order
C Receiving department personnel are expected to match and reconcile the receiving report with the purchase order
D Internal auditors periodically examine, on a surprise basis, the receiving department copies
48 An inventory turnover analysis is useful to the auditor because it may detect:
A Inadequacies in inventory pricing
B Methods of avoiding cyclical holding cost
C The optimum automatic reorder points
D The existence of obsolete merchandise
49 After accounting for a sequence of inventory tags, an auditor traces a sample of tags to thephysical inventory listing to obtain evidence that all items:
A Included in the listing have been counted
B Represented by inventory tags are included in the listing
C Included in the listing are represented by inventory tags
D Represented by inventory tags are bona fide
Trang 1250 The most reliable procedure for an auditor to use to test the existence of a client's
inventory at an outside location would be to
A Observe physical counts of the inventory items
B Trace the total on the inventory listing to the general ledger inventory account
C Obtain a confirmation from the client indicating inventory ownership
D Analytically compare the current-year inventory balance to the prior-year balance
51 Tracing copies of computer-prepared sales invoices to copies of the corresponding
computer-prepared shipping documents provides evidence that
A Shipments to customers were properly billed
B Entries in the accounts receivable subsidiary ledger were for sales actually shipped
C Sales billed to customers were actually shipped
D No duplicate shipments to customers were made
52 In auditing a manufacturing entity, which of the following procedures would an auditor
least likely perform to determine whether slow-moving, defective, and obsolete items
included in inventory are properly identified?
A Test the computation of standard overhead rates
B Tour the manufacturing plant or production facility
C Compare inventory balances to anticipated sales volume
D Review inventory experience and trends
Essay Questions
53 In auditing a client's inventory, the auditors must be concerned with the detection of goodsthat are both damaged and obsolete
a Why are the auditors concerned with detecting damaged and obsolete goods?
b How do the auditors test for damaged goods in the client's inventory?
c How do the auditors test for obsolete goods in the client's inventory?
Trang 1354 Observation of a client's inventory is a generally accepted auditing procedure that should
be performed whenever it is possible
a What part should the auditors play in planning the physical inventory?
b Describe the procedures performed by the auditors during their observation of a client's physical inventory
c Why do the auditors document their inventory test counts in their working papers?
Trang 14Chapter 12 Inventories and Cost of Goods Sold Answer Key
True / False Questions
1 Observation of inventories is a generally accepted auditing standard
Trang 156 The lower of cost or market test by the auditors is generally designed to assure that
inventories are not valued above their net realizable values
TRUE
Difficulty: Easy
7 When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unqualified opinion on the client's income statement
FALSE
Difficulty: Medium
8 To test the client's cutoff of inventories, the auditors will make a record of the serial number of the final receiving and shipping documents used prior to the taking of the physical inventory
10 The examination of warehouse receipts is not sufficient verification of a material amount
of goods stored in public warehouses
TRUE
Difficulty: Medium