2-2. Choice "c" is correct.

The internal control procedure of prenumbering receiving reports and periodically reconciling
them to the inventory records most likely addresses the completeness assertion for inventory, because it allows the
auditor to determine whether all goods received have been recorded as inventory.
Choice "a" is incorrect. Reconciling the work in process account (per the general ledger) with subsidiary records (direct
materials, direct labor, overhead) tests that those records are interfacing properly, but does not provide any information
about the completeness assertion for inventory.
Choice "b" is incorrect. Separation of employees responsible for custody of finished goods from the receiving function
addresses the safeguarding of assets, not the completeness of the inventory records.
Choice "d" is incorrect. The separation of duties between the payroll department and inventory accounting personnel is
related to the valuation (pricing) of inventory, not its completeness.

2-4. Answer (B) is correct. If credit memos for items returned by customers have not been prepared and recorded, the
returned items will be reflected in the physical inventory but not in the perpetual records.
Answer (A) is incorrect because items counted but not added to the inventory accumulation sheets will understate the
physical count.
Answer (C) is incorrect because, if no journal entry has been made for items returned to vendors, the perpetual records
will be overstated.
Answer (D) is incorrect because, if an entry has not been made in the perpetual records and the item has not been
received, both the records and physical inventory will be understated by the same amount. FOB shipping point means
that title passes when the items are shipped, and they should be included in both inventory and accounts payable at
that time.

3-1. Choice "b" is correct. Inspecting agreements to determine whether any inventory is pledged as collateral or subject
to liens provides the most reliable evidence concerning the entity’s assertion of rights and obligations. These documents
will probably verify ownership and show lenders’ restrictions on the inventories.
Choice "a" is incorrect. Tracing from the auditor’s test counts to the entity’s summarization of quantities would provide
evidence concerning the completeness assertion.
Choice "c" is incorrect. Determining whether shipments were recorded as sales provides evidence about the
completeness of recorded sales.
Choice "d" is incorrect. Inspecting the open purchase order file for significant commitments that should be disclosed
would provide evidence concerning the appropriate presentation, description, and disclosure of such items.

3-2. Choice "D" is correct. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning
management's assertions about valuation and allocation (i.e., if the inventory is becoming older, an obsolescence
reserve might be required).
Choice "a" is incorrect. The existence assertion addresses whether assets, liabilities, and equity interests exist. Analysis
of inventory turnover would not provide evidence concerning this assertion.
Choice "b" is incorrect. Rights and obligations pertain to ownership of assets and liabilities. Analysis of inventory
turnover would not provide evidence concerning this assertion.
Choice "c" is incorrect. Completeness deal with whether the components of the financial statements are properly
presented, described, and disclosed. Analysis of inventory turnover would not provide evidence concerning this
assertion.

3-3. Choice "B" is correct. Policy and procedure manuals are least important because the most important features are
the actual workings of the controls as indicated by the other three choices.

5-2
Purchase cut off is made during an audit to determine that all goods owned at year end are included in the inventory
balance presented in the balance sheet. Purchase cut off deals whether purchases are recorded in the proper period.
This test aims to ensure that the inventory reported in the financial statements is accurate.
Therefore, the correct answer is d. all goods owned at year-end are included in the inventory balance.
The other options are also important however, they are not the main objective of conducting a purchase cutoff test.
The purchase cutoff test verifies that the purchasing transactions are recorded in the proper period

5-4. Answer (B) is correct. If credit memos for items returned by customers have not been prepared and recorded, the
returned items will be reflected in the physical inventory but not in the perpetual records.
Answer (A) is incorrect because items counted but not added to the inventory accumulation sheets will understate the
physical count.
Answer (C) is incorrect because, if no journal entry has been made for items returned to vendors, the perpetual records
will be overstated.
Answer (D) is incorrect because, if an entry has not been made in the perpetual records and the item has not been
received, both the records and physical inventory will be understated by the same amount. FOB shipping point means
that title passes when the items are shipped, and they should be included in both inventory and accounts payable at
that time.

5-5. D is correct because examining material requisitions and reperforming client controls related to issuances will
provide evidence on operating effectiveness related to issuance of raw materials to production.
A is incorrect because reconciling raw materials and work in process records to the general ledger balances does not
directly test the controls over the issuance of raw materials to production
B is incorrect because the handling of defective materials only addresses a very limited portion of the issuance of raw
materials to production..
C is incorrect because these procedures test the safeguard controls over raw materials, not the controls over issuance to
production.