9.

20 Which of the following methods for determining

inventory cost is not allowed by GAAP?
a. Average Cost
b. FIFO
c. LIFO
d. Standard cost
d. Standard cost

9.21 Which cycle is not directly linked to the production

cycle?
a. Acquisition and expenditure cycle
b. Payroll cycle
c. Revenue and collection cycle
d. Finance and investment cycle
d. Finance and investment cycle

9.22 To determine the client's planned amount and timing of

production of a product, the auditor reviews the:
a. sales forecast
b. inventory reports
c. production plan
d. purchases journal
c. production plan

9.23 An auditor reviews job cost sheets to test which

transaction assertion?
a. occurrence
b. completeness
c. accuracy
d. classification
c. accuracy

9.24 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 inventory counts
c. the warehouse manager is responsible for maintenance of
perpetual inventory records
d. perpetual inventory records are maintained only for items
of significant value
c. the warehouse manager is responsible for maintenance of
perpetual inventory records
9.25 To make a year-to-year comparison of inventory turnover
most meaningful, the auditor performs the analysis:
a. for the company as a whole
b. by division
c. by product
d. all of the above
c. by product
9.26 Which of the following procedures would best prevent or
detect the theft of valuable items from an inventory that
consists of hundreds of different items selling for $1 to $10
and a few items selling for hundreds of dollars?
a. maintain a perpetual inventory of only the more valuable
items with frequent periodic verification of the accuracy of
the perpetual inventory record
b. have an independent accounting firm prepare an internal
control report on the effectiveness of the controls over
inventory
c. have separate warehouse space for the more valuable
items with frequent periodic physical inventory counts and
comparison to perpetual inventory records
d. require a manager's signature for the removal of any
inventory item with a value of more than $50
c. have separate warehouse space for the more valuable
items with frequent periodic physical inventory counts and
comparison to perpetual inventory records
9.27 An auditor usually traces the details of the test counts
made during the observation of physical inventory counts to a
final inventory compilation. 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:
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
d. included in the final inventory schedule
9.28 A retailer's physical count of inventory was higher than
that shown by the perpetual records. Which of the following
could explain the difference?
a. inventory items had been counted but the tags placed on
the items had not been taken off and added to the inventory
accumulation sheets
b. credit memos for several items returned by customers had
not been recorded
c. no journal entry had been made on the retailer's books for
several items returned to its suppliers
d. an item purchased FOB shipping point had not arrived at
the date of the inventory count and had not been reflected in
the perpetual records
b. credit memos for several items returned by customers had
not been recorded
9.29 From the auditors' point of view, inventory counts are
more acceptable prior to the year-end when:
a. internal control is weak
b. accurate perpetual inventory records are maintained
c. inventory is slow moving
d. significant amounts of inventory are held on a consignment
basis
b. accurate perpetual inventory records are maintained
9.30 Which of the following internal control activities most
likely addresses the completeness assertion for inventory?
a. the work-in-process account is periodically reconciled with
subsidiary inventory records
b. employees responsible for custody of finished goods do not
perform the receiving function
c. receiving reports are prenumbered, and the numbering
sequence is checked periodically
d. there is a separation of duties between the payroll
department and inventory accounting personnel
c. receiving reports are prenumbered, and the numbering
sequence is checked periodically
9.31 When auditing inventories, an auditor would least likely
verify that:
a. all inventory owned by the client is on hand at the time of
the count
b. the client has used proper inventory pricing
c. the financial statement presentation of inventories is
appropriate
d. damaged goods and obsolete items have been properly
accounted for
a. all inventory owned by the client is on hand at the time of
the count
9.32 A client maintains perpetual inventory records in
quantities and in dollars. If the assessed control risk is high, an
auditor would probably:
a. apply gross profit test to ascertain the reasonableness of
the physical inventory counts
b. increase the extent of tests of controls relevant to the
inventory cycle
c. request the client to schedule the physical inventory count
at the end of the year
d. insist that the client perform physical inventory counts of
inventory items several times during the year
c. request the client to schedule the physical inventory count
at the end of the year
9.33 An auditor selected items for test counts while observing
a client's physical inventory count. The auditor then traced
the test counts to the client's inventory listing. This procedure
most likely obtained evidence concerning management's
balance assertion of:
a. rights & obligations
b. completeness
c. existence
d. valuation and allocation
b. completeness
9.34 Which of the following auditing procedures probably
would provide the most reliable evidence concerning the
entity's assertion of rights and obligations related to
inventories?
a. trace test counts noted during the entity's physical count to
the entity's summarization of quantities
b. inspect agreements to determine whether any inventory is
pledged as collateral or subject to any liens
c. select the last few shipping documents used before the
physical count and determine whether the shipments were
recorded as sales
d. inspect the open purchase order file for significant
commitments that should be considered for disclosure
b. inspect agreements to determine whether any inventory is
pledged as collateral or subject to any liens
9.35 An auditor most likely would analyze inventory turnover
rates to obtain evidence concerning managment's balance
assertions about:
a. existence
b. rights and obligations
c. completeness
d. valuation and allocation
d. valuation and allocation
9.36 An auditor would vouch inventory on the inventory
status report to the vendor's invoice to obtain evidence
concerning management's balance sheet assertions about:
a. existence
b. rights and obligations
c. completeness
d. valuation
d. valuation
9.37 When evaluating inventory controls, an auditor would be
least likely to:
a. inspect documents
b. make inquiries
c. observe procedures
d. consider policy and procedure manuals
d. consider policy and procedure manuals
9.38 When testing a company's cost accounting system, the
auditor uses procedures that are primarily designed to
determine that:
a. quanitities on hand have been computed based on
acceptable cost accounting techniques that reasonably
approximate actual quantities on hand
b. physical inventory counts agree substantially with book
inventories
c. the system is in accordance with generally accepted
accounting principles and is functioning as planned
d. costs have been properly assigned to finished goods, work-
in-process, and cost of goods sold
d. costs have been properly assigned to finished goods, work-
in-process, and cost of goods sold
9.39 The auditor tests the quantity of materials charged to
work-in-process by vouching these quanitites to:
a. cost ledgers
b. perpetual inventory records
c. receiving reports
d. material requisitions
d. material requisitions
9.40 Your client counts inventory three months before the
end of the fiscal year because controls over inventory are
excellent. Which procedure is not necessary for the roll-
forward?
a. check that shipping documents for the last three months
agree with perpetual records
b. trace receiving reports for the last three months to
perpetual records
c. compare gross margin percentages for the last three
months
d. request the client to recount inventory at the end of the
year
d. request the client to recount inventory at the end of the
year
9.41 An auditor is examining a nonpublic company's inventory
procurement system and has decided to perform test of
controls. Under which of the following conditions do GAAS
require test of controls be performed by an auditor?
a. significant weaknesses were found in the company's
internal control
b. the auditor hopes to reduce the amount of work to be
done in assessing inherent risk
c. the auditor believes that testing the controls could lead to a
reduction in overall audit time and cost
d. tests of controls are always performed when the auditor
begins to assess control risk
c. the auditor believes that testing the controls could lead to a
reduction in overall audit time and cost
9.42 Which of the following management assertions is an
auditor most likely testing if the audit objective states that all
inventory on hand is reflected in the ending inventory
balance?
a. the entity has rights to the inventory
b. inventory is properly valued
c. inventory is properly presented in the financial statements
d. inventory is complete
d. inventory is complete
9.43 A portion of the client's inventory is in public
warehouses. Evidence of the existence of this merchandise
can most efficiently be acquired through which of the
following methods?
a. observation
b. confirmation
c. calculation
d. inspection
b. confirmation
9.44 The purpose of tracing a sample of inventory tags to a
client's computerized listing of inventory items is to
determine whether the inventory items:
a. represented by tags were included on the listing
b. included on the listing were properly counted
c. respresented by tags were reduced to the lower of cost or
market
d. included in the listing were properly valued
a. represented by tags were included on the listing
9.46 Test of controls related to controls and assertions.
Identify the assertion being addressed for each procedure:
1. balance and reconcile detailed production cost sheets to
work-in-process inventory control account
completeness
TRACE: production cost sheets (SOURCE DOCS) to work-in-
process inventory control account (ACCTG RECS)
9.46 Test of controls related to controls and assertions.
Identify the assertion being addressed for each procedure:
2. scan closed production cost sheets for missing numbers in
the sequence
completeness
9.46 Test of controls related to controls and assertions.
Identify the assertion being addressed for each procedure:
3. vouch a sample of open and closed production cost sheet
entries to (a) labor reports and (b) issue forms and materials
used reports
existence/occurrence
"Vouch" = "compare" --> EXAM
9.46 Test of controls related to controls and assertions.
Identify the assertion being addressed for each procedure:
4. locate the material issue forms and determine whether
they are (a) prenumbered (b) kept in a secure location, and (c)
available to unauthorized persons
(a) completeness ("prenumbered")
(b) existence/occurrence
(c) existence/occurrence
9.46 Test of controls related to controls and assertions.
Identify the assertion being addressed for each procedure:
5. select several summary journal entries in the work-in-
process inventory and (a) vouch them to weekly labor and
material reports and to production cost sheets and (b) trace
them to the control account
(a) existence/occurrence
(b) classification
9.46 Test of controls related to controls and assertions.
Identify the assertion being addressed for each procedure:
6. select a sample of the material issue forms in the
production department file and examine them for:
a. issue date and materials used report date
b. production order number
c. floor supervisor's signature or initials
d. name and number of material
e. raw materials stores clerk's signature or initials
f. material requisition in raw materials stores file, noting the
date of the requisition
a. cut-off / valuation-allocation
b. completeness
c. existence/occurrence
d. accuracy
e. accuracy / valuation - allocation
f. cut-off / valuation-allocation
9.46 Test of controls related to controls and assertions.
Identify the assertion being addressed for each procedure:
7. determine by inquiry and inspection whether cost clerks
review dates on reports of units completed for accounting in
the proper period
cut-off
valuation/allocation
completeness
An auditor generally tests the segregation of duties related to
inventory by:
a. test counts and cutoff procedures
b. document inspection and reconciliation
c. analytical procedures and invoice recomputation
d. personal inquiry and observation
d. personal inquiry and observation
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:
a. sales returns
b. purchase discounts
c. sales
d. purchase returns
a. sales returns
Which of the following internal controls most likely would
prevent direct labor hours from being charged to
manufacturing overhead?
a. use of time tickets to record actual labor worked on
production orders
b. periodic independent counts of work-in-process for
comparison to recorded amounts
c. comparison of daily journal entries with approved
production orders
d. reconciliation of work-in-process inventory with periodic
cost budgets
a. use of time tickets to record actual labor worked on
production orders
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. review inventory experience and trends
d. compare inventory balances to anticipated sales volume
a. test the computation of standard overhead rates
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. analytically compare the current-year inventory balance to
the prior-year balance
b. obtain a confirmation from the client indicating inventory
ownership
c. trace the total on the inventory listing to the general ledger
inventory account
d. observe physical counts of the inventory items
d. observe physical counts of the inventory items
As part of the process of observing a client's physical
inventories, an auditor should be alert to:
a. the verification of inventory values assigned to goods in
process
b. the existence of outstanding purchase commitments
c. any change in the method of pricing from prior years
d. the inclusion of any obsolete or damaged goods
d. the inclusion of any obsolete or damaged goods
The auditor's inventory observation test counts are traced to
the client's inventory listing to test for which of the following
financial assertions?
a. understandability and classification
b. rights and obligations
c. allocation and valuation
d. completeness
d. completeness
To gain assurance that all inventory items in a client's
inventory listing schedule are valid, an auditor most likely
would trace:
a. inventory tags noted during the auditor's observation to
items listed in receiving reports and vendors' invoices
b. inventory tags noted during the auditor's observation to
items listed in the inventory-listing schedule
c. items listed in receiving reports and vendors' invoices to the
inventory-listing schedule
d. items listed in the inventory-listing schedule to inventory
tags and the auditor's recorded count sheets
d. items listed in the inventory-listing schedule to inventory
tags and the auditor's recorded count sheets
Under which of the following conditions may an auditor's
observation procedure for inventory be performed during or
after the end of the period under audit?
a. when the auditor finds minimal variations in client records
and test counts in prior periods
b. when well-kept perpetual inventory records are checked by
the client periodically by comparisons with physical counts
c. when total inventory has not varied more than 5% in the
last five years
d. when the client maintains periodic inventory records
b. when well-kept perpetual inventory records are checked by
the client periodically by comparisons with physical counts
Which of the following procedures would be most
appropriate for testing the completeness assertion as it
applies to inventory?
a. performing cutoff procedures for shipping and receiving
b. examining paid vendor invoices
c. scanning perpetual inventory, production, and purchasing
records
d. tracing inventory items from the tag listing back to the
physical inventory quanitites
a. performing cutoff procedures for shipping and receiving
An auditor most likely would analyze inventory turnover rates
to obtain evidence concerning management's assertions
about:
a. existence
b. rights and obligations
c. understandability and classification
d. valuation and allocation
d. valuation and allocation
An insignificant portion of a client's inventory is in public
warehouses. Evidence of the existence of this merchandise
can most efficiently be acquired through which of the
following methods?
a. calculation
b. inspection
c. observation
d. confirmation
d. confirmation
The purpose of tracing a sample of inventory tags to a client's
computerized listing of inventory items is to determine
whether the inventory items:
a. represented by tags were included on the listing
b. represented by tags were reduced to the lower of cost or
market
c. included in the listing were properly valued
d. included on the listing were properly counted
a. represented by tags were included on the listing
Which is true about the auditor's observation of physical
inventory counts?
I. It can provide evidence supporting the existence assertion
II. It can provide evidence supporting the completeness
assertion
a. I only
b. II only
c. Both I and II
d. Neither I or II are true
c. Both I and II
Which audit procedure is most likely related to the Which of the following procedures is the auditor least likely to
classification and understandability of the financial perform on the actual date the physical inventory count is
statements with respect to inventory? observed?
a. obtaining quotations for the current market value of a. examine inventory to make sure that it is tagged by client
inventory count teams
b. analyzing inventory turnover b. watch for inventory items that are rust - or dust- covered or
c. confirming inventories pledged under loan agreements otherwise damaged
d. examining consignment agreements c. observe client count teams to determine if they are
c. confirming inventories pledged under loan agreements conducting the physical inventory count in accordance with
client policies and procedures
Which of the following management assertions is an auditor d. examine documentation supporting the acquisition of
most likely testing if the audit objective states that all highly material inventory items on hand at the count date
inventory on hand is reflected in the ending inventory d. examine documentation supporting the acquisition of
balance? highly material inventory items on hand at the count date
a. inventory is properly valued
b. inventory is properly presented in the financial statements An inventory turnover analysis is useful to the auditor
c. the entity has rights to the inventory because it may detect:
d. inventory is complete a. inadequacies in inventory pricing
d. inventory is complete b. methods of avoiding cyclical holding costs
c. the existence of obsolete merchandise
Which of the following controls will most likely justify a d. the optimum automatic reorder points
reduced assessed level of control risk for the occurrence c. the existence of obsolete merchandise
assertion for purchases of inventory?
a. receiving reports for inventory additions are accounted for
and entry of received goods into the purchases system is
verified by accounting clerks
b. the purchases system automatically updates the perpetual
inventory master file when transactions are entered into the
purchases journal
c. the perpetual inventory system will not allow an addition to
inventory to be posted without entry of a valid receiving
report number
d. at the close of each day, the system reconciles the
perpetual inventory master file to the inventory general
ledger account and generates an exception report when
differences exist
b. the purchases system automatically updates the perpetual
inventory master file when transactions are entered into the
purchases journal

For control purposes, the quantities of materials ordered may

be omitted from the copy of the purchase order that is:
a. returned to the requisitioner
b. forwarded to the receiving department
c. forwarded to the accounting department
d. retained in the purchasing department's files
b. forwarded to the receiving department

The accuracy of perpetual inventory master files may be

established, in part, by comparing perpetual inventory
records with:
a. purchase requisitions
b. receiving reports
c. purchase orders
d. vendor payments
b. receiving reports