ACCT 4150 Chapter 13 Concepts – Flashcards
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Shipping orders are forwarded from the revenue process to A. The materials requisitions department. B. Finished goods stores. C. Raw materials stores. D. Inventory management.
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Finished goods stores
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Which of the following departments typically approves purchase requisitions? A. Raw materials stores. B. Cost accounting. C. Inventory management. D. IT.
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Inventory management
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Which of the following best describes the occurrence assertion for inventory? A. Purchase requisitions initiated by authorized personnel. B. Recorded inventory actually exists. C. Inventory properly accumulated from journals and ledgers. D. All inventory is recorded.
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Recorded inventory actually exists
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Auditors are most likely to ensure that no production activity is scheduled prior to A. Determining standard costs. B. Observing physical inventory. C. Completing the book to physical adjustment. D. Determining the amount of consigned inventory.
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Observing physical inventory
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The safeguarding of inventory most likely includes A. Comparison of the information contained on the purchase requisitions, purchase orders, receiving reports, and vendors' invoices. B. Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count. C. Analytical procedures for raw materials, goods in process, and finished goods that identify unusual transactions, theft, and obsolescence. D. Application of established overhead rates on the basis of direct labor hours or direct labor costs.
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Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count
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Which of the following is not a misstatement related to the occurrence assertion for inventory? A. Consigned goods are included as part of inventory. B. Unauthorized production activity. C. Fictitious inventory. D. Recorded inventory is not on hand because of theft.
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Unauthorized production activity
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Failure to record inventory in the proper period can affect all of the following accounts except: A. Sales. B. Receivables. C. Cost of Goods Sold. D. Prepaid Expenses.
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Prepaid Expenses
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Which of the following audit procedures would provide the least reliable evidence that the entity has legal title to inventories? A. Confirmation of inventories at locations outside the entity's facilities. B. Analytical review of inventory balances compared to purchasing and sales activities. C. Observation of physical inventory counts. D. Examination of paid vendors' invoices.
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Analytical review of inventory balances compared to purchasing and sales activities
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The audit of year-end physical inventories should include steps to verify that the entity's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a A. Sale in the subsequent period. B. Purchase in the current period. C. Sale in the current period. D. Purchase return in the subsequent period.
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Sale in the current period
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For the purpose of determining proper cutoff for inventory, the auditor will select a sample from which of the following for a few days before and after year-end? A. Materials requisitions. B. Production schedules. C. Receiving documents. D. Purchase orders.
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Receiving documents
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Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation? A. Vouching the raw materials' costs to vendors' invoices. B. Obtaining confirmation of inventories pledged under loan agreements. C. Reviewing shipping and receiving cutoff activities for inventories. D. Tracing test counts to the entity's inventory listing.
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Vouching the raw materials' costs to vendors' invoices
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An auditor will usually trace the details of the test counts made during the observation of the physical inventory count to a final inventory schedule. 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 entity. B. Not obsolete. C. Physically present at the time of the preparation of the final inventory schedule. D. Included in the final inventory schedule.
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Included in the final inventory schedule
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An entity'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 A. Sales. B. Sales returns. C. Purchases. D. Purchase discounts.
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Sales
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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 A. The final inventory is valued at cost. B. All inventory represented by an inventory tag is listed on the inventory sheets. C. All inventory represented by an inventory tag is bona fide. D. Inventory sheets do not include untagged inventory items.
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All inventory represented by an inventory tag is listed on the inventory sheets
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An entity'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.
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Purchases
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If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded A. Sales. B. Sales discounts. C. Purchases. D. Purchase discounts.
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Purchases
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An auditor selected items for test counts while observing an entity's physical inventory. The auditor then traced the test counts to the entity's inventory listing. This procedure most likely provided evidence concerning management's assertion of A. Rights and obligations. B. Completeness. C. Existence. D. Valuation.
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Completeness
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While observing an entity'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 entity's perpetual records. This situation could be the result of the entity's failure to record A. Purchase discounts. B. Purchase returns. C. Sales. D. Sales returns.
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Sales returns
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In a manufacturing company, which one of the following audit procedures would give the least assurance about the valuation of inventory at the audit date? A. Testing the computation of standard overhead rates. B. Examining paid vendors' invoices. C. Reviewing direct labor rates. D. Obtaining confirmation of inventories pledged under loan agreements.
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Obtaining confirmation of inventories pledged under loan agreements
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Which of the following is least likely to be a possible cause of book-to-physical differences in inventory quantities? A. Inventory cutoff errors. B. Misapplication of LIFO. C. Unreported scrap or spoilage. D. Theft.
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Misapplication of LIFO
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An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of A. Valuation. B. Rights and obligations. C. Existence. D. Completeness.
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Valuation
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Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory? A. Obsolete inventory. B. New product line where sales exceed production. C. Manufacturing overhead was not allocated to the production process. D. Manufacturing salaries were recorded as administrative expenses.
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Obsolete inventory
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Key segregations of duties in the inventory management process include all of the following except separating: A. Cost accounting from review of variance reports. B. Inventory management from cost accounting. C. Cost accounting from the general ledger function. D. Supervision of physical inventory from inventory management.
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Cost accounting from review of variance reports
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An auditor generally tests physical security controls over inventory by A. Test counts and cutoff procedures. B. Examination and reconciliation. C. Inspection and recomputation. D. Inquiry and observation.
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Inquiry and observation
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When perpetual inventory records are maintained in quantities and in dollars and internal control over inventory is weak, the auditor would probably A. Want the entity to schedule the physical inventory count at the end of the year. B. Insist that the entity perform physical counts of inventory items several times during the year. C. Increase the extent of tests for unrecorded liabilities at the end of the year. D. Have to disclaim an opinion on the income statement for that year.
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Want the entity to schedule the physical inventory count at the end of the year
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An entity maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably A. Increase the extent of tests of controls for the inventory cycle. B. Request that the entity schedule the physical inventory count at the end of the year. C. Insist that the entity perform physical counts of inventory items several times during the year. D. Apply gross profit tests to ascertain the reasonableness of the physical counts.
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Request that the entity schedule the physical inventory count at the end of the year
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In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would A. Review the entity's description of inventory policies and procedures. B. Perform test counts of inventory during the entity's physical count. C. Analyze inventory turnover statistics to identify slow-moving and obsolete items. D. Analyze monthly production reports to identify variances and unusual transactions.
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Review the entity's description of inventory policies and procedures
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For several years, an entity's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal controls that led to the failure to record some A. Purchases returned to vendors. B. Sales returns received. C. Sales discounts allowed. D. Cash purchases.
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Purchases returned to vendors
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Which of the following control activities would most likely be used to maintain accurate perpetual inventory records? A. Independent storeroom count of goods received. B. Periodic independent reconciliation of control and subsidiary records. C. Periodic independent comparison of records with goods on hands. D. Independent matching of purchase orders, receiving reports, and vendors' invoices.
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Periodic independent comparison of records with goods on hands
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An inventory turnover analysis is useful to the auditor because it may detect A. Inadequacies in inventory pricing. B. Methods of avoiding cyclical holding costs. C. The optimum automatic reorder points. D. The existence of obsolete merchandise.
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The existence of obsolete merchandise
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Tracing costs used to price inventory to vendors' invoices test which of the following assertions? A. Occurrence. B. Cutoff. C. Accuracy. D. Classification.
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Accuracy
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The auditor tests the quantity of materials charged to work in process by tracing these quantities to A. Cost ledgers. B. Perpetual inventory records. C. Receiving reports. D. Material requisitions.
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Material requisitions
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Purchase cutoff activities should be designed to test that merchandise is included in the inventory of the entity 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.
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Holds legal title to the merchandise
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Which one of the following procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity's physical inventories? A. Confirmation of goods in the hands of public warehouses. B. Supervising the annual physical inventory count. C. Carrying out physical inventory procedures at an interim date. D. Obtaining written representation from the entity as to the existence, quality, and dollar amount of the inventory.
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Supervising the annual physical inventory count
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When outside firms of non-accountants specializing in physical inventory counts are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily A. Consider the report of the outside inventory firm to be an acceptable alternative procedure to the observation of physical inventories. B. Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions. C. Increase the extent of work on the physical count of inventory. D. Consider the reduced audit effort with respect to the physical count of inventory as a scope limitation.
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Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions
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Which of the following is the best audit procedure for the discovery of damaged merchandise in an entity's ending inventory? A. Compare the physical quantities of slow-moving items with corresponding quantities of the prior year. B. Observe the condition of merchandise and raw materials during the entity's physical inventory count. C. Review the management's inventory representation letter for accuracy. D. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.
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Observe the condition of merchandise and raw materials during the entity's physical inventory count
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The physical count of inventory of a retailer was higher than shown in its perpetual records. Which of the following could explain the difference? A. Inventory items had been counted but tags placed on the items had not been taken off the items and added to the inventory accumulation sheets. B. Credit memos for several items returned by customers had not been prepared. 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.
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Credit memos for several items returned by customers had not been prepared
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In an audit of inventories, an auditor would least likely verify that A. All inventory owned by the entity is on hand at the time of the count. B. The entity 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.
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All inventory owned by the entity is on hand at the time of the count
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The element of the audit planning process most likely to be agreed upon with the entity before implementation of the audit strategy is the determination of the A. Evidence to be gathered to provide a sufficient basis for the auditor's opinion. B. Procedures to be undertaken to discover litigation, claims, and assessments. C. Pending legal matters to be included in the inquiry of the entity's attorney. D. Timing of inventory observation procedures to be performed.
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Timing of inventory observation procedures to be performed
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To gain assurance that all inventory items in an entity'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 the inventory listing schedule. B. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. C. Items listed in the inventory listing schedule to inventory tags and the count sheets. D. Items listed in receiving reports and vendors' invoices to the inventory listing schedule.
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Items listed in the inventory listing schedule to inventory tags and the count sheets
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Observing an entity's inventory held on consignment by others tests the assertion of A. Existence. B. Completeness. C. Valuation. D. Rights and obligations.
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Existence
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When an auditor tests an entity's cost accounting system, the auditor's tests are primarily designed to determine that A. Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand. B. Physical inventories are in substantial agreement 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 work in process, finished goods, and cost of goods sold.
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Costs have been properly assigned to work in process, finished goods, and cost of goods sold
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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 entity. B. Verifying that the entity has used proper inventory pricing. C. Ascertaining the physical quantities of inventory on hand. D. Verifying that all inventory owned by the entity is on hand at the time of the count.
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Verifying that all inventory owned by the entity is on hand at the time of the count
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An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure, and A. Valuation and allocation. B. Completeness. C. Existence. D. Rights and obligations.
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Valuation and allocation
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Which assertion for ending inventory is most likely violated if the gross profit percentage is much greater than last year? A. Existence. B. Completeness. C. Rights and obligations. D. Valuation and allocation.
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Completeness
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Which of the following is a question that the auditor would expect to find on the production process section of an internal control questionnaire? A. Are vendors' invoices for raw materials approved for payment by an employee who is independent of the cash disbursements function? B. Are signed checks for the purchase of raw materials mailed directly after signing without being returned to the person who authorized the invoice processing? C. Are all releases by storekeepers of raw materials from storage based on approved requisition documents? D. Are details of individual disbursements for raw materials balanced with the total to be posted to the appropriate general ledger account?
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Are all releases by storekeepers of raw materials from storage based on approved requisition documents?
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In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to A. Coordinate cutoff tests with physical inventory observation. B. Compare cutoff reports with purchase orders. C. Compare vendors' invoices with vendors' statements. D. Coordinate mailing of confirmations with cutoff tests.
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Coordinate cutoff tests with physical inventory observation
