Chapter 13 Review Questions

question

Why does inventory represent one of the more complex parts of the audit?
answer

question

How does the inventory management process relate to the revenue, purchasing, and payroll process?
answer

question

Production Schedule
answer

Is used to determine the quantity of goods needed and the time at which they are required to meet the production scheduling.
question

Materials Requisition
answer

Is the document that authorizes the release of raw materials from the raw materials department
question

Inventory Master File
answer

Contains all the important information related the entity’s inventory including the perpetual inventory records for raw material , work in process, and finished goods.
question

Production Data Information
answer

Is reported about the transfer of goods and related cost accumulation at each stage of production.
question

Cost Accumulation and Variance Report
answer

Summarizes the various cost charged to departments and products and presents the results of inventory processing in terms of actual costs versus standard or budgeted costs.
question

What duties are performed within the inventory management, stores, and cost-accounting functions?
answer

question

List the key segregation of duties in the inventory management process.
answer

question

What errors or fraud can occur if such segregation of duties is not present?
answer

question

List the inherent risk factors that affect the inventory management process.
answer

question

List the major steps in setting control risk in the inventory management process.
answer

1-understand and document the inventory internal control system based on the planned level of control risk
question

The three major steps in assessing control risk in the inventory process are:
answer

2-plan and perform test of controls on inventory process transactions.
question

The three major steps in assessing control risk in the inventory process are:
answer

3-assess and document control risk for the inventory process
question

What control activities can a client use to prevent unauthorized inventory production?
answer

-preparation and review of an authorized production schedule -use of material requirements planning and/or just in time inventory systems -review of inventory levels by the inventory management department.
question

List three substantive analytical procedures that can test the fairness of inventory and related accounts.
answer

question

Describe how an auditor audits standard costs.
answer

question

List the procedures the auditor should perform during the account of the client’s physical inventory.
answer

question

What are some possible causes of book-to-physical inventory differences?
answer

-inventory cutoff errors – unreported scrap or spoilage -pilferage or theft
question

List five items for inventory and related accounts that may require disclosure.
answer

question

The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that…
answer

Custody of work in process and finished goods is properly maintained.
question

Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions?
answer

Inventory manager doesn’t have ability to record inventory transactions.
question

Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory?
answer

Independent comparisons of finished goods records with counts of goods on hand.
question

Independent internal verification of inventory(i.e. proper segregation of duties) occurs when employees who
answer

Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.
question

An auditor’s tests of controls over the issuance of raw materials to production would most likely include
answer

Examination of materials requisitions and performance of client controls designed to process and record issuances.
question

Which of the following internal control activities is most likely to address the completeness assertion for inventory?
answer

Receiving reports are pre-numbered and periodically reconciled.
question

After accounting for a sequence of inventory tags, an auditor traces a samples of tags the physical inventory listing to obtain evidence that all items
answer

Represented by inventory tags are included in the listing.
question

When auditing merchandise inventory at year- end, the auditor performs a purchase cutoff test to obtain evidence that
answer

All goods owned at year-end are included in the inventory balance.
question

Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management’s assertion of
answer

Valuation
question

Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates?
answer

Perpetual inventory records are maintained.
question

An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file?
answer

Economic re-order quantity.
question

Which of the following audit procedures would probably provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventory?
answer

During the physical observation of inventory verify that “bill-and-hold” inventory is segregated and not included in the ending inventory account.
question

Audit Procedure: review loan agreements and minutes of board of director’s meeting.
answer

Specific assertion: ensure that entity has legal title to inventory(rights and obligations).
question

Audit procedure: select a sample if items during the physical inventory count and determine that they have been included on count sheets.
answer

Specific Assertion: ensure that recorded inventory quantities include all products on hand(completeness)
question

Audit procedure: examine current vendor price lists.
answer

Specific Assertion:verify that inventory has been reduced, when appropriate, to replacement cost or net realizable value(valuation)
question

Audit procedure:select a sample of recorded items and examine supporting vendor invoices and contracts.
answer

Specific Assertion: verify that the cost of inventory has been properly determined(accuracy).
question

Audit procedure:review drafts of the financial statements.
answer

Specific Assertion: verify that the major categories of inventory and their bases of valuation are adequately reported in the financial statements(completeness and accuracy and valuation for presentation and disclosure).

Get instant access to
all materials

Become a Member