Q&A Hero

Q: The test of details of balance procedure which requires the auditor to account for unused inventory tag numbers to make sure none have been omitted is an attempt to satisfy the objective of A) allocation. B) existence. C) completeness. D) accuracy.

Q: The test of details of balance procedure which requires the auditor to review contracts with suppliers and customers and inquire of management for the possibility of the inclusion of consigned or other non-owned inventory is an attempt to satisfy the objective of A) existence. B) completeness. C) realizable value. D) rights and obligations.

Q: From which of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories? A) observation of physical inventory counts B) written inventory representations from management C) confirmation of inventories in a public warehouse D) auditor's recomputation of inventory extensions

Q: A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory. The audit objective being achieved by this procedure is A) inventory as recorded on tags exists (existence). B) existing inventory is counted and tagged (completeness). C) inventory is counted accurately (accuracy). D) inventory is classified correctly (classification).

Q: XYZ Company uses standard costs for allocating costs to work-in-process and finished goods inventory. For the last few months, there have been high variances between total standard costs and actual costs. What is one of the likely reasons for this variance? A) the accounting department has been developing the costs B) production quantities are different than expected C) there is an increase in inventory quantities on hand D) receiving department has been stockpiling raw materials

Q: XYZ Company uses standard costs for allocating costs to work-in-process and finished goods inventory. What internal control is required with respect to these costs to ensure proper valuation of inventory? A) procedures must be designed to keep the standards updated for changes in production processes and costs B) computer software should be used to make sure that the standard costs are properly updated into the inventory item master file C) input edit routines should be used to help detect input data entry errors for the entry of the standard costs D) standard costs should be used to provide a value for inventory every month by calculating cost times quantity on hand

Q: A useful starting point for becoming familiar with the client's inventory is for the auditor to A) obtain and review industry ratios. B) review accounting theory covering special problems, such as gas and oil accounting, or lease-purchase agreements. C) read client's Accounting Manual. D) tour the client's facility.

Q: A public accountant observes his client's physical inventory count on December 31. There are eight inventory-taking teams, and a tag system is used. The public accountant's observation normally may be expected to result in detection of which of the following inventory errors? A) The inventory takers forgot to count all the items in one room of the warehouse. B) An error is made in the count of one inventory item. C) Some of the items included in the inventory had been received on consignment. D) The inventory omits items on consignment to wholesalers.

Q: The most important part of the observation of inventory is determining whether A) the inventory-takers are qualified. B) the physical count is being taken in accordance with the client's instructions. C) the counts are accurate. D) obsolete inventory has been identified.

Q: Sample size in physical observation of inventory is A) determined using attributes sampling. B) determined using variables sampling. C) determined using dollar-unit sampling. D) difficult to specify because the emphasis is on observing client's procedures.

Q: The client has a perpetual inventory system, and takes an inventory count of 100 items every two weeks, for comparison to the perpetual records. There are no plans to have a complete year end physical count of inventory. How will the auditor conduct the audit of physical inventory? A) select an attribute sample of items to count at the year end for comparison to the perpetual records B) select a dollar unit sample of items to count at the year end for comparison to the perpetual records C) use roll-forwards to carry forward the inventory records from the cyclical counts for an attribute sample of inventory items D) conduct test counts and compare the perpetual records with a cyclical count during the intern audit

Q: When a physical count of inventory is permitted at an interim date, the auditor observes it at that time, and also tests the perpetual inventory for transactions A) throughout the year. B) which are a representative sample of the period under audit. C) from the date of the count to year-end. D) from the date of the count to the end of the audit field work.

Q: The auditor has determined that the inventory procedures are highly automated, with limited use of a paper or physical trail. Rather than having people count inventory (since all inventory has RFID tags attached), inventory is being read using the wireless mesh network. To provide assurance with respect to ending inventory, the auditor should A) bring in additional audit staff, and conduct a high level of test counts, matching these counts to the automated systems. B) use dollar unit sampling to identify all high dollar inventory items, and ask the client to physically count these items using count teams. C) test the quality of the controls over the programs in use, and over tagging inventory items. D) request that the client implement manual rotating counts to test the quality of the automated systems.

Q: The auditor has evaluated the effectiveness of the client's procedures to count inventory, and has provided constructive suggestions for improvement. However, the client has not implemented the suggestions, so the auditor has concluded that the inventory instructions do not provide adequate controls. This means that the auditor A) must send a management letter informing management of the impact of these weaknesses. B) must spend more time ensuring that the physical count is accurate. C) should use attribute sampling to select a smaller sampling for testing the physical inventory. D) increase the level of price and compilation tests to ensure better quality inventory pricing data.

Q: Dishware Distribution Limited uses average costing to cost its inventory. It keeps a perpetual inventory file that is linked to its sales systems. It orders inventory in for specific customers as needed, and traditionally has a slow time just before its year end. Accordingly, inventory at the yearend is about $2,000, while materiality is about $30,000. How should the auditor approach the audit of physical inventory? A) exclude testing of physical inventory from the audit program B) use attribute sampling to select a sample of items to count C) use dollar unit sampling to select a sample of items to count D) count only those items that have a dollar value in excess of $100

Q: If the auditor is appointed after the year end of the client, the auditor A) should qualify the audit opinion for the inventory balance and cost of sales. B) could attend a current perpetual inventory count and roll backward with the records. C) should do an inventory count as soon as he is appointed. D) will inquire with management of the company about the inventory count performed at year end.

Q: What are inventory price tests and inventory compilation tests? Provide an example of each.

Q: Discuss the methodology for designing tests of details of balances for inventory.

Q: The audit of the inventory and distribution cycle consists of five parts. State the five parts and, for each part, identify the cycle in which that part is tested by the auditor.

Q: The CAS require that audit procedures for inventory include that the auditor A) must count the inventory. B) must be present at the count and must receive adequate documentation from client regarding the effectiveness of inventory-taking. C) must be present at the count and evaluate the methods followed in the determination of quantities and values. D) need not be present at the count but must review the methods followed in the determination of quantities and values.

Q: Which analytical procedures will help the auditor identify possible misstatements in compilation, unit costs, or extensions that affect inventory and cost of goods sold? Compare A) compare gross margin percentage with previous years'. B) unit costs of inventory with previous years'. C) inventory turnover with previous years'. D) extended inventory value with previous years'.

Q: To detect an overstatement or understatement of inventory and cost of goods sold, the auditor may perform an analytical procedure such as comparing A) gross margin percentage with previous years. B) inventory turnover with previous years. C) current year manufacturing costs with previous years. D) extended inventory value with previous years.

Q: Which one of the following analytical procedures would be most helpful in alerting the auditor to the possibility of obsolete inventory? Comparing A) gross margin percentage with previous years. B) unit costs of inventory with previous years. C) inventory turnover with previous years. D) current year manufacturing costs with previous years.

Q: The auditor has determined that the perpetual inventory master files are high quality, assessing control risk related to physical observation of inventory as low. How does this affect audit testing? The auditor may A) reduce the extent of control tests over data entry to the master file. B) reduce the extent of the tests of physical inventory. C) reduce the extent of control tests with respect to program change controls. D) increase assessed inherent risks over the tests of physical inventory.

Q: It is frequently possible to test the physical inventory prior to the balance sheet date when A) there are accurate perpetual inventory master files. B) year-end sales are small. C) the internal control system is no better at year-end than at an earlier point in time. D) client counts inventory at interim dates.

Q: The auditor would like to test the existence and accuracy of the transfer of goods from the raw materials storeroom to the manufacturing assembly lines. Which of the following audit procedures should be used? A) conduct a variance analysis of the costs associated with manufacturing, looking for gross profit fluctuations B) account for a sequence of raw material requisitions, examining details and looking for proper approvals C) look at overtime records to determine the amount and timing of overtime hours used in the manufacturing process D) inquire of the inventory custodian with respect to procedures used to transfer raw materials to the production line

Q: If the auditor concludes that the physical controls over inventory are so inadequate that inventory will be difficult to count, the auditor should A) inquire of management the additional controls that can be put in place to enable a better count to be carried out. B) conduct additional control tests over the pricing and compilation of inventory to obtain a higher degree of accuracy. C) rely upon the perpetual inventory master files rather than the physical count. D) expand the observation of physical inventory tests to ensure that an adequate count is carried out.

Q: The existence of an adequate storeroom with a competent custodian in charge results in the orderly storage of inventory. It can protect inventory from theft and misuse. How would the auditor assess these controls? Using A) observation during the audit and inquiry of the accounting staff. B) inquiry of the accounting staff and inspection of theft statistics. C) observation during the inventory count and inquiry of inventory personnel. D) inspection of inventory damage statistics and inquiry of inventory personnel.

Q: The auditor's tests of the adequacy of the physical controls over raw materials, work-in-process, and finished goods are usually limited to A) observation and inquiry. B) inspection and observation. C) inspection and confirmation. D) inspection and inquiry.

Q: A well-designed computerized system of perpetual inventory data files includes information about the A) units of inventory purchased, sold, and on hand. B) unit costs of inventory purchased, sold, and on hand. C) units and unit costs of inventory purchased, sold, and on hand. D) units of raw materials, work-in-process, and finished goods.

Q: To protect the inventory, Globus Corp wants to assign the custody of inventory to a specific responsible individual. Globus can accomplish this by requesting A) a designated employee to authorize movement of inventory. B) employees to have photo id cards. C) have restricted access to the production facility. D) have frequent inventory counts.

Q: Cost accounting controls are those related to the physical inventory and the consequent costs from the point at which A) materials are ordered for purchase until the finished product is sold. B) raw materials are requisitioned until the finished product is sent to storage. C) raw materials are requisitioned until the finished product is completely manufactured. D) the customer's order is received until the finished product is shipped.

Q: The auditor must verify whether the physical counts were correctly summarized, the inventory quantities and prices were correctly extended, and the extended inventory was correctly footed. These tests are called A) price tests. B) compilation tests. C) cost tests. D) mechanical tests.

Q: Shipping of finished goods is an integral part of the A) acquisitions and payments cycle. B) inventory and distribution cycle. C) sales and collections cycle. D) human resources and payroll cycle.

Q: Segregation of duties between production, inventory control, and accounting are important controls in the inventory and distribution cycle. How would the auditor test these controls? Using A) inquiry and reperformance. B) observation and inquiry. C) observation and reperformance. D) discussion with managment.

Q: Master files, worksheets, and reports that accumulate material, labour, and overhead as the costs are incurred are A) accounting system controls. B) storeroom documents. C) finished goods inventory records. D) cost accounting records.

Q: When labour is a significant part of inventory, verifying the proper accounting of these costs should be tested in the A) inventory and distribution cycle. B) human resources and payroll cycle. C) acquisitions and payments cycle. D) cash cycle.

Q: The controls over purchase requisitions and the related purchase orders are evaluated and tested as part of the A) inventory and distribution cycle. B) acquisitions and payments cycle. C) human resources and payroll cycle. D) capital acquisitions cycle.

Q: The overall objective in the audit of the inventory and distribution cycle is to determine that A) costs of goods sold and gross profit are correctly stated on the income statement. B) inventory items on the balance sheet are neither fraudulent nor materially in error. C) gross profit and inventory are fairly presented on the financial statements. D) inventory and cost of goods sold are fairly stated on the financial statements.

Q: Receipt of ordered materials by the receiving department will generate the completion of a form called the A) receiving report. B) materials requisition. C) bill of lading. D) inventory acquisition summary.

Q: Describe the major risks of error or fraud in the inventory and distribution cycle, using the headings of (i) risks of error, (ii) risks of misappropriation of assets, other fraud or illegal acts, and (iii) risks of inadequate disclosure or incorrect presentation of financial information, including fraudulent financial reporting.

Q: State the six functions that make up the inventory and distribution cycle and, for each function, identify the related documents and/or records that would be used by a manufacturing company.

Q: The costs used to value the physical inventory must be tested to determine whether the client has correctly followed an inventory method that is in accordance with an acceptable financial reporting framework and is consistent with previous years. The audit procedures used to verify these costs are referred to as inventory A) price tests. B) compilation tests. C) cost allocation tests. D) consistency tests.

Q: The auditor evaluates the internal transfer of assets and related costs during the A) acquisition and payments cycle. B) human resources and payroll cycle. C) sales and collection cycle. D) inventory and distribution cycle.

Q: The auditor has determined that the risks are high that the client would overvalue inventory. Which audit assertions would require additional testing? A) accuracy and existence B) allocation and accuracy C) accuracy and valuation D) valuation and classification

Q: The bias in recording inventory would be toward A) overstatement. B) understatement. C) increasing share price. D) income smoothing.

Q: The inventory and distribution cycle can be thought of as comprising two separate but closely related systems, one involving the actual physical flow of goods, and the other the A) internal control over those goods. B) related costs. C) storing of the goods. D) prevention of waste, obsolescence, and theft.

Q: The form used to request the purchasing department to place orders for inventory items is the A) purchase order. B) purchase requisition. C) materials requisition. D) bill of lading.

Q: Obtaining an adequate understanding of the client's business is important in physical observation of inventory because A) it is required by GAAP. B) it will help the auditor in assessing the risk of theft of inventory. C) inventory is normally a significant item. D) inventory varies significantly for different companies.

Q: Auditing, 12e (Arens) 17.1 Describe the business functions, documents, and records of the inventory and distribution cycle

Q: An auditor learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and once based upon the monthly statement. A control procedure that should have prevented this duplicate payment is A) attachment of the receiving report to the invoice only. B) prenumbering of disbursement vouchers. C) use of a limit or reasonableness test. D) prenumbering of receiving reports.

Q: Because many of the types of errors and irregularities that may be found in the acquisition and payment cycle represent a misstatement of earnings and are of significant concern to the auditor, the tolerable exception rate selected by the auditor for attribute testing of this cycle will be A) low. B) high. C) average. D) 15% or less.

Q: Because of the importance of tests of controls for acquisitions and cash disbursements, it is common in this audit area to use A) attributes sampling. B) variables sampling. C) probability-proportional-to-size sampling. D) block sampling.

Q: Internal controls which are likely to prevent the client from including as a business expense those transactions that primarily benefit management or other employees rather than the entity being audited satisfy the control objective that A) recorded acquisitions are for goods and services received. B) existing acquisitions are recorded. C) acquisitions are correctly valued. D) acquisitions are correctly classified.

Q: Which of the following areas are tested as part of the audit of the acquisition and payment cycle? A) payment for raw materials, receipt of raw materials, shipment of goods to customers B) processing of sales orders, production of goods for clients, and subsequent invoicing C) processing supplier invoices, vendor master file changes, shipment of goods to customers D) processing purchase orders, vendor master file changes, receiving goods and services

Q: Since the audit of accounts payable generally takes a considerable amount of audit time, effective internal controls, properly tested, can significantly reduce audit costs by reducing A) tests of controls. B) confirmations. C) tests of details of balances. D) analytical procedures.

Q: When accounts payable and purchasing systems are highly automated, more detail is included in the transaction files. This deeper level of detail is illustrated by including A) economic order quantities for each item that is held in inventory, including delivery times. B) quantities, prices and item descriptions from each line of the supplier invoice. C) sequentially numbered purchase requisitions and purchase orders (with matching numbers). D) having receiving report numbers match the numbers on the supplier invoices for improved tracking.

Q: A) Describe each of the five business functions that comprise the acquisition and payment cycle. B) Describe the key documents used in processing purchase orders for the acquisitions and payment cycle. C) Discuss the key documents and records used in the recognizing the liability function in the acquisitions and payment cycle.

Q: When processing and recording cash disbursements, it is important to have a method of cancelling the supporting documents to prevent their reuse as support for another cheque at a later time. A common method is to A) shred the documents so they can't be reused. B) transfer possession of the documents to a bank vault such as a safety deposit box. C) move the documents to a permanent off-site facility such as a warehouse. D) write the cheque number and payment date on the supporting documents.

Q: After the supplier master file data has been entered, to best improve internal controls the A) supplier master file data should be matched to the accounts payable files. B) transaction file detail should be matched to the supplier master file. C) data entry should be independently verified. D) accounting department should file the new supplier authorization form sequentially.

Q: Before a new supplier is added into the supplier master file (or the purchasing master file), the company should A) conduct a credit check on the new supplier. B) have the supplier detail matched against the invoice detail. C) ask the purchasing manager to verify the authenticity of the supplier. D) have the accounting department enter the necessary detail about the supplier.

Q: An important control in the accounts payable and information systems departments is to require that those personnel who record acquisitions do not have access to A) lists of vendors' names and addresses. B) cash, marketable securities, and other assets. C) vendors' price lists. D) the accounts payable master file.

Q: The proper recognition of accounts payable liabilities are crucial to ensure fair statement of the ending accounts payable balance. What documents are required to adequately support accounts payable? A) receiving reports and bill of lading documents that indicate dates shipped B) bill of lading documents matched to the internal purchase requisition C) purchase requisition (authorized) matched with the purchase order to the supplier D) supplier invoices matched to receiving reports and authorized purchase documents

Q: Many companies have inventory that is easy to steal and is readily marketable. Which of the following controls help to prevent theft and misuse of inventory? A) physical control of inventory from time of receipt until use B) proper access controls over the inventory master and transaction files C) dual signatures required on all purchase orders over $10,000 D) purchase requisitions are to be approved by the production manager

Q: The point at which most companies first recognize the acquisition and related liability on their records is when the A) purchase requisition is completed. B) purchase order is completed. C) receiving report is completed. D) vendor's invoice is paid.

Q: Segregation of duties has an important role in providing for good quality internal controls. Which of the following segregation of duties improve controls over the inventory and distribution cycle? A) purchasing department should not be responsible for updating the economic order quantity B) the accounting staff should not be responsible for the data entry of supplier invoice detail C) the inventory transaction processing systems should not be accessible to the receiving department D) purchasing department should not be responsible for authorizing the acquisition or receiving the goods

Q: The purchase order, usually in writing, is a legal document that is A) a non-binding agreement between client and vendor. B) an offer to buy. C) not enforceable if it is not in writing. D) an acceptance of a vendor's catalogue offer to sell.

Q: A document identifying the description, supplier, quantity, and related information for goods and services the company intends to purchase is the A) purchases catalogue. B) purchase requisition. C) receiving report. D) purchase order.

Q: When automatic purchase orders are generated, to help make sure that goods are ordered for products that the company still needs, the company should A) have all purchase orders approved by the purchasing manager. B) have suppliers automatically replenish the shelves. C) ensure that re-order points are monitored. D) have receiving reports matched to the purchase order amounts.

Q: To ensure that goods and services acquired are for authorized company purposes, and help acquire only needed items A) receiving reports should be independently signed and reconciled to the purchase order. B) proper authorization for acquisitions and changes to the master file should take place. C) purchase requisitions should be approved and matched to purchase orders. D) account allocations of vendor invoices should be carefully checked.

Q: To protect against theft of physical assets (such as computer equipment), the company should A) assign the computers to specific individuals at the company. B) assign the computers to specific areas within the company. C) use strong access controls (such as login passwords) to prevent access. D) have them engraved or otherwise permanently labeled and a subsidiary ledger maintained.

Q: One form of accounts payable fraud occurs when the accounts payable clerk or another employee steals a cheque made payable to a legitimate vendor. The purchases information is then resubmitted for payment and the second cheque sent to the vendor. How could such a theft be prevented? A) cancel supporting documents to prevent their being re-used B) make sure that all payments are supported by valid documents C) reconcile the transaction files to the accounts payable master file D) have receiving reports authorized independently

Q: One of the ways to prevent the use of fictitious suppliers to steal company funds is by A) having adequate network access controls to prevent unauthorized access to transaction files. B) ensuring that accounts payable programs are available only in source code. C) having software automatically check for duplicate invoice numbers before payment. D) having authorized personnel carefully scrutinize documentation supporting payments.

Q: One of the ways to prevent the use of fictitious suppliers to steal company funds is to A) have adequate network access controls to prevent unauthorized access to transaction files. B) ensure that accounts payable programs are available only in source code. C) establish controls to establish only approved vendors. D) reconcile the accounts payable trial balance to the general ledger.

Q: The most common fraud in the acquisitions area is for the perpetrator to A) alter the cheque payment file before it is printed so that the payee name is changed. B) issue payments to fictitious vendors and deposit the cheques to a fictitious account. C) change the optical characters at the bottom of a cheque to alter the account to be credited. D) issue duplicate payments for invoices and then pocket the second cheque.

Q: The major balance sheet account in the acquisition and payment cycle is A) accounts payable. B) purchases. C) merchandise inventory. D) common stock.

Q: 16.1 Describe the major business functions, documents, and records in the acquisition and payment cycle

Q: Describe the two objectives that are most important in auditing accumulated amortization. Explain why these objectives are important.

Q: Discuss the audit tests the auditor would use to audit capital assets acquired in prior years.

Q: Discuss the key internal controls related to the disposal of manufacturing equipment.