Q&A Hero

Q: Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated? A. Repairs and maintenance expense. B. Depreciation expense. C. Gain on disposal of equipment. D. Accounts payable.

Q: Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to property, plant, and equipment are not understated? A. Depreciation expense. B. Accounts payable. C. Cash. D. Repairs and maintenance expense.

Q: The auditor is least likely to learn of retirement of equipment through which of the following? A. Reviewing the purchase return and allowance account. B. Reviewing depreciation. C. Analyzing debits to the accumulated depreciation account. D. Reviewing insurance policy riders.

Q: The auditor may conclude that depreciation charges are insufficient by noting A. insured values greatly in excess of book values. B. large amounts of fully depreciated assets. C. continuous trade-ins of relatively new assets. D. excessive recurring losses on assets retired.

Q: In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the A. adequacy of controls. B. extent of property abandoned, retired, or sold during the year. C. adequacy of replacement funds. D. reasonableness of the depreciation.

Q: The auditor is most likely to seek information from the plant manager with respect to the A. adequacy of the provision for uncollectible accounts. B. appropriateness of physical inventory observation procedures. C. existence of obsolete machinery. D. deferral or procurement of certain necessary insurance coverage.

Q: Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions? A. Are requests for major repairs approved at a higher level than the department initiating the request? B. Are prenumbered purchase orders used for equipment and periodically accounted for? C. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids? D. Are procedures in place to monitor and properly restrict access to equipment?

Q: Which of the following policies constitutes a control weakness related to the acquisition of factory equipment? A. Acquisitions are to be made through and approved by the department in need of the equipment. B. Advance executive approvals are required for equipment acquisitions. C. Variances between authorized equipment expenditures and actual costs are to be immediately reported to management. D. Depreciation policies are reviewed only once a year.

Q: An auditor typically sets inherent risk for intangible assets at this level A. low. B. moderate. C. zero. D. high.

Q: Assets no longer used in operations are accounted for in essentially the same manner as those used in operations.

Q: Generally, auditors rely on controls when auditing the property management function and therefore less substantive testing is used.

Q: If an entity has few capital asset purchases, it will generally not have a formal control system over such transactions.

Q: If a periodic physical inventory of property, plant, and equipment is taken, the individual responsible for the inventory should be independent of the custodial and record-keeping functions.

Q: The purchase of capital assets should be consistent with the authorization table used by the entity to approve such transactions. However, no such table is normally used for lease transactions.

Q: Inquiry of entity personnel and a review of lease transactions for the same period can provide evidence on proper cutoff for capital leases.

Q: Reviewing capital budgets and comparing the amounts spent with amounts budgeted is an example of a substantive analytical procedure for auditing prepaid accounts.

Q: Substantive analytical procedures should not be used in the audit of property, plant, and equipment.

Q: The property, plant, and equipment records function should be segregated from the custodial function.

Q: If the auditor has detected misstatements in prior audits, the assessment of inherent risk for the property management process will usually be set higher.

Q: Disposition of capital assets through sale, exchange, retirement, or abandonment are transactions that occur in the property management process.

Q: Substantive analytical procedures are commonly used to test prepaid accounts.

Q: Inherent risk for prepaid expenses would generally be assessed as low because these accounts do not usually include complex transactions.

Q: An example of a prepaid account is prepaid interest.

Q: Prepaid expenses provide economic benefit for longer than a year.

Q: A receiving report records the shipment of goods to customers.

Q: The "cradle-to-grave" cycle for inventory begins when goods are purchased and stored and ends when the finished goods are shipped to customers.

Q: Explain the importance of observing physical inventory during an audit.

Q: Below is information relating to the inventory management of Quick Sell. Using analytical procedures, identify any concerns you have about misstatements in the financial statements. Inventory $16,500 $26,250 $25,000 Inventory Turnover 12 9 18

Q: The audit of inventory is often the most involved aspect of an audit. Describe at least three inherent risk factors that affect the audit of inventory.

Q: The audit of the inventory management process is affected by the audit results from multiple other processes. Identify the processes, other than the inventory management process, that affect the audit of inventory and explain how each affect the audit of inventory. The inventory management process is affected by the control activities in the revenue, purchasing, and payroll processes. The revenue process accounts for the sale of finished goods. The purchasing process controls the acquisition and payment for inventory. The payroll process affects the costs of direct and indirect labor that is assigned to inventory. (See Figure 13-1 of the textbook for a diagram of the relationship between the processes.)

Q: The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with A. purchase requisitions. B. receiving reports. C. purchase orders. D. vendor payments.

Q: 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.

Q: 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?

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: Observing an entity's inventory held on consignment by others tests the assertion of A. existence. B. completeness. C. valuation. D. rights and obligations.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: Tracing costs used to price inventory to vendors' invoices test which of the following assertions? A. Occurrence. B. Cutoff. C. Accuracy. D. Classification.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: Which of the following best describes the occurrence assertion for inventory? A. Purchase requisitions initiated by authorized personnel. B. Recorded inventory transactions actually happened. C. Inventory properly accumulated from journals and ledgers. D. All inventory is recorded.

Q: Which of the following departments typically approves purchase requisitions? A. Raw materials stores. B. Cost accounting. C. Inventory management. D. IT.

Q: 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.

Q: Inherent risk is typically assessed at a low to moderate level for inventory due to the nature of the asset.

Q: Production personnel should ordinarily be responsible for maintaining perpetual inventory records.