Original Inventory

1) Receipt of ordered materials by the receiving department will generate the completion of a form
called the

A) bill of lading.

B) receiving report.

C) materials requisition.

D) inventory acquisition summary.

B) receiving report.

2) ________ is normally characterized as a difficult and complex account to audit.

A) Property, plant and equipment

B) Cash

C) Inventory

D) Prepaid insurance

C) Inventory

3) Inventory is a complex area to audit for all except which of the following reasons?

A) Inventory is often in different locations.

B) There are several acceptable valuation methods and some entities use different methods for different
types of inventory.

C) Inventory is often the largest account on the balance sheet.

D) Inventory valuation includes few estimates.

D) Inventory valuation includes few estimates.

4) In most manufacturing companies, the inventory and warehousing cycle begins with the

A) receipt of a customer's order.

B) completion of production of a customer's order.

C) initiation of production of a customer's order.

D) acquisition of raw materials for production.

D) acquisition of raw materials for production.

5) ________ accumulate costs by individual jobs as material is issued into production and labor costs are
incurred.

A) Just-in-time production systems

B) Job cost systems

C) Process cost systems

D) Manufacturing systems

B) Job cost systems

6) Master files, spreadsheets, and reports that accumulate material, labor, and overhead as the costs
are incurred are

A) accounting systems.

B) storeroom documents.

C) cost accounting records.

D) finished goods inventory records.

C) cost accounting records.

7) The main difference between job order and process costing systems is that

A) one accumulates costs by materials issued and the other by labor incurred.

B) one accumulates costs by individual jobs and the other by particular processes.

C) one emphasizes costs accumulated in completed products and the other emphasizes costs associated
with work-in-process.

D) one emphasizes costs adding value to the product and the other emphasizes costs incurred because
of waste, scrap, and obsolescence.

B) one accumulates costs by individual jobs and the other by particular processes.

8) The inventory and warehousing cycle can be thought of as having two separate but closely related
systems, one involving the actual physical flow of goods, and the other the

A) related costs.

B) storage of the goods.

C) internal control over those goods.

D) prevention of waste, obsolescence, and theft.

A) related costs.

9) Auditors test 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.

D) material requisitions.

10) Which of the following is a continuously updated computerized record of inventory items purchased,
used, sold, and on hand for merchandise, raw materials, and finished goods?

A) job cost system

B) standard cost records

C) cost accounting records

D) perpetual inventory master file

D) perpetual inventory master file

11) In the flow of inventory and costs, when work-in-progress is credited, ________ is (are) debited.

A) raw materials

B) cost of goods sold

C) finished goods

D) direct labor

C) finished goods

1) The audit tests to verify that the client is using an inventory method which is generally accepted and
to verify that physical counts were correctly summarized are performed during the audit of the

A) acquisition and payments cycle.

B) payroll and personnel cycle.

C) inventory and warehousing cycle.

D) sales and collection cycle.

C) inventory and warehousing cycle.

2) Handling the receipt of ordered goods is a part of the ________ cycle. A) purchasing

B) acquisition and payment

C) inventory

D) inventory and warehousing

B) acquisition and payment

3) Which of the following is not a function within the inventory and warehousing cycle?

A) process the goods

B) store raw materials

C) ship finished goods

D) process invoices for shipped goods

D) process invoices for shipped goods

4) Inventory is often a significant part of a company's current assets. Because of its importance,

A) auditors are required by auditing standards to observe the client taking a physical inventory count.

B) price tests must be performed to verify whether the physical counts were correctly summarized.

C) companies are required to use perpetual inventory systems.

D) auditors are required by auditing standards to take the physical inventory for the client.

A) auditors are required by auditing standards to observe the client taking a physical inventory count.
1) Auditor tests of the physical controls over raw materials, work in process, and finished goods are
generally limited to

A) observation and confirmation.

B) observation and inquiry.

C) inquiry and reconciliation.

D) observation and reconciliation.

B) observation and inquiry.

2) Almost all companies need physical controls over their assets to prevent loss. Which of the following
is not an example of such a control?

A) perpetual inventory master files

B) segregated, limited-access storage areas

C) custody of assets assigned to specific responsible individuals

D) approved prenumbered documents for authorizing movement of inventory

A) perpetual inventory master files

3) The reliability of perpetual inventory master files affects the timing and ________ of the auditor's
physical examination of inventory.

A) cutoff

B) accuracy

C) nature

D) extent

D) extent
4) When auditing inventory cost accounting, the auditor is concerned with all of the following except for

A) net realizable value.

B) unit cost records.

C) physical controls over inventory.

D) documents and records for transferring inventory.

A) net realizable value.

5) Auditors usually test cost accounting records as part of the

A) acquisition tests.

B) payroll tests.

C) sales tests.

D) All of the above are correct.

D) All of the above are correct.

6) To ensure proper segregation of duties, who should maintain the perpetual inventory master files?

A) production personnel

B) inventory storeroom personnel

C) inventory receiving personnel

D) accounting department personnel

D) accounting department personnel

7) Which of the following statements is correct regarding the audit of inventory cost accounting?

A) Cost accounting systems and controls are the same for all manufacturing companies.

B) All companies that have work-in-process must use a perpetual inventory system.

C) Auditors test perpetual inventory master files by examining documentation that supports additions
and reductions of inventory amounts in the master files.

D) Manufacturing companies keep their cost accounting records separate from the production and other
accounting records.

C) Auditors test perpetual inventory master files by examining documentation that supports additions
and reductions of inventory amounts in the master files.

8) Which of the following is an accurate statement regarding perpetual inventory master files?

A) When perpetual inventory master files are accurate, auditors can test the physical inventory after the
balance sheet date.

B) It is a difficult procedure for the auditor to test the accuracy of the perpetual inventory master files.

C) Auditors test the perpetual records for reductions in finished goods for sale as part of the sales and
collection cycle.

D) All of the above are accurate statements.

C) Auditors test the perpetual records for reductions in finished goods for sale as part of the sales and
collection cycle.

9) Which of the following is a significant audit concern related to the transfer of inventory from one
location to another?

A) Recorded transfers occurred.

B) Transfers were properly transported.

C) Transfers were properly planned.

D) Transfers represent efficient movement of assets.

A) Recorded transfers occurred.

10) When auditing manufacturing overhead costs assigned to inventory, auditors should keep in mind
that

A) GAAP has strict procedures that must be followed when assigning overhead to work-in- process
inventory.

B) overhead costs must be allocated to raw materials, work-in-process, and finished goods inventory.

C) management typically allocates overhead using total direct labor dollars as the basis for the
allocation.

D) determining the reasonableness of the allocation method is relatively simple for work-in- process
inventory.

C) management typically allocates overhead using total direct labor dollars as the basis for the
allocation.

11) A major difficulty in the verification of inventory cost records for the purpose of inventory valuation
is in determining the reasonableness of the

A) direct labor costs.

B) raw material costs.

C) manufacturing overhead costs.

D) period costs.

C) manufacturing overhead costs.

13) If the perpetual inventory master files 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.

C) purchases.

14) 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) the customer's order is received until the finished product is shipped.

C) raw materials are requisitioned until the finished product is sent to storage.

D) raw materials are requisitioned until the finished product is completely manufactured.

C) raw materials are requisitioned until the finished product is sent to storage.

15) In order to strengthen controls over cost accounting information, a company should consider
implementing

A) perpetual inventory master files.

B) a job order cost accounting system.

C) an accounting system that keeps separate the records of the accounting department from the records
of the production department.

D) an economic quantity order system.

A) perpetual inventory master files.

16) The auditor is concerned with four aspects of cost accounting, including
A) documents and records for transferring inventory.

B) perpetual inventory master files.

C) unit cost records.

D) all of the above.

D) all of the above.

17) One of the auditor's primary concerns in verifying the transfer of inventory from one location to
another is that

A) recorded transfers exist.

B) all actual transfers are recorded.

C) the quantity, date, and description of all recorded transfers are accurate.

D) all of the above.

D) all of the above.

18) The audit of cost accounting begins with the internal transfer of assets from raw materials to work-
in-process to

A) manufacturing overhead.

B) finished goods inventory.

C) the perpetual inventory master files.

D) retail sales.

B) finished goods inventory.

1) Which one of the following substantive analytical procedures would be most useful in alerting the
auditor to the possibility of obsolete inventory?
A) Compare gross margin percentage with that of previous years.

B) Compare unit costs of inventory with previous years.

C) Compare inventory turnover ratio with previous years.

D) Compare current year manufacturing costs with previous years.

C) Compare inventory turnover ratio with previous years.

2) Which one of the following substantive analytical procedures would be most useful in alerting the
auditor to the possibility inventory and cost of goods sold being overstated or understated? A) Compare
extended inventory value with that of previous years.

B) Compare unit costs of inventory with previous years.

C) Compare inventory turnover ratio with previous years.

D) Compare current year manufacturing costs with previous years.

C) Compare inventory turnover ratio with previous years.

1) You are auditing the inventory account and are concerned about the possibility of an inventory
overstatement. What is the best audit procedure to detect damaged inventory?

A) Observe the condition of inventory during the client's physical count.

B) Compare the condition of inventory from the previous year's count to the current year.

C) Compare inventory turnover from the previous year's inventory to the current year's inventory.

D) Reconcile the inventory counts to the cost accounting records.

A) Observe the condition of inventory during the client's physical count.

2) When determining the sample size for the number of items the auditor should count during the
physical inventory,
A) it is easy to quantify the number of items based on a formula developed by the AICPA.

B) one of the key determinants that must be considered is internal control over the physical count.

C) one of the key determinants that must be considered is the cost involved.

D) generally accepted auditing standards require that at least 80% of the dollar value of the inventory
should be included in the sample.

B) one of the key determinants that must be considered is internal control over the physical count.

3) There must be a periodic physical count by the client of the inventory items on hand

A) only if the client uses the LIFO method.

B) only if the client uses a lower-of-cost-or-market method.

C) regardless of the client's inventory valuation method.

D) only if the client uses either the LIFO or FIFO method.

C) regardless of the client's inventory valuation method.

4) If the auditor concludes that physical controls over inventory are so inadequate that the inventory will
be difficult to count, the auditor should ordinarily

A) withdraw from the engagement.

B) issue a qualified audit report.

C) conduct expanded observation tests of physical inventory.

D) hire a specialist to assist the auditor.

C) conduct expanded observation tests of physical inventory.

5) 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

A) observation of physical inventory counts

6) When auditors observe the client counting inventory, they should be careful to do all of the following
except

A) inquire about items that are likely to be obsolete or damaged.

B) calculate the unit cost of the inventory items.

C) discuss with management the reasons for excluding any material items.

D) observe the counting of the most significant items.

B) calculate the unit cost of the inventory items.

7) It is frequently possible to test the physical inventory prior to the balance sheet date when

A) the perpetual inventory records are accurate and related controls operate effectively.

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) the client counts inventory at interim dates.

A) the perpetual inventory records are accurate and related controls operate effectively.

8) Comparing the physical counts with the perpetual inventory master files satisfies the balance- related
audit objective of
A) classification.

B) observation.

C) completeness.

D) accuracy.

D) accuracy.

10) McKesson & Robbins Company is a well-known audit case involving auditor responsibility. What
occurred at the McKesson & Robbins Company to change the way in which auditors audit inventory?

A) The company recorded nonexistent inventory.

B) The auditor did not perform any audit tests of the inventory.

C) The auditor and company colluded to overstate inventory balances.

D) The company counted inventory three months prior to year-end.

A) The company recorded nonexistent inventory.

11) When a physical count of inventory is performed at an interim date, the auditor observes it at that
time and tests the perpetual records 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.

C) from the date of the count to year-end.

12) When there are no perpetual inventory files and inventory is material,
A) an audit cannot be performed, so the auditor must issue a disclaimer.

B) a physical inventory should be taken by the client near the end of the accounting period.

C) the auditor will have to perform the inventory count and determine valuation.

D) the auditor need not observe inventory counts but must do test counts.

B) a physical inventory should be taken by the client near the end of the accounting period.

13) The most important part of the observation of inventory is to determine whether

A) all counts are accurate.

B) the inventory-takers are qualified.

C) obsolete inventory has been identified.

D) the physical count is being taken in accordance with the client's instructions.

D) the physical count is being taken in accordance with the client's instructions.

14) A useful starting point for becoming familiar with the client's inventory is for the auditor to

A) read the AICPA's Industry Audit Guide.

B) review accounting theory covering special inventory problems.

C) read the client's accounting manual.

D) tour the client's facility.

D) tour the client's facility.

15) 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 item. The audit objective being
achieved by this procedure is
A) inventory as recorded on tags actually exists (existence).

B) existing inventory is counted and tagged (completeness).

C) inventory is counted accurately (accuracy).

D) inventory is classified correctly (classification).

A) inventory as recorded on tags actually exists (existence).

16) If a client intends to count inventory at an interim date, the auditor should expect there to be all of
the following except

A) controls over the preparation and maintenance of perpetual inventory records.

B) competent personnel assigned to count the inventory.

C) third-party inventory counting specialists.

D) an adequately designed plan to count the inventory.

C) third-party inventory counting specialists.

17) A common inventory observation procedure is to be alert for items that are damaged, rust- or dust-
covered, or located in inappropriate places. The balance-related audit objective being achieved by this
procedure is

A) classification.

B) cutoff.

C) realizable value.

D) rights.

C) realizable value.
18) The test of details of balance procedure which requires the auditor to account for unused inventory
tag numbers to make sure none have been deleted is associated with the audit objective of

A) accuracy.

B) existence.

C) detail tie-in.

D) completeness.

D) completeness.

19) Which of the following is an accurate statement regarding inventory and risk?

A) Inventory with a high business risk includes products with potential obsolescence.

B) Auditors often have a greater concern for misstatements when inventory is stored in one warehouse.

C) Inherent risk is generally set at low for manufacturing companies.

D) Performance materiality for inventory is determined before assessing client business risk.

A) Inventory with a high business risk includes products with potential obsolescence.

20) The auditor's tour of the client's inventory facilities should be led by

A) a member of the audit committee.

B) the CFO.

C) a plant supervisor.

D) the company president.

C) a plant supervisor.
22) When an auditor observes that personnel who are responsible for physically counting inventory are
not following the inventory instructions, the auditor should

A) contact a client's supervisor to correct the problem.

B) modify the client's physical inventory instructions.

C) not discuss the problem with client's s

Original

The audit tests to verify that the client is using an inventory method which is generally accepted and to
verify that physical counts were correctly summarized are performed during the audit of the:

A. acquisition and payments cycle.

B. payroll and personnel cycle.

C. inventory and warehousing cycle.

D. sales and collection cycle.

Handling the receipt of ordered goods is a part of the ________ cycle.

A. purchasing

B. acquisition and payment

C. inventory

D. inventory and warehousing

B
Which of the following is not a function within the inventory and warehousing cycle?

A. process the goods

B. store raw materials

C. ship finished goods

D. process invoices for shipped goods

The inventory and warehousing cycle can be thought of as having two separate but closely

related systems, one involving the actual physical flow of goods, and the other the:

A. related documentation.

B. storage of the goods.

C. internal control over those goods.

D. prevention of waste, obsolescence, and theft.

Auditors test 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.

D
The audit of the inventory and warehousing cycle will be affected by the results from other business
processes. Identify the "other" business cycles and how they impact the audit of inventory.

▪ Acquisition and Payment: Acquire and record raw materials, labor, overhead

▪ Sale and collection: Ship goods and record revenue and the appropriate costs

The audit of the inventory and warehousing cycle will be affected by the results from other business
processes. Identify the "other" business cycles and how they impact the audit of inventory.

(Acquisition and Payment)

Acquire and record raw materials, labor, overhead

The audit of the inventory and warehousing cycle will be affected by the results from other business
processes. Identify the "other" business cycles and how they impact the audit of inventory.

(Sales and Collection)

Ship goods and record revenue and the appropriate costs

What are the auditor's primary concerns in verifying the transfer of inventory from one location to
another?

1. recorded transfers exist

2. all transfers are recorded

3. the quantity, description, and date of all recorded transfer are accurate
The audit of the inventory and warehousing cycle consists of five parts. State

• Acquire and record raw materials, labor, and overhead. This is tested during the audits of the
acquisition and payment cycle, and the payroll and personnel cycle.

• Internally transfer assets and costs. This is tested in the inventory and warehousing cycle.

• Ship goods, and record revenue and costs. This is tested during the audit of the sales and collection
cycle.

• Physically observe inventory. This is tested in the inventory and warehousing cycle.

• Price and compile inventory. This is tested in the inventory and warehousing cycle.

The audit of the inventory and warehousing cycle consists of five parts. State the first part

Acquire and record raw materials, labor, and overhead. This is tested during the audits of

the acquisition and payment cycle, and the payroll and personnel cycle.

The audit of the inventory and warehousing cycle consists of five parts. State the second part

Internally transfer assets and costs. This is tested in the inventory and warehousing cycle.

The audit of the inventory and warehousing cycle consists of five parts. State the third part

Ship goods, and record revenue and costs. This is tested during the audit of the sales and collection
cycle.

The audit of the inventory and warehousing cycle consists of five parts. State the fourth part

Physically observe inventory. This is tested in the inventory and warehousing cycle.
The audit of the inventory and warehousing cycle consists of five parts. State the fifth part

Price and compile inventory. This is tested in the inventory and warehousing cycle.

Perpetual inventory records should be maintained by persons having access to inventory.

A. True

B. False

An approved purchase requisition form authorizes shipment of goods to customers.

A. True

B. False

The receipt of raw materials is a part of the acquisition and payment cycle.

A. True

B. False

Internal controls over the processing of purchase orders function, the receipt of raw materials function,
and the storage of raw materials function in the inventory and warehousing cycle are normally tested by
the auditor as a part of performing tests of controls and substantive tests of transactions in the
acquisition and payment cycle and the payroll and personnel cycle.

A. True

B. False

Auditor tests of the physical controls over raw materials, work in process, and finished goods

are generally limited to:

A. observation and confirmation.

B. observation and inquiry.

C. inquiry and reconciliation.

D. observation and reconciliation.

Almost all companies need physical controls over their assets to prevent loss. Which of the following is
not an example of such a control?

A. perpetual inventory master files

B. segregated, limited-access storage areas

C. custody of assets assigned to specific responsible individuals

D. approved prenumbered documents for authorizing movement of inventory

A
Which department within a manufacturing company is often responsible for the review of

production and scrap reports?

A. Purchasing

B. Accounts Payable

C. Accounting

D. Production

Johnson Co.'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.

Which of the following controls would be appropriate regarding the release of materials from

a stockroom?

A. Production employees request materials be delivered to their work areas as they need them.
B. Stockroom employees deliver materials to work areas throughout the day to maintain acceptable
levels of safety stock — no written records are maintained.

C. Production employees submit approved requisition forms to the stockroom for materials needed.

D. Production employer in need of materials should personally pick up needed materials from the
stockroom.

To assure proper segregation of duties, who should maintain the perpetual inventory master files?

A. production personnel

B. inventory storeroom personnel

C. inventory receiving personnel

D. accounting department personnel

In any company involved in manufacturing, an adequate cost accounting internal control system is
necessary to indicate the relative profitability of the various products for management planning and
control and to:

A. determine variances from standards.

B. determine variances from budgets.

C. value inventories for financial statement purposes.

D. value inventories for audit verification.

A well-designed computerized system of perpetual inventory master 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 of raw materials, work-in-process, and finished goods.

D. units and unit costs of inventory purchased, sold, and on hand.

Which of the following is a significant audit concern related to the transfer of inventory from one
location to another?

A. recorded transfers occurred

B. transfers were properly transported

C. transfers were properly planned

D. transfers represent efficient movement of assets

The auditor's tests of the adequacy of the physical controls over raw materials, work-in-

process, and finished goods are usually restricted to:

A. observation and inquiry.

B. documentation and observation.

C. documentation and confirmation.

D. documentation and inquiry.

A
A major difficulty in the verification of inventory cost records for the purpose of inventory

valuation is in determining the reasonableness of:

A. direct labor's hourly rate.

B. raw materials per unit cost.

C. cost allocations.

D. number of direct labor hours applied.

If the perpetual inventory master files 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.

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. the customer's order is received until the finished product is shipped.

C. raw materials are requisitioned until the finished product is sent to storage.
D. raw materials are requisitioned until the finished product is completely manufactured.

Hardy Company mass-produces eight different products. The controller who is interested in

strengthening internal controls over the accounting for materials used in production would be most
likely to implement a(n):

A. perpetual inventory system.

B. job order cost accounting system.

C. economic order quantity system.

D. separation of duties among production personnel.

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. The cycle basis is used for physical counts.

B. Supplies of relatively little value are expensed when purchased.

C. Perpetual inventory records are maintained only for items of significant value.

D. The storekeeper is responsible for maintenance of perpetual inventory records.

If the perpetual inventory master files show lower quantities of inventory than the physical

count, one explanation of the difference might be unrecorded sales.

A. True

B. False

When verifying the transfer of inventory from one location to another, the audit objectives with

which the auditor is primarily concerned are occurrence of recorded transfers, completeness of
recorded transfers, and accuracy of recorded transfers.

A. True

B. False

Production personnel should ordinarily be responsible for maintaining perpetual inventory

records.

A. True

B. False

The extent and timing of an auditor's physical examination of inventory is significantly

influenced by the adequacy of the client's perpetual inventory records.

A. True

B. False

A
You are auditing the inventory account and are concerned about the possibility of an inventory
overstatement. What is the best audit procedure to detect damaged inventory?

A. observe the condition of inventory during the client's physical count

B. compare the condition of inventory from the previous year's count to the current year

C. compare inventory turnover from the previous year's inventory to the current year's

inventory

D. reconcile the inventory counts to the cost accounting records

The audit procedure "observe the client taking a physical inventory count and test the count"

is sufficient to determine all of the following except:

A. whether recorded inventory actually exists.

B. whether recorded inventory was properly valued by the client.

C. whether recorded inventory was properly counted by the client.

D. whether client inventory instruction had properly been followed.

There must be a periodic physical count by the client of the inventory items on hand:

A. only if the client uses the LIFO method.

B. only if the client uses a lower-of-cost-or-market method.

C. regardless of the client's inventory valuation method.

D. only if the client uses either the LIFO or FIFO method.

C
If the auditor concludes that physical controls over inventory are so inadequate that the

inventory will be difficult to count, the auditor should ordinarily:

A. withdraw from the engagement.

B. issue a qualified audit report.

C. conduct expanded observation tests of physical inventory.

D. hire a specialist to assist the auditor.

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

Which of the following is the best audit procedure for the discovery of damaged merchandise

in a client's ending inventory?

A. Compare the physical quantities of slow-moving items with corresponding quantities of

the prior year.

B. Observe merchandise and raw materials during the client'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.

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. the client counts inventory at interim dates.

Tests of the perpetual inventory master files for the purpose of reducing the tests of physical

inventory or changing their timing are done through the use of:

A. inquiry.

B. observation.

C. confirmation.

D. documentation.

Which one of the following analytical procedures would be most useful in alerting the auditor

to the possibility of obsolete inventory?

A. Compare gross margin percentage with previous years'.

B. Compare unit costs of inventory with previous years'.

C. Compare inventory turnover ratio with previous years'.

D. Compare current year manufacturing costs with previous years'.

McKesson & Robbins Company is a well-known audit case involving auditor responsibility.

What occurred at the McKesson & Robbins Company to change the way in which auditors audit

inventory?

A. The company recorded nonexistent inventory.

B. The auditor did not perform any audit tests of the inventory.

C. The auditor and company colluded to overstate inventory balances.

D. The company counted inventory three months prior to year-end.

When a physical count of inventory is performed at an interim date, the auditor observes it at that time
and tests the perpetual records 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.

C
When there are no perpetual inventory files and inventory is material:

A. an audit cannot be performed, so the auditor must issue a disclaimer.

B. a physical inventory should be taken by the client near year-end.

C. the auditor will have to perform the inventory count and determine valuation.

D. the auditor need not observe inventory counts but must do test counts.

The most important part of the observation of inventory is to determine whether:

A. all counts are accurate.

B. the inventory-takers are qualified.

C. obsolete inventory has been identified.

D. the physical count is being taken in accordance with the client's instructions.

A useful starting point for becoming familiar with the client's inventory is for the auditor to:

A. read the PICPA's Industry Audit Guide.

B. review accounting theory covering special problems, such as gas and oil accounting, or

lease-purchase agreements.

C. read the client's Accounting Manual.

D. tour the client's facility.

D
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 item. The audit objective being

achieved by this procedure is:

A. inventory as recorded on tags actually exists (existence).

B. existing inventory is counted and tagged (completeness).

C. inventory is counted accurately (accuracy).

D. inventory is classified correctly (classification).

If a client intends to count inventory at an interim date, the auditor should expect there to be

all of the following except:

A. controls over the preparation and maintenance of perpetual inventory records.

B. competent personnel assigned to count the inventory.

C. third-party inventory counting specialists.

D. an adequately designed plan to count the inventory.

A common inventory observation procedure is to be alert for items that are damaged, rust- or

dust-covered, or located in inappropriate places. The balance-related audit objective being achieved by
this procedure is:

A. classification.

B. cutoff.

C. realizable value.
D. rights.

The test of details of balance procedure which requires the auditor to account for unused

inventory tag numbers to make sure none have been deleted is associated with the audit objective of:

A. accuracy.

B. existence.

C. detail tie-in.

D. completeness.

Most of the audit testing of the storage of finished goods as well as the shipment of

merchandise takes place during the testing of the:

A. sales and collection cycle.

B. payroll and personnel cycle.

C. acquisitions and payments cycle.

D. inventory and warehousing cycle.

Which of the following situations would most likely require special audit planning?

A. Inventory consists of precious stones.

B. Some items of factory and office equipment do not bear identification numbers.
C. Depreciation methods used on the client's tax return differ from those used on the books.

D. Assets costing less than P500 are expensed even though their expected life exceeds one

year.

For several years, a client'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 control that led to

the failure to adjust the accounting records for some:

A. purchases returned to vendors.

B. sales returns received.

C. sales discounts allowed.

D. cash purchases.

When an auditor observes that personnel who are responsible for physically counting inventory

are not following the inventory instructions, the auditor should:

A. contact a client's supervisor in an attempt to correct the problem.

B. modify the client's physical inventory instructions.

C. not discuss the problem with client's supervisor in order to maintain independence.

D. assign audit staff to the inventory count.

C
The auditor's objective during an observation of a client's physical inventory count is to:

A. discover whether a client has counted a particular inventory item or group of items.

B. obtain direct knowledge that the inventory exists and has been properly counted.

C. provide an appraisal of the quality of the merchandise on hand on the day of the physical

count.

D. allow the auditor to supervise the conduct of the count so as to obtain assurance that inventory
quantities are reasonably accurate.

The audit of year-end physical inventories should include steps to verify that the client'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 current period.

B. sale in the subsequent period.

C. purchase in the current period.

D. purchase return in the subsequent period.

Which one of the following procedures would not be appropriate for an auditor in discharging his
responsibilities concerning the client's physical inventories?

A. confirmation of goods in the hands of public warehouses

B. supervising the taking of the annual physical inventory

C. carrying out physical inventory procedures at an interim date

D. obtaining written representation from the client as to the existence, quality, and dollar amount