AT.16 Audit of Inventory and Payroll Cycle Drill

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

Choices:

• Accuracy, valuation, and allocation.

• Rights and obligations.

• Existence.

• Presentation.

Correct answer: Accuracy, valuation, and allocation.

A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high, an auditor would probably

Choices:

• Insist that the client perform physical counts of inventory items several times during the year.

• Apply gross profit tests to ascertain the reasonableness of the physical counts.

• Increase the extent of tests of controls of the inventory cycle.

• Request the client to schedule the physical inventory count at the end of the year.

Correct answer: Request the client to schedule the physical inventory count at the end of the year

As part of the process of observing a client's physical inventories, an auditor should be alert to

Choices:

• The inclusion of any obsolete or damaged goods.

• Any change in the method of pricing from prior years.

• The existence of outstanding purchase commitments.

• The verification of inventory values assigned to goods in process.

Correct answer: The inclusion of any obsolete or damaged goods.

Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified?

Choices:

• Testing shipping and receiving cutoff procedures.

• Confirming inventories at locations outside the entity's premises.

• Examining an analysis of inventory turnover.

• Tracing inventory observation test counts to perpetual listings

 

Correct answer: Examining an analysis of inventory turnover.

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to

Choices:

• Observe physical counts of the inventory items.

• Trace the total on the inventory listing to the general ledger inventory account.

• Obtain a confirmation from the client indicating inventory ownership.

• Analytically compare the current year inventory balance to the prior year balance

Correct answer: Observe physical counts of the inventory items

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

Choices:

• Periodic reconciliation of work in process with job cost sheets.

• Segregation of functions between general accounting and cost accounting.

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

• Approval of inventory journal entries by the storekeeper

 

Correct answer: Independent comparisons of finished goods records with counts of goods on hand

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?

Choices:

• The entity has rights to the inventory.

• Inventory is properly valued.

• Inventory is valid and exists.

• Inventory is complete.

 

Correct answer: Inventory is complete.

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the

Choices:

• Terms of the open purchase orders.

• Purchase cutoff procedures.

• Contractual commitments made by the purchasing department.

• Purchase invoices received on or around year-end

Correct answer: Purchase cutoff procedures.

Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories?

Choices:

• Confirmation of inventories at location outside the client's facilities.

• Analytical procedures comparing inventory balances to purchasing and sales activities.

• Observation of physical inventory counts.

• Examination of paid vendors' invoices

Correct answer: Analytical procedures comparing inventory balances to purchasing and sales activities

In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the purchase

Choices:

• Journal.

• Requisitions.

• Orders.

• Invoices.

Correct answer: Invoices

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 conditions in internal control that led to the failure to record some

Choices:

• Purchases returned to vendors.

• Sales returns received.

• Sales discounts allowed.

• Cash purchases.

 

Correct answer: Purchases returned to vendors.

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of

Choices:

• Rights and obligations.

• Completeness.

• Existence.

• Accuracy, valuation, and allocation.

 

Correct answer: Completeness.

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would trace

Choices:

• Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices.

• Items listed in receiving reports and vendors' invoices to the inventory listing.

• Inventory tags noted during the auditor's observation to items in the inventory listing.

• Items in the inventory listing to inventory tags and the auditor's recorded count sheets

Correct answer: Items in the inventory listing to inventory tags and the auditor's recorded count sheets.

Which of the following is most likely to be a response to the auditor's assessment that the risk of material misstatement due to fraud for the existence of inventory is high?

Choices:

• Observe test counts of inventory at certain locations on an unannounced basis.

• Perform analytical procedures rather than taking test counts.

• Request that inventories be counted prior to year-end.

• Request that inventory counts at the various locations be counted on different dates so as to allow the same auditor to be present at every count

 

Correct answer: Observe test counts of inventory at certain locations on an unannounced basis

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably

Choices:

• Increase the extent of tests of controls of the inventory cycle.

• Request the client to schedule the physical inventory count at the end of the year.

• Insist that the client perform physical counts of inventory items several times during the year.

• Apply gross profit tests to ascertain the reasonableness of the physical counts

 

Correct answer: Request the client to schedule the physical inventory count at the end of the year

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when

Choices:

• Internal control is weak.

• Accurate perpetual inventory records are maintained.

• Inventory is slow-moving.

• Significant amounts of inventory are held on a consignment basis

Correct answer: Accurate perpetual inventory records are maintained.

An inventory turnover analysis is useful to the auditor because it may detect

Choices:

• Inadequacies in inventory pricing.

• Methods of avoiding cyclical holding costs.

• The optimum automatic reorder points.

• The existence of obsolete merchandise.

Correct answer: The existence of obsolete merchandise.

The safeguarding of inventory most likely includes

Choices:

• Comparison of the information contained on the purchase requisitions, purchase orders, receiving reports, and vendors invoices.

• Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count.

• Analytical procedures for raw materials, goods in process, and finished goods that identify unusual transactions, theft, and obsolescence.

• Application of established overhead rates on the basis of direct labor hours or direct labor costs.

 

Correct answer: Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count

While observing a client'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 client's perpetual records. This situation could be the result of the client's failure to record

Choices:

• Purchase discounts.

• Purchase returns.

• Sales.

• Sales returns

 

Correct answer: Sales returns.

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit?

Choices:

• When the client maintains periodic inventory records.

• When the auditor finds minimal variations in client records and test counts in prior periods.

• When total inventory has not varied more than 5% in the last five years.

• When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts

 

Correct answer: When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts