AUD 4.4 - Inventory Cycle

Question 1

For inventory held by the entity, proper internal control includes:

Answer 1

Adequate safeguarding of inventory
Proper segregation of duties

Question 2

What duties should be segregated for inventory cycle:

Answer 2

Purchasing
Receiving
Warehouse
Shipping

Question 3

In the purchasing process of inventory, who should receive purchase orders?

Answer 3

The accounting and receiving departments

Question 4

In the receiving portion of inventory cycle, what does the receiving department do?

Answer 4

They are solely responsible for the receipt of goods. Also, they deliver the goods received to the warehouse department

Question 5

In the warehouse portion of the inventory cycle, what happens?

Answer 5

The warehouse department acts as custodian for the verified quantity of goods received

Question 6

If the assessed level of control risk is high, the observation procedures should be performed when?

Answer 6

At year end

Question 7

If inventory held off-site in public warehouses or on consignment is significant, what should the auditor do? If no significant, what?

Answer 7

Significant - observe
Not significant - confirm

Question 8

When testing for the completeness assertion of the inventory cycle, the auditor should:

Answer 8

Trace test counts to the inventory report
Select a sample of pre-numbered inventory tags and trace them to the inventory report sheets

Question 9

When testing the valuation, allocation, and accuracy assertion for the inventory cycle, the auditor should:

Answer 9

Reconcile the inventory report to the general ledger
Inquire about obsolete and slow moving inventory
Examine invoices, labor rates, test the computation of standard OH rate, and std. cost variance analyses

Question 10

When testing the existence and occurrence assertion for the inventory cycle, the auditor should:

Answer 10

Observe inventory

Question 11

When testing the rights and obligations assertion for the inventory cycle, the auditor should:

Answer 11

Ascertain that consigned inventory is excluded from the inventory count
Inventory in transit at year end should be properly accounted for based on shipping terms