Audit of Inventories

Question 1

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?

a. Inventory item has been counted but the tags placed on the items had not been taken off the items and added to the accumulation sheets.
b. 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.
c. No journal entry had been made on the retailer’s books for several items returned to its suppliers
d. Credit memos for several items returned by customers had not been recorded.

Answer 1

d. Credit memos for several items returned by customers had not been recorded.

Question 2

When the objective of the auditor is to evaluate the appropriateness of adjustments to sales, the best available evidence would normally be
a. Analytical evidence obtained by comparing sales adjustments to gross sales for a period of time
b. Physical evidence obtained by inspection of goods returned for credit
c. Documentary evidence obtained by inspecting documents supporting entries to adjustment accounts
d. Oral evidence obtained by discussing adjustment-related procedures with controller personnel

Answer 2

c. Documentary evidence obtained by inspecting documents supporting entries to adjustment accounts

Question 3

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. These procedures most likely obtained evidence concerning management’s assertion of
a. Rights and obligations
b. Completeness
c. Valuation
d. Existence and occurrence

Answer 3

b. Completeness

Question 4

For manufactured inventories, the valuation assertion if best tested by
a. Inquiring as to inventory obsolescence
b. Testing for purchases and sales cutoff
c. Comparing unit prices with recent vendor invoices
d. Tracing units costs appearing on final inventory listings is auditor’s copy of audited finished goods unit costs

Answer 4

d. Tracing units costs appearing on final inventory listings is auditor’s copy of audited finished goods unit costs

Question 5

When auditing inventories, an auditor would least likely verify that
A. The financial statement presentation of inventories is appropriate.
B. Damaged goods and obsolete items have been properly accounted for.
C. All inventory owned by the client is on hand at the time of the count.
D. The client has used proper inventory pricing.

Answer 5

B. Damaged goods and obsolete items have been properly accounted for.

Question 6

The primary objective of a CPA’s observation of the client’s physical inventory count is to
A. Discover whether a client has counted particular inventory items 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 merchandise on hand on the day of physical count.
D. Allow the auditor to supervise the conduct of the count so as to obtain assurance that inventory quantities are reasonably accounted.

Answer 6

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

Question 7

A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high, an auditor would probably
A. Increase the extent of tests of controls of the inventory cycle.
B. Request the client to schedule the physical inventory count at the end of the year.
C. Insist that the client perform counts of inventory items several times during the year.
D. Apply gross profit tests to ascertain the reasonableness of the physical counts

Answer 7

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

Question 8

The audit of year-end physical inventories should include steps to verify that the client’s purchases and sales cut-offs are adequate. The audit 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

Answer 8

C. Sale in the current period.

Question 9

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items
A. Included in the listing have been counted.
B. Represented by inventory tags are included in the listing.
C. Included in the listing are represented by inventory tags.
D. Represented by inventory tags are bona fide.

Answer 9

D. Represented by inventory tags are bona fide.

Question 10

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 evidenced concerning management’s assertion of
A. Rights and obligations
B. Existence and occurrence
C. Completeness
D. Valuation

Answer 10

C. Completeness

Question 11

To gain assurance that all inventory items in a client’s inventory listing schedule are valid, an auditor most likely would trace
A. Inventory tags noted during auditor’ 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 vendor’s invoices.
C. Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded count sheets.
D. Items listed in receiving report and vendors’ invoices to the inventory listing schedule.

Answer 11

C. Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded count sheets.

Question 12

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?
A. Inventory items had been counted but the 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 recorded.
C. No journal entry had been made on the retailers’ 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.

Answer 12

B. Credit memos for several items returned by customers had not been recorded.

Question 13

For several years a client’s physical inventory count has been lower than what was shownon 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 record some
A. Purchases returned to vendors.
B. Sales returns received.
C. Sales discounts allowed.
D. Cash purchases

Answer 13

A. Purchases returned to vendors.

Question 14

Which of the following is the best audit procedure for the discovery of damaged merchandised in a client’s inventory?
A. Compare the physical quantities of slow-moving items with corresponding quantities of the prior year.
B. Observe merchandise and raw material during the client’s physical inventory taking.
C. Review the management’s inventory representation letter of accuracy.
D. Test overall fairness of inventory values by comparing the company’s turnover ratio with the industry average.

Answer 14

B. Observe merchandise and raw material during the client’s physical inventory taking.

Question 15

An inventory turnover ratio 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.

Answer 15

D. The existence of obsolete merchandise.

Question 16

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?
A. Testing the entity’s computation of standard OH rates.
B. Obtaining confirmation of inventories pledged under loan agreements.
C. Reviewing shipping and receiving cut-off procedures for inventories.
D. Tracing tests counts to the entity’s inventory listing.

Answer 16

A. Testing the entity’s computation of standard OH rates.

Question 17

When auditing merchandise inventory at year-end, the auditor performs a purchase cut-off test to obtain evidence that:
A. All goods purchased before year-end are received before the physical count.
B. No goods held on consignment for customers are included in the inventory balance.
C. No goods observed during the physical count are pledged or sold.
D. All goods owned at year-end are included in the inventory balance

Answer 17

D. All goods owned at year-end are included in the inventory balance

Question 18

In a manufacturing company, which one of the following audit procedures would give the least assurance of the valuation of inventory at the audit date?
A. Testing the computation of standard OH rates.
B. Examining paid vendors’ invoices.
C. Reviewing direct labor rates.
D. Obtaining confirmation of inventories pledged under loan agreements

Answer 18

D. Obtaining confirmation of inventories pledged under loan agreements

Question 19

Observation of inventories is a generally accepted auditing procedure. Which of the following statements concerning this accepted auditing procedure is not correct?
A. Regardless of the inventory system maintained by the client, an annual physical count must be made of each item in the inventory, and test counts must be made by the auditor
B. The independent auditor, when he asked to audit financial statements covering the current period and one or more periods for which (s)he had not observed or made some physical counts, may be able to become satisfied as to such prior inventories through appropriate alternative procedures.
C. When the well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts, the auditor’s observation procedures usually can be performed either during or after the end of the period under audit.
D. Inventories, which in the ordinary course of business are physically located in public warehouses, may be verified by direct confirmation in writing form the custodians, provided that, when the amount involved is a significant portion of the current assets or the total assets, additional procedures are applied as deemed necessary.

Answer 19

B. The independent auditor, when he asked to audit financial statements covering the current period and one or more periods for which (s)he had not observed or made some physical counts, may be able to become satisfied as to such prior inventories through appropriate alternative procedures.

Question 20

An auditor is most likely to inspect loan agreements under which an entity’s inventories are pledged to support management’s assertion of
A. Existence and occurrence
B. Presentation and disclosure
C. Completeness
D. Valuation or allocation

Answer 20

B. Presentation and disclosure

Question 21

Which of the following is the best audit test to evaluate the accuracy of the inventory records for materials inventory in a production operation?
A. Trace selected inventory receipts to perpetual inventory records.
B. Vouch selected postings in the perpetual inventory records to source documents.
C. Perform turnover tests for materials inventory.
D. Reconcile quantities on hand per physical counts of selected items with perpetual inventory records and verify pricing

Answer 21

D. Reconcile quantities on hand per physical counts of selected items with perpetual inventory records and verify pricing

Question 22

Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following suggests to the auditor that the client’s good have been shipped on consignment?
A. Numerous shipments of small quantities.
B. Numerous shipments of large quantities and few returns.
C. Large debits to accounts receivable and small periodic credits.
D. Large debits to accounts receivable and large periodic credits

Answer 22

C. Large debits to accounts receivable and small periodic credits.

Question 23

In assessing control risk for purchases, an auditor vouches a sample of entries in
the voucher register to the supporting documents. Which assertion would this test
of controls most likely support?

a. Completeness
b. Occurrence
c. Allocation and valuation
d. Rights and obligations

Answer 23

b. Occurrence

Question 24

An auditor suspects that certain client employees are ordering merchandise for
themselves over the internet without recording the purchase or receipt of the
merchandise. When vendors’ invoices arrive, one of the employees approves the
invoices for payment. After the invoices are paid, the employee destroys the
invoices and the related vouchers. In gathering evidence regarding the fraud, the
auditor most likely would select items for testing from the file of all:
a. Cash disbursements
b. Approved vouchers
c. Receiving reports
d. Vendors’ invoices

Answer 24

a. Cash disbursements

Question 25

To gain assurance that all inventory items in a client’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 report and vendors’ invoices.
c. Items listed in the inventory-listing schedule to inventory tags and
auditor’s recorded count sheets.
d. Items listed in receiving reports and vendor’s invoices to the
inventory-listing schedule.

Answer 25

c. Items listed in the inventory-listing schedule to inventory tags and
auditor’s recorded count sheets.

Question 26

The primary objective of a CPA’s 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. Provide an appraisal of the quality of the merchandise on hand on
the day of the physical count
c. Allow the auditor to supervise the conduct of the count in order to
obtain assurance that inventory quantities are reasonably accurate.
d. Ascertain that the physical count has been properly conducted in
accordance with the client’s internal control policies and
procedures and obtain direct knowledge that the inventory exists.

Answer 26

d. Ascertain that the physical count has been properly conducted in
accordance with the client’s internal control policies and
procedures and obtain direct knowledge that the inventory exists.

Question 27

23. An auditor most likely to inspect loan agreements under which an entity’s inventories are pledged to support management’s financial statement assertion of
    a. Existence or occurrence
    b. Presentation and disclosure I
    c. Valuation or allocation
    d. Completeness

Answer 27

b. Presentation and disclosure

Question 28

. Moscow Company has an increase in purchases from specific vendors and an increase in raw materials inventory for the items purchased from these vendors.
Sales for the company have not increased and are not forecast to increase. From this information an auditor might suspect
a. an increase in obsolete raw material inventory.
b. theft of raw material inventory.
c. kickbacks from vendors.
d. poor security over raw material inventory.

Answer 28

c. kickbacks from vendors.

Question 29

Which of the following is the best procedure for identifying shortages of specific items in an inventory of raw materials?
a. Estimates inventory quantities by using the gross profit method
b. Review internal controls for the physical protection of inventories
c. Compare the results of a physical inventory of raw materials with perpetual inventory records
d. Compare inventory turnover rates with prevailing rates from previous years

Answer 29

c. Compare the results of a physical inventory of raw materials with perpetual inventory records

Question 30

In auditing inventories, a major objective relates to the existence assertion. Of the following audit procedures relating to inventories, which does not support the existence assertion?
a. The auditor reviews the client’s inventory-taking instructions for such matters as proper arrangement of goods, separation of consigned goods, and limits on movements of goods during inventory.
b. The auditor observes the client’s inventory and performs test counts as appropriate
c. The auditor confirms inventories not on the premises
d. The auditor performs a lower of cost or market test for major categories of inventory

Answer 30

d. The auditor performs a lower of cost or market test for major categories of inventory

Question 31

Which of the following items should not be included in a physical inventory?
a. Materials in transit from vendors
b. Goods in a private warehouse
c. Goods received for repairs under warranty d. Consignment to an agent

Answer 31

c. Goods received for repairs under warranty

Question 32

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?
a. Tracing test counts to the entity’s inventory listing
b. Testing the entity’s computation of standard overhead rates
c. Obtaining confirmation of inventories pledged under loan agreements
d. Reviewing shipping and receiving cutoff procedures for inventories

Answer 32

b. Testing the entity’s computation of standard overhead rates

Question 33

Which of the following is not one of the independent auditor’s objectives regarding the audit of inventories?
a. Verifying that the client has used proper inventory pricing
b. Verifying that the inventory counted is owned by the client
c. Verifying that all inventory owned by the client is on hand at the time of the count
d. Ascertaining the physical quantities of inventory on hand

Answer 33

c. Verifying that all inventory owned by the client is on hand at the time of the count