auditing inventory Flashcards
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably
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.
Request the client to schedule the physical inventory count at the end of the year.
A high assessed level of control risk may result in changing the timing of substantive tests to year-end rather than at an interim date. If the assessed level of control risk is low, the auditor could perform interim substantive tests and rely upon internal control to provide valid year-end records. However, because the assessed level of control risk is high, the controls cannot be relied upon. Also, the nature of substantive tests may change from less effective to more effective procedures (e.g., use of independent parties outside the entity rather than internal) and an increase in the extent of procedures (e.g., larger sample sizes).
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?
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.
When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.
This answer is correct because well-kept perpetual inventory records may result in a situation in which the auditor may observe a count at one of those times and then perform procedures to determine whether the year-end inventory is reasonable.
The auditor tests the quantity of materials charged to work in process by tracing these quantities to Cost ledgers. Perpetual inventory records. Receiving reports. Material requisitions.
Material requisitions.
This answer is correct because material requisitions ordinarily are the basis for charging materials to work in process.
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?
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.
Observe test counts of inventory at certain locations on an unannounced basis.
Observing test counts of inventory on an unannounced basis will provide evidence as to whether record inventory exists.
An auditor most likely would inspect loan agreements under which an entity's inventories are pledged in order to support management's financial statement assertion of Existence or occurrence. Completeness. Presentation and disclosure. Valuation or allocation.
Presentation and disclosure.
Correct! An auditor would inspect loan documents to verify that inventories have been pledged in support of the presentation and disclosure assertions. Presentation and disclosure addresses the adequacy of disclosures related to the inventory account.
To verify valuation/allocation pertaining to inventory
the auditor would perform a pricing test of inventory items or trace obsolete inventory noted during the physical inventory-taking into the final inventory listing in order to verify that related values had been appropriately reduced. The auditor would not inspect loan agreements.
To verify completeness pertaining to inventory
the auditor would trace inventory from the warehouse to the inventory listings rather than review loan agreements.
A senior auditor conducted a dual-purpose test on a client’s invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?
Substantive procedures and analytical procedures
Substantive analytical procedures and tests of controls
Tests of controls and tests of details
Tests of details and substantive procedures
Tests of controls and tests of details
Correct! A “dual-purpose” test involves gathering evidence in part to evaluate the effectiveness of internal control and in part to evaluate the fairness of the financial statements. “Tests of controls” address the internal control part of the dual-purpose test; and the inspection of underlying accounting documents constitutes a test of details, which addresses the substantive part of the dual-purpose test.
Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
Scanning perpetual inventory, production, and purchasing records.
Examining paid vendor invoices.
Tracing inventory items from the tag listing back to the physical inventory quantities.
Performing cutoff procedures for shipping and receiving.
Performing cutoff procedures for shipping and receiving.
This answer is correct because cutoff procedures applied to transactions recorded subsequent to year-end for shipping and receiving will address completeness–that is whether transactions that should have been recorded prior to year-end were so recorded.
To obtain assurance that all inventory items in a client’s inventory listing are valid, an auditor most likely would agree
Inventory tags noted during the auditor’s observation to items listed in receiving reports and vendors’ invoices.
Items listed in receiving reports and vendor’s 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.
Items in the inventory listing to inventory tags and the auditor’s recorded count sheets.
Correct! Validity pertains to existence—that inventory is real and exists. Agreeing items in the inventory listing (which might be thought of as the subsidiary ledger for the adjusted general ledger balance for inventory) to the underlying inventory tags and the auditor’s recorded count sheets provides support that the inventory in the listing actually exists. The direction of the test is critical to determining whether existence or completeness is most involved.
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?
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.
Examining an analysis of inventory turnover.
This answer is correct because analyzing inventory turnover (Cost of goods sold / Inventory) will indicate slow-moving and obsolete items since those items will have very low (or zero) turnover rates.
When an auditor tests a client’s cost accounting system, the auditor’s tests are primarily designed to determine that
Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand.
Physical inventories are in substantial agreement with book inventories.
The system is in accordance with generally accepted accounting principles and is functioning as planned.
Costs have been properly assigned to finished goods, work in process and cost of goods sold.
Costs have been properly assigned to finished goods, work in process and cost of goods sold.
This answer is correct because the major objective of a manufacturing firm’s cost accounting system is the valuation of the product(s) being produced. The auditor would test the accuracy of this system by assuring that the product costs have been properly assigned to the accounts associated with the various stages of product completion (i.e., finished goods, work in process, and cost of goods sold).
To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the
Terms of the open purchase orders.
Purchase cutoff procedures.
Contractual commitments made by the purchasing department.
Purchase invoices received on or around year-end.
Purchase cutoff procedures.
This answer is correct because the objective of purchase cutoff procedures is to ascertain whether all merchandise owned by the client at year-end is properly included in year-end inventory. For example, goods which are shipped to the client FOB shipping point before year-end but not received until after year-end are owned by the client and should be included in inventory (the related liability should also be recorded).
A client'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 Sales. Sales returns. Purchases. Purchase discounts.
Sales.
This answer is correct because if sales had not been recorded, the perpetual inventory records would not reflect the shipment of inventory resulting in inventory overstatement per the books.
Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories?
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.
Analytical procedures comparing inventory balances to purchasing and sales activities.
This answer is correct because analytical procedures applied to inventory balances alone will not provide information as to legal title to inventory, although subsequent tests of details of transactions and balances as a result of fluctuations identified may provide such evidence.
