Chapter 21 Flashcards
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.
The audit of ______ is often the most difficult and complex part of an audit.
a. property, plant and equipment
b. cash
c. inventory
d. prepaid insurance
c. inventory
Inventory is a complex area to audit for all but 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 in working capital.
d. Inventory valuation includes few estimates.
d. Inventory valuation includes few estimates.
When labor is a significant part of inventory, verifying the proper accounting of these costs should be tested in the:
a. inventory and warehousing cycle.
b. payroll and personnel cycle.
c. acquisitions and payments cycle.
d. cash cycle.
b. payroll and personnel cycle.
For retail and wholesale businesses, the most important inventory is:
a. merchandise available for sale.
b. work-in-process.
c. raw materials.
d. inventory held on consignment.
a. merchandise available for sale.
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.
b. whether recorded inventory was properly valued by the client.
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 of an order.
d. acquisition of raw materials for production of an order.
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.
Which of the following would be an appropriate initiation of a purchase requisition? (One initiated based on a periodic count
of raw materials / One initiated by stockroom personnel as raw materials are needed)
a. Yes Yes
b. No No
c. Yes No
d. No Yes
a. Yes Yes
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.
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.
d. Production.
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
_________ accumulate costs by individual jobs as material is issued into production and labor costs are incurred.
a. Just-in-time production systems
b. Job order cost systems
c. Process cost systems
d. Manufacturing systems
b. Job order cost systems
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.
With regard to the physical count of inventory, necessary control procedures include:
a. proper instructions for the physical count.
b. independent third-party verification of the counts.
c. third-party reconciliations of the physical counts with perpetual inventory master files.
d. counting the inventory only on the year-end date.
d. counting the inventory only on the year-end date.
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.
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.
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.
a. sales.
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.
If an auditor were concerned with obtaining evidence about the appropriateness of the value of inventory, which of the following tests would be most appropriate?
a. Compilation tests.
b. Price tests.
c. Confirmation of inventory held by outside parties.
d. Physical examination of the inventory.
b. Price tests.
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.
b. Observe merchandise and raw materials during the client’s physical inventory count.
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.
c. Production employees submit approved requisition forms to the stockroom for materials needed.
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.
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.
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.
c. value inventories for financial statement purposes.
Master files, worksheets, 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.
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.
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.
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.
a. Recorded transfers occurred.
