Chapter 21

Question 1

Controls over physical inventory and the related costs from the point that raw materials are requisitioned to the point that the manufactured product is completed and transferred to storage

Answer 1

Cost Accounting Controls

Question 2

The accounting records concerned with the manufacture and processing of the goods and storing finished goods

Answer 2

Cost Accounting Records

Question 3

The transaction cycle that involves the physical flow of goods through the organization, as well as related costs

Answer 3

Inventory and Warehouse Cycle

Question 4

Audit procedures used to verify whether physical counts of inventory are correctly summarized, inventory quantities and prices are correctly extended, and extended inventory is correctly footed

Answer 4

Inventory Compilation Tests

Question 5

Audit procedures used to verify the costs used to value physical inventory

Answer 5

Inventory Price Tests

Question 6

System of cost accounting where costs are accumulated by individual jobs when material is used and labor costs are incurred

Answer 6

Job Cost System

Question 7

A continuously updated computerized record of inventory items purchased, used, sold, and on hand for merchandise, raw materials, and finished goods

Answer 7

Perpetual Inventory Master File

Question 8

System of cost accounting where costs are accumulated for a process, with unit costs for each process assigned to the products passing through the process

Answer 8

Process Cost System

Question 9

Records that indicate variances between projected material, labor, and overhead costs, and the actual costs

Answer 9

Standard Cost Records

Question 10

Factors affecting the Complexity of the audit of inventory include:

Answer 10

1) Inventory is normally the largest account
2) Inventory is in many locations
3) Diversity of inventory difficult to observe and value
4) Valuation often based on estimations
5) Multiple acceptable inventory valuation methods

Question 11

Two systems involved in inventory and warehouse cycle:

Answer 11

Physical flow of goods and pricing

Question 12

6 functions of the inventory and warehouse cycle

Answer 12

1) Process Purchase Orders
2) Receive Raw Materials
3) Store Raw Materials
4) Process the Goods
5) Store Finished Goods
6) Ship Finished Goods

Question 13

5 activities of the inventory and warehouse cycle

Answer 13

1) Acquire and record raw materials, labor, and overhead
2) Internally transfer assets and costs
3) Ship goods and record revenue and costs
4) Physically observe inventory
5) Price and compile inventory

Question 14

Categories of Cost Accounting Controls:

Answer 14

1) Physical control over raw materials, work-in process, and finished goods inventory
2) Control over the related costs

Question 15

Reasons of usefulness for Perpetual Inventory Master Files:

Answer 15

1) Provide a record of inventory on hand
2) Provide a record of the use of raw materials and the sale of finished goods
3) Provide a record to pinpoint responsibility when differences between physical counts and amounts shown on the perpetual list exist

Question 16

Auditors are concerned with four aspects of cost accounting:

Answer 16

1) Physical controls over inventory
2) Documents and records for transferring inventory
3) Perpetual inventory master files
4) Unit cost records

Question 17

The reliability of BLANK affects the timing and extent of the auditor’s physical examination of inventory

Answer 17

Perpetual Inventory Master File

Question 18

Auditors usually test cost accounting records as part of the acquisition, payroll, and sales tests to avoid BLANK

Answer 18

Testing the records more than once and to increase audit efficiency

Question 19

When testing acquisition transactions, auditors should BLANK

Answer 19

Trace the units and unit costs of raw materials to additions recorded in the perpetual inventory master files

Question 20

Auditing standards require auditors to satisfy themselves about BLANK

Answer 20

The effectiveness of the client’s methods of counting inventory and the reliance they can place on the client’s representations about the quantities and physical condition of the inventory

Question 21

To meet the requirement of satisfying auditors needs, auditors must:

Answer 21

1) Be present at the time the client counts their inventory
2) observe the client’s counting procedures
3) Make inquiries of client personnel about their counting procedures
4) Make their own independent tests of the physical count

Question 22

While auditors observe inventory counting, they should:

Answer 22

1) Observe the counting of the most significant items and a representative sample of typical inventory items
2) Inquire about items that are likely to be obsolete or damaged
3) Discuss with management the reasons for excluding any material items

Question 23

Balance related audit objectives for the physical inventory observation

Answer 23

Existence, completeness, accuracy, classification, cutoff, realizable value, and rights

Question 24

Common inventory observation procedure for existence in physical inventory observation

Answer 24

Observe whether movement of inventory takes place during the count

Question 25

Common inventory observation procedure for completeness in physical inventory observation

Answer 25

Observe whether movement of inventory takes place during the count

Question 26

Common inventory observation procedure for accuracy in physical inventory observation

Answer 26

Record client’s counts for subsequent inventory

Question 27

Common inventory observation procedure for classification in physical inventory observation

Answer 27

Examine inventory descriptions on the tags and compare with the actual inventory

Question 28

Common inventory observation procedure for cutoff in physical inventory observation

Answer 28

Make sure the inventory for the above item was included in the physical count

Question 29

Common inventory observation procedure for realizable value in physical inventory observation

Answer 29

Test for obsolete inventory

Question 30

Common inventory observation procedure for rights in physical inventory observation

Answer 30

Inquire about consignment or customer inventory included on client’s premises

Question 31

Balance related objective for inventory pricing (detail tie-in)

Answer 31

Trace totals to general ledger

Question 32

Balance related objective for inventory pricing (existence)

Answer 32

Account for unused tag numbers

Question 33

Balance related objective for inventory pricing (completeness)

Answer 33

Trace from inventory tags to inventory listings

Question 34

Balance related objective for inventory pricing (accuracy)

Answer 34

Perform price tests of inventory

Question 35

Balance related objective for inventory pricing (classification)

Answer 35

Verify the classification into raw materials, work-in-process, and finished goods

Question 36

Balance related objective for inventory pricing (realizable value)

Answer 36

Perform tests of lower of cost or market, selling price, and obsolescence

Question 37

Balance related objective for inventory pricing (rights)

Answer 37

Review contracts with suppliers and customers