MCQ 4 Flashcards
In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?
A.
Test the computation of standard overhead rates. (69%)
B.
Tour the manufacturing plant or production facility. (13%)
C.
Compare inventory balances to anticipated sales volume. (8%)
D.
Review inventory experience and trends
Choice A (Correct) and Choices B, C, D (Incorrect): Standard overhead rates do not affect inventory and would not provide information about slow moving, defective, or obsolete inventory. By touring the facility, the auditor may observe inventory that appears to be slow moving, defective, or obsolete. Inventory balances that are disproportionately high compared to anticipated sales volume may be an indication that it includes items the entity does not expect to sell. Inventory experience and trends would provide the auditor with information about inventory movement and if items are no longer selling.
Which of the following procedures would an auditor generally perform regarding subsequent events?
A.
Inspect inventory items that were ordered before year end but arrived after year end. (26%)
B.
Test internal control activities that were previously reported to management as inadequate. (2%)
C.
Review the client’s cutoff bank statements for several months after year end. (26%)
D.
Compare the latest available interim financial statements with the statements being audited.
D
Auditors are required to perform procedures that identify subsequent events to determine if management has properly recognized/disclosed them in the financial statements (F/S) in accordance with GAAP. The procedures should focus on events after year end that are relevant to conditions that existed during the year under audit.
Comparing the most recent F/S (ie, after year end) with the audited F/S would provide relevant information. If the information suggests that a material lawsuit that began in Year 1 was settled, then an adjustment and disclosure are required.
(Choices A and C) Cutoff procedures are used to test if transactions that occur near the end of the year are reported in the correct period. Inspection of inventory ordered before year end but that arrived after year end is used to verify that inventory was accounted for in the proper period. Similarly, a bank cutoff statement is used to verify that items on a bank reconciliation (eg, outstanding checks) clear the bank to confirm it was properly included in that period’s cash balance.
(Choice B) Although management may provide auditors with information about how internal control deficiencies identified during the audit were corrected, it would not help identify subsequent events.
Things to remember:
Procedures to identify subsequent events should focus on events after year end that are relevant to conditions that existed during the year under audit. This includes following up on accruals or contingencies, reading minutes or financial information after year end, and inquiring with management.
If the objective of an auditor’s test of details is to detect the overstatement of sales, the auditor should trace transactions from the
A.
Sales journal to the shipping documents. (59%)
B.
Shipping documents to the cash receipts journal. (9%)
C.
Cash receipts journal to the customer’s purchase orders. (6%)
D.
Customer’s purchase orders to the sales journal.
A
Revenues must be earned before they are recognized. A company that sells goods generally recognizes revenue after goods are shipped or delivered. Overstatements can be substantiated by testing for existence. Auditors testing for existence will verify that items in the financial statements (F/S) can be supported by corroborating evidence.
Although existence may be tested with a variety of methods in practice, the key for the exam is to understand that the starting point must be the F/S and the ending point is the supporting evidence. In this case, sales are earned when items ship. The auditor will trace items from the sales journal (F/S) to the shipping documents (ie, the supporting evidence) to verify the sale.
(Choice B) Tracing shipping documents to the cash receipts journal starts at the supporting evidence, not the F/S.
(Choice C) Tracing to customer purchase orders (POs) does not provide evidence that sales were earned, only that customers made the order. Sales of goods are generally earned when shipped or delivered.
(Choice D) Assuming POs could substantiate recognizing a sale, the direction of the testing is still incorrect because it starts at the supporting evidence.
Things to remember:
To detect an overstatement of sales, auditors can test for existence. To perform this test, auditors start at the financial statements (eg, sales journal) and trace/vouch information to the supporting evidence (eg, shipping documents). Items with no corroborating evidence will be investigated further.
