Audit Ch 13 MC Qs

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1. D The objectives of internal control for an inventory manage-

ment process are to provide assurance that transactions
are properly authorized and recorded and that

a. independent internal verification of activity reports is

established
b. transfers to the finished goods department are docu-
mented by a completed production report and a quality
control report
c. production orders are prenumbered and signed by a
supervisor
d. custody of work in process and finished goods is prop-
erly maintained

2. A Which of the following control activities would be most

likely to assist in reducing the control risk related to the
occurrence of inventory transactions?

a. Inventory manager does not have ability to record inven-

tory transactions
b. summary of the receiving reports is independently com-
pared to the inventory status report
c. inventory is periodically reviewed for slow-moving or
obsolete items, which may require a write-down
d. subsidiary ledgers are periodically reconciled with in-
ventory control accounts

3. c Which of the following would most likely be an internal con-

trol activity designed to detect errors and fraud concerning
the custody of inventory?

a. periodic reconciliation of work in process with job cost

sheets
b. segregation of functions between general accounting
and cost accounting
c. independent comparisons of finished goods reports with
counts of goods on hand
d. approval of inventory journal entries by the storekeeper

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 Audit Ch 13 MC Qs
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4. b Independent internal verification of inventory (i.e. proper
segregation of duties) occurs when employees who

a. issue raw materials obtain materials requisitions for

each issue and prepare daily totals of materials issued
b. compare records of goods on hand with physical quan-
tities do not maintain the records or have custody of the
inventory
c. obtain receipts for the transfer of completed work to
finished goods prepare a completed production report
d. are independent of issuing production orders update
records from completed job cost sheets and production
cost reports on a timely basis

5. d An auditor's test of controls over the issuance of raw

materials to production would most likely include

a. reconciliation of raw materials and work-in-process per-

petual inventory records to general ledger balances
b. inquiry of the custodian about the procedures followed
when defective materials are received from the vendors
c. observation that raw materials are stored in secured
areas and that store room security is supervised by a
responsible individual
d. examination of materials requisitions and reperfor-
mance of entity controls designed to process and record
issuances

6. c Which of the following internal control activities is most

likely to address the completeness assertion for invento-
ry?

a. the work-in-process account is periodically reconciled

with subsidiary records
b. employees responsible for custody of finished goods do
not perform the receiving function
c. receiving reports are prenumbered and periodically rec-
onciled

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d. there is a separation of duties between payroll depart-
ment and inventory accounting personnel

7. d An entity maintains perpetual inventory records in both

quantities and dollars. If the level of control risk were set
at high, an auditor would probably

a. insist that the entity perform physical counts of inventory

items several times during the year
b. apply gross profit tests to ascertain the reasonableness
of the physical counts
c. increase the extent of tests of controls of the inventory
system
d. request that the entity schedule the physical inventory
count at the end of the year

8. b 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 listings
c. included in the listing are represented by inventory tags
d. represented by inventory tags are bona fide

9. d When auditing merchandise inventory at year end, the

auditor performs a purchase cutoff test to obtain evidence
that

a. all goods purchased before year-end are received be-

fore the physical inventory count
b. no goods held on consignment for customers are includ-
ed in the inventory balance
c. goods observed during the physical count are pledged
or sold
d. all goods owned at year-end are included in the inven-
tory balance

10. d Inquiries of warehouse personnel concerning possibly ob-

solete or slow-moving inventory items provide assurance
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about management's assertion of

a. completeness
b. existence
c. presentation
d. valuation

11. b Periodic or cycle counts of selected inventory items are

made at various times during the year rather than via a
single inventory count at year-end. Which of the following
is necessary if the auditor plans to observe inventory at
interim dates?

a. complete recounts are performed by independent

teams
b. perpetual inventory records are maintained
c. unit cost records are integrated with production-ac-
counting records
d. inventory balances are rarely at low levels

12. a An auditor would probably be least interested in which

of the following fields in an electronic perpetual inventory
file?

a. economic reorder quantity

b. warehouse location
c. date of last purchase
d. quantity sold

13. d Which of the following audit procedures would probably

provide the most reliable evidence concerning the entity's
assertion of rights and obligations related to inventory?

a. tracing of test counts noted during the entity's physical

count to the entity's summarization of quantities
b. inquiry of management to determine whether there are
significant purchase commitments that should be consid-
ered for disclosure
c. selection of the last few shipping advices used before

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 Audit Ch 13 MC Qs
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the physical count and determination of whether the ship-
ments were recorded as sales
d. during physical observation of inventory verify that
"bill-and-hold" inventory is segregated and not included in
the ending inventory count

14. d The element of the audit-planning process most likely to

be agreed upon with the client before implementation of
the audit strategy is the determination of the

a. evidence to be gathered to provide a sufficient basis for

the auditor's opinion
b. procedures to be undertaken to discover litigation,
claims, and assessments
c. pending legal matters to be included in the inquiry of the
client's attorney
d. timing of inventory observation procedures to be per-
formed

15. a When auditing inventories, an auditor would least likely

verify that

a. all inventory owned by the client is on hand at the time

of the count
b. the client has used proper inventory pricing
c. the financial statement presentation of inventories is
appropriate
d. damaged goods and obsolete items have been properly
accounted for

16. c To gain assurance that all inventory items in a client's

inventory listing schedule are valid, an auditor most likely
would vouch

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 reports and vendors' invoices
c. items listed in the inventory listing schedule to inventory

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tags and the auditor's recorded count sheets
d. items listed in receiving reports and vendors' invoices to
the inventory listing schedule

17. b 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. Tracing test counts
most likely obtained evidence concerning the relevant as-
sertion about

a. rights and obligations

b. completeness
c. existence
d. valuation

18. d While observing a client's annual physical inventory, an

auditor recorded test counts for several items and noticed
that certain test counts were higher than the recorded
quantities in the client's perpetual records. This situation
could be the result of the client's failure to record

a. purchase discounts
b. purchase returns
c. sales
d. sales returns

19. b Which of the following audit procedures probably would

provide the most reliable evidence concerning the entity's
assertion of rights and obligations related to inventories?

a. trace test counts noted during the entity's physical count

to the entity's summarization of quantities
b. inspect agreements to determine whether any inventory
is pledged as collateral or subject to any liens
c. select the last few shipping advices used before the
physical count and determine whether the shipments were
recorded as sales
d. inspect the open purchase order file for significant com-
mitments that should be considered for disclosure

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20. b To measure how effectively an entity employs its re-
sources, an auditor calculates inventory turnover by divid-
ing average inventory into

a. net sales
b. cost of goods sold
c. operating income
d. gross sales

21. d An auditor most likely would analyze inventory turnover

rates to obtain evidence concerning relevant assertions
about

a. existence
b. rights and obligations
c. classification and understandability
d. valuation and allocation

22. a An auditor most likely would make inquiries of produc-

tion and sales personnel concerning possible obsolete or
slow-moving inventory to support the relevant assertion
about

a. valuation and allocation

b. rights and obligations
c. existence
d. classification and understandability

23. a An auditor concluded that no excessive costs for an idle

plant were charged to inventory. This conclusion most
likely related to the auditor's objective to obtain evidence
about the relevant assertions regarding inventory, includ-
ing presentation and disclosure and

a. valuation and allocation

b. completeness
c. occurrence
d. rights and obligations

24. a
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Audit Ch 13 MC Qs
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Which of the following auditing procedures most likely
would provide assurance regarding a manufacturing en-
tity's relevant assertions about inventory valuation?

a. testing the entity's computation of standard overhead

rates
b. obtaining confirmation of inventories pledged under
loan agreements
c. reviewing shipping and receiving cutoff procedures for
inventories
d. tracing test counts to the entity's inventory listing

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