According to GAAP, which method for determining inventory cost is not allowed?

a. Average Cost

b. FIFO

c. LIFO

d. Standard cost

Correct Answer: d. Standard cost

9.21 Which cycle is not directly associated with the production cycle?

a. Acquisition and expenditure cycle

b. Payroll cycle

c. Revenue and collection cycle

d. Finance and investment cycle

Correct Answer: d. Finance and investment cycle

9.22 To ascertain the client's planned amount and timing of production of a product, the auditor reviews
the:

a. Sales forecast

b. Inventory reports

c. Production plan

d. Purchases journal

Correct Answer: c. Production plan

9.23 When reviewing job cost sheets, an auditor is primarily testing which transaction assertion?

a. Occurrence

b. Completeness

c. Accuracy
d. Classification

Correct Answer: c. Accuracy

9.24 What is considered an internal control weakness for a company with a large number of individual
items in its supplies inventory?

a. Supplies of relatively little value are expensed when purchased

b. The cycle basis is used for physical inventory counts

c. The warehouse manager is responsible for maintenance of perpetual inventory records

d. Perpetual inventory records are maintained only for items of significant value

Correct Answer: c. The warehouse manager is responsible for maintenance of perpetual inventory
records

9.25 To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs
the analysis:

a. For the company as a whole

b. By division

c. By product

d. All of the above

Correct Answer: c. By product

9.26 What procedure would best prevent or detect theft from an inventory with a wide range of item
values?

a. Maintain a perpetual inventory of only the more valuable items with frequent periodic verification

b. Have an independent accounting firm prepare an internal control report on inventory controls

c. Have separate warehouse space for more valuable items with frequent periodic physical inventory
counts

d. Require a manager's signature for the removal of any inventory item with a value of more than $50
Correct Answer: c. Have separate warehouse space for more valuable items with frequent periodic
physical inventory counts

9.27 An auditor traces test counts made during the observation of physical inventory counts to the final
inventory compilation to provide evidence that items observed by the auditor are:

a. Owned by the client

b. Not obsolete

c. Physically present at the time of final inventory schedule preparation

d. Included in the final inventory schedule

Correct Answer: d. Included in the final inventory schedule

9.28 If a retailer's physical count of inventory exceeds the perpetual records, what could explain the
difference?

a. Inventory items were counted, but tags were not added to the accumulation sheets

b. Credit memos for returned items were not recorded

c. No journal entry was made for items returned to suppliers

d. Items purchased FOB shipping point had not arrived by the count date

Correct Answer: b. Credit memos for returned items were not recorded

9.29 From the auditors' perspective, when are inventory counts more acceptable before year-end?

a. Internal control is weak

b. Accurate perpetual inventory records are maintained

c. Inventory is slow-moving

d. Significant amounts of inventory are held on consignment

Correct Answer: b. Accurate perpetual inventory records are maintained

9.30 What internal control activity is most likely to address the completeness assertion for inventory?

a. Work-in-process account reconciliation with subsidiary inventory records

b. Employees responsible for custody of finished goods do not perform the receiving function

c. Prenumbered receiving reports with periodic numbering sequence checks

d. Separation of duties between the payroll department and inventory accounting personnel

Correct Answer: c. Prenumbered receiving reports with periodic numbering sequence checks

9.31 When auditing inventories, an auditor would least likely verify:

a. All inventory owned by the client is on hand at the time of the count

b. Proper inventory pricing

c. Financial statement presentation of inventories

d. Damaged goods and obsolete items are properly accounted for

Correct Answer: a. All inventory owned by the client is on hand at the time of the count

9.32 If assessed control risk is high and a client maintains perpetual inventory records, an auditor would
likely:

a. Apply gross profit test to ascertain the reasonableness of physical inventory counts

b. Increase the extent of tests of controls relevant to the inventory cycle

c. Request the client to schedule the physical inventory count at year-end

d. Insist that the client perform physical inventory counts several times during the year

Correct Answer: c. Request the client to schedule the physical inventory count at the end of the year

9.33 When an auditor traces test counts to a client's inventory listing after a physical inventory count,
which management assertion is being obtained?

a. Rights & obligations

b. Completeness
c. Existence

d. Valuation and allocation

Correct Answer: b. Completeness