Question 1

A receiving report records the shipment of goods to customers.

Accepted Answer

A) True 
 B)False

Question 2

Obsolete inventory should be written down to its current market value.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory?

Accepted Answer

A)   Obsolete inventory.
B)   New product line where sales exceed production.
C)   Manufacturing overhead was not allocated to the production process.
D)   Manufacturing salaries were recorded as administrative expenses.

Question 4

The auditor tests the quantity of materials charged to work in process by tracing these quantities to

Accepted Answer

A)   Cost ledgers.
B)   Perpetual inventory records.
C)   Receiving reports.
D)   Material requisitions.

Question 5

An auditor selected items for test counts while observing an entity's physical inventory. The auditor then traced the test counts to the entity's inventory listing. This procedure most likely provided evidence concerning management's assertion of

Accepted Answer

A)   Rights and obligations.
B)   Completeness.
C)   Existence.
D)   Valuation. B

Question 6

Shipping orders are forwarded from the revenue process to

Accepted Answer

A)   The materials requisitions department.
B)   Finished goods stores.
C)   Raw materials stores.
D)   Inventory management.

Question 7

When the entity's perpetual inventory master files are inadequate, the auditor will probably choose to test the physical inventory prior to the balance sheet date.

Accepted Answer

A) True 
 B)False

Question 8

The physical count of inventory of a retailer was higher than shown in its perpetual records. Which of the following could explain the difference?

Accepted Answer

A)   Inventory items had been counted but tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.
B)   Credit memos for several items returned by customers had not been prepared.
C)   No journal entry had been made on the retailer's books for several items returned to its suppliers.
D)   An item purchased "FOB shipping point" had not arrived at the date of the inventory count and had not been reflected in the perpetual records.

Question 9

The audit of the inventory management process is affected by the audit results from multiple other processes. Identify the processes, other than the inventory management process, that affect the audit of inventory and explain how each affect the audit of inventory.

Accepted Answer

The inventory management process is affe...

Question 10

Inherent risk is typically assessed at a low to moderate level for inventory due to the nature of the asset.

Accepted Answer

A) True 
 B)False

Question 11

Sale of finished goods is a part of the inventory management process.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following departments typically approves purchase requisitions?

Accepted Answer

A)   Raw materials stores.
B)   Cost accounting.
C)   Inventory management.
D)   IT.

Question 13

In a manufacturing company, which one of the following audit procedures would give the least assurance about the valuation of inventory at the audit date?

Accepted Answer

A)   Testing the computation of standard overhead rates.
B)   Examining paid vendors' invoices.
C)   Reviewing direct labor rates.
D)   Obtaining confirmation of inventories pledged under loan agreements.

Question 14

To gain assurance that all inventory items in an entity's inventory listing schedule are valid, an auditor most likely would trace

Accepted Answer

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 tags and the count sheets.
D)   Items listed in receiving reports and vendors' invoices to the inventory listing schedule. C

Question 15

Which one of the following procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity's physical inventories?

Accepted Answer

A)   Confirmation of goods in the hands of public warehouses.
B)   Supervising the annual physical inventory count.
C)   Carrying out physical inventory procedures at an interim date.
D)   Obtaining written representation from the entity as to the existence, quality, and dollar amount of the inventory.

Question 16

The major control procedure for preventing fictitious inventory transactions from being recorded is proper segregation of duties.

Accepted Answer

A) True 
 B)False

Question 17

Purchase cutoff activities should be designed to test that merchandise is included in the inventory of the entity company if the company

Accepted Answer

A)   Has paid for the merchandise.
B)   Has physical possession of the merchandise.
C)   Holds legal title to the merchandise.
D)   Holds the shipping documents for the merchandise issued in the company's name.

Question 18

The audit of inventory is often the most involved aspect of an audit. Describe at least three inherent risk factors that affect the audit of inventory.

Accepted Answer

One inherent risk concerns the valuation...

Question 19

An entity maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably

Accepted Answer

A)   Increase the extent of tests of controls for the inventory cycle.
B)   Request that the entity schedule the physical inventory count at the end of the year.
C)   Insist that the entity perform physical counts of inventory items several times during the year.
D)   Apply gross profit tests to ascertain the reasonableness of the physical counts.

Question 20

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 financial statement assertions regarding inventory, including presentation and disclosure, and

Accepted Answer

A)   Valuation and allocation.
B)   Completeness.
C)   Existence.
D)   Rights and obligations. A

Exam 13: Auditing the Inventory Management Process

A receiving report records the shipment of goods to customers.

Correct AnswerverifiedShow Answer

Obsolete inventory should be written down to its current market value.

Correct AnswerverifiedShow Answer

Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory?

Correct AnswerverifiedShow Answer

The auditor tests the quantity of materials charged to work in process by tracing these quantities to

Correct AnswerverifiedShow Answer

An auditor selected items for test counts while observing an entity's physical inventory. The auditor then traced the test counts to the entity's inventory listing. This procedure most likely provided evidence concerning management's assertion of

Correct AnswerverifiedB

Shipping orders are forwarded from the revenue process to

Correct AnswerverifiedShow Answer

When the entity's perpetual inventory master files are inadequate, the auditor will probably choose to test the physical inventory prior to the balance sheet date.

Correct AnswerverifiedShow Answer

The physical count of inventory of a retailer was higher than shown in its perpetual records. Which of the following could explain the difference?

Correct AnswerverifiedShow Answer

The audit of the inventory management process is affected by the audit results from multiple other processes. Identify the processes, other than the inventory management process, that affect the audit of inventory and explain how each affect the audit of inventory.

Correct AnswerverifiedThe inventory management process is affe...View AnswerShow Answer

Inherent risk is typically assessed at a low to moderate level for inventory due to the nature of the asset.

Correct AnswerverifiedShow Answer

Sale of finished goods is a part of the inventory management process.

Correct AnswerverifiedShow Answer

Which of the following departments typically approves purchase requisitions?

Correct AnswerverifiedShow Answer

In a manufacturing company, which one of the following audit procedures would give the least assurance about the valuation of inventory at the audit date?

Correct AnswerverifiedShow Answer

To gain assurance that all inventory items in an entity's inventory listing schedule are valid, an auditor most likely would trace

Correct AnswerverifiedC

Which one of the following procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity's physical inventories?

Correct AnswerverifiedShow Answer

The major control procedure for preventing fictitious inventory transactions from being recorded is proper segregation of duties.

Correct AnswerverifiedShow Answer

Purchase cutoff activities should be designed to test that merchandise is included in the inventory of the entity company if the company

Correct AnswerverifiedShow Answer

The audit of inventory is often the most involved aspect of an audit. Describe at least three inherent risk factors that affect the audit of inventory.

Correct AnswerverifiedOne inherent risk concerns the valuation...View AnswerShow Answer

An entity maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably

Correct AnswerverifiedShow Answer

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 financial statement assertions regarding inventory, including presentation and disclosure, and

Correct AnswerverifiedA

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B

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The inventory management process is affe...
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C

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One inherent risk concerns the valuation...
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A