1
Chapter 21 Multple-Choice Questons 1. easy b
Receip of ordered maerials by he receiving deparmen will generae he completon of a form called he: a. bill of lading. b. receiving re repor. c. ma maeria erials ls reuis uisit iton on.. d. inve inven nor oryy a ac cui uisi sito ton n summ summar aryy.
!. easy c
"he audi of ###### is o$en he mos di%cul and comple& par of an audi. a. prop proper ery y'' pla plan n and and eui euipm pmen en b. cash c. invenory d. prepaid in insuranc ance
(. easy d
)nvenory is a comple& area o audi for all bu which of he following reasons* a. )nve )nven nor oryy is o$en o$en iin n di+ di+eren eren loca locato tons ns.. b. "here "here are sever several al accepabl accepable e valuaton valuaton mehods mehods and and some some enttes enttes use di+e di+eren ren mehods mehods for di+eren ypes of invenory. c. )nven )nvenor oryy is o$en o$en he he larg larges es accoun accoun in wor, wor,ing ing capi capial. al. d. )nven )nvenor oryy valu valuato aton n incl include udess few few estma estmaes es..
. easy b
hen labor is a signi/can par of invenory' verifying he proper accountng of hese coss should be esed in he: a. inve inven nor oryy and and ware wareho hous usin ing g cyc cycle le.. b. payr payrol olll and and per personn sonnel el cyc cycle le.. c. acu acuis isit iton onss and and paym paymen ens s cycl cycle. e. d. cash cycle.
0. easy a
or reail and wholesale businesses' he mos imporan invenory is: a. merc me rcha hand ndis ise e avai availa labl ble e for for sale sale.. b. wor, or,-in-in-p proces ocess. s. c. raw ma maerials. d. inve inven nor oryy hel held d on on cons consig ignm nmen en. .
2. easy b
"he audi procedure 3observe he clien a,ing a physical invenory invenory coun and es he coun4 is su%cien o deermine all of he following e&cep: e&cep: a. whehe wheherr reco record rded ed inven invenor oryy acua acually lly e&is e&iss. s. b. whehe wheherr recor recorded ded inven invenor oryy was prope properly rly valu valued ed by he he clien clien.. c. whehe wheherr recor recorded ded inven invenor oryy was prope properly rly coun coune ed d by he clien clien. . d. wheher wheher clien clien inven invenory ory insr insructon ucton had properly properly been followed. followed.
5. easy d
)n mos manufacuring companies' he invenory and warehousing cycle begins wih he: a. rece receip ip of of a cus cusom omer6 er6ss ord order er.. b. comple completon ton of of produ producto cton n of a cusom cusomer6 er6ss order order.. c. initat initaton on of pro produc ducton ton of a cusom cusomer6 er6ss order order.. d. acuis acuisito iton n of raw raw maeri maerials als for for produ producto cton n of an order order..
7. easy c
"he audi es esss o verify verify ha ha he clien clien is using using an inven invenor oryy meho mehod d which which is gener generall allyy acceped and o verify ha physical couns were correcly summari8ed are performed during he audi of he: a. acu acuis isit iton on and and pay payme men nss cycl cycle. e. b. payr payrol olll and and per personn sonnel el cyc cycle le.. c. inve inven nor oryy a and nd ware wareho hous usin ing g cyc cycle le.. d. sale saless and and coll collec ecto ton n cyc cycle le..
9. easy a
hich of of h he fo following wo would be be an an ap appropriae in initaton of of a purchase re reuisiton*
a. b.
Arens/Elder/Beasley Arens/Elder/Beasley
ne initaed based on a periodic coun of raw maerials. ;es
ne initaed by soc,room personnel as raw maerials are needed. ;es
2
c. d.
;es
1=. easy a
>lmos all companies need physical conrols over heir asses o preven loss. hich of he following is no an e&le of such a conrol* a. ?erpeual invenory maser /les. b. @egregaed' limied-access sorage areas. c. Cusody of asses assigned o speci/c responsible individuals. d. >pproved prenumbered documens for auhori8ing movemen of invenory.
11. easy d
hich deparmen wihin a manufacuring company is o$en responsible for he review of producton and scrap repors* a. ?urchasing. b. >ccouns ?ayable. c. >ccountng. d. ?roducton.
1!. easy b
Aandling he receip of ordered goods is a par of he ######## cycle. a. purchasing b. acuisiton and paymen c. invenory d. invenory and warehousing
1(. easy b
######### accumulae coss by individual Bobs as maerial is issued ino producton and labor coss are incurred. a. us-in-tme producton sysems b. ob order cos sysems c. ?rocess cos sysems d. Manufacuring sysems
1. easy c
"here mus be a periodic physical coun by he clien of he invenory iems on hand: a. only if he clien uses he D) mehod. b. only if he clien uses a lower-of-cos-or-mar,e mehod. c. regardless of he clien6s invenory valuaton mehod. d. only if he clien uses eiher he D) or ) mehod.
10. easy d
ih regard o he physical coun of invenory' necessary conrol procedures include: a. proper insructons for he physical coun. b. independen hird-pary veri/caton of he couns. c. hird-pary reconciliatons of he physical couns wih perpeual invenory maser /les. d. countng he invenory only on he year-end dae.
12. easy c
)f he audior concludes ha physical conrols over invenory are so inadeuae ha he invenory will be di%cul o coun' he audior should ordinarily: a. wihdraw from he engagemen. b. issue a uali/ed audi repor. c. conduc e&panded observaton ess of physical invenory. d. hire a specialis o assis he audior.
15. easy a
rom which of he following evidence-gahering audi procedures would an audior obain mos assurance concerning he e&isence of invenories* a. bservaton of physical invenory couns. b. riEen invenory represenatons from managemen. c. Con/rmaton of invenories in a public warehouse. d. >udior6s recompuaton of invenory e&ensions.
17. easy a
ohnson Co.6s physical coun of invenories was lower han he invenory uanttes shown in is perpeual records. "his siuaton could be he resul of he failure o record: a. sales. b. sales reurns. c. purchases. d. purchase discouns.
19.
hich of he following is no a functon wihin he invenory and warehousing cycle*
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3
easy d
a. b. c. d.
!=. easy b
)f an audior were concerned wih obaining evidence abou he appropriaeness of he value of invenory' which of he following ess would be mos appropriae* a. Compilaton ess. b. ?rice ess. c. Con/rmaton of invenory held by ouside partes. d. ?hysical e&aminaton of he invenory.
!1. easy b
hich of he following is he bes audi procedure for he discovery of damaged merchandise in a clien6s ending invenory* a. Compare he physical uanttes of slow-moving iems wih corresponding uanttes of he prior year. b. bserve merchandise and raw maerials during he clienFs physical invenory coun. c. Review he managemen6s invenory represenaton leEer for accuracy. d. "es overall fairness of invenory values by comparing he company6s urnover rato wih he indusry average.
!!. medium c
hich of he following conrols would be appropriae regarding he release of maerials from a soc,room* a. ?roducton employees reues maerials be delivered o heir wor, areas as hey need hem. b. @oc,room employees deliver maerials o wor, areas hroughou he day o mainain accepable levels of safey soc, G no wriEen records are mainained. c. ?roducton employees submi approved reuisiton forms o he soc,room for maerials needed. d. ?roducton employer in need of maerials should personally pic, up needed maerials from he soc,room.
!(. medium d
ho should mainain he perpeual invenory maser /les* a. ?roducton personnel. b. )nvenory soreroom personnel. c. )nvenory receiving personnel. d. >ccountng deparmen personnel.
!. medium a
"he invenory and warehousing cycle can be hough of as having wo separae bu closely relaed sysems' one involving he acual physical How of goods' and he oher he: a. relaed coss. b. sorage of he goods. c. inernal conrol over hose goods. d. preventon of wase' obsolescence' and he$.
!0. medium c
)n any company involved in manufacuring' an adeuae cos accountng inernal conrol sysem is necessary o indicae he relatve pro/abiliy of he various producs for managemen planning and conrol and o: a. deermine variances from sandards. b. deermine variances from budges. c. value invenories for /nancial saemen purposes. d. value invenories for audi veri/caton.
!2. medium c
Maser /les' wor,shees' and repors ha accumulae maerial' labor' and overhead as he coss are incurred are: a. accountng sysems. b. soreroom documens. c. cos accountng records. d. /nished goods invenory records.
!5. medium b
"he main di+erence beween Bob order and process costng sysems is ha: a. one accumulaes coss by maerials issued and he oher by labor incurred. b. one accumulaes coss by individual Bobs and he oher by partcular processes. c. one emphasi8es coss accumulaed in compleed producs and he oher emphasi8es
Arens/Elder/Beasley
?rocess he goods. @ore raw maerials. @hip /nished goods. ?rocess invoices for shipped goods.
4
coss associaed wih wor,-in-process. d. one emphasi8es coss adding value o he produc and he oher emphasi8es coss incurred because of wase' scrap' and obsolescence. !7. medium d
> well-designed compueri8ed sysem of perpeual invenory maser /les includes informaton abou he: a. unis of invenory purchased' sold' and on hand. b. uni coss of invenory purchased' sold' and on hand. c. unis of raw maerials' wor,-in-process' and /nished goods. d. unis and uni coss of invenory purchased' sold' and on hand.
!9. medium a
hich of he following is a signi/can audi concern relaed o he ransfer of invenory from one locaton o anoher* a. Recorded ransfers occurred. b. "ransfers were properly ranspored. c. "ransfers were properly planned. d. "ransfers represen e%cien movemen of asses.
(=.
hen may audiors observe he physical invenory coun*
medium a
a. b. c. d.
> an inerim dae ;es
> year-end ;es
(1. medium d
hich of he following is no an aspec of concern when auditng he cos accountng sysem* a. Ini cos records. b. ?hysical conrols over invenory. c. Jocumens and records for ransferring invenory. d. @afeguarding he raw maerials from poin of receip o he soreroom.
(!. medium a
"he audior6s ess of he adeuacy of he physical conrols over raw maerials' wor,-inprocess' and /nished goods mus be resriced o: a. observaton and inuiry. b. documenaton and observaton. c. documenaton and con/rmaton. d. documenaton and inuiry.
((. medium a
) is freuenly possible o es he physical invenory prior o he balance shee dae when: a. here are accurae perpeual invenory maser /les. b. year-end sales are small. c. he inernal conrol sysem is no beEer a year-end han a an earlier poin in tme. d. he clien couns invenory a inerim daes.
(. medium d
"ess of he perpeual invenory maser /les for he purpose of reducing he ess of physical invenory or changing heir tming are done hrough he use of: a. inuiry. b. observaton. c. con/rmaton. d. documenaton.
(0. medium c
> maBor di%culy in he veri/caton of invenory cos records is deermining reasonableness of: a. direc labor6s hourly rae. b. raw maerials per uni cos. c. cos allocatons. d. number of direc labor hours applied.
(2. medium d
hen auditng he invenory and warehousing cycle' he use of analytcal procedures is: a. no imporan for his cycle. b. less imporan han for any oher cycle. c. more imporan han for any oher cycle. d. as imporan as heir use in any oher cycle.
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5
(5. medium c
hich one of he following analytcal procedures would be mos helpful in alertng he audior o he possibiliy of obsolee invenory* a. Compare gross margin percenage wih previous years6. b. Compare uni coss of invenory wih previous years6. c. Compare invenory urnover rato wih previous years6. d. Compare curren year manufacuring coss wih previous years6.
(7. medium a c
hich of he following saemens is correc regarding he audior6s responsibiliy wih respec o he year-end invenory procedures of an audi clien*
a. b. c. d.
"he audior is responsible for reconciling he physical coun wih he perpeual invenory maEer /les. ;es
"he audior is responsible for a,ing and compiling he invenory.
"he audior is responsible for observing he physical countng of invenory.
(9. medium a
McKesson L Robbins Company is a well-,nown audi case involving audior responsibiliy. ha occurred a he McKesson L Robbins Company o change he way in which audiors audi invenory* a. "he company recorded none&isen invenory. b. "he audior did no perform any audi ess of he invenory. c. "he audior and company colluded o oversae invenory balances. d. "he company couned invenory hree monhs prior o year-end.
=. medium c
hen a physical coun of invenory is performed a an inerim dae' he audior observes i a ha tme and ess he perpeual records for ransactons: a. hroughou he year. b. which are a represenatve sample of he period under audi. c. from he dae of he coun o year-end. d. from he dae of he coun o he end of he audi /eld wor,.
1. medium b
hen here are no perpeual invenory /les and invenory is maerial: a. an audi canno be performed' so he audior mus issue a disclaimer. b. a physical invenory should be a,en by he clien near year-end. c. he audior will have o perform he invenory coun and deermine valuaton. d. he audior need no observe invenory couns bu mus do es couns.
!.
>udior ess of physical conrols over raw maerials' wor,-in-process' and /nished goods are performed by:
medium d
a. b. c. d.
&aminaton ;es
bservaton
)nuiry ;es
(. medium d
"he mos imporan par of he observaton of invenory is o deermine wheher: a. all couns are accurae. b. he invenory-a,ers are uali/ed. c. obsolee invenory has been ident/ed. d. he physical coun is being a,en in accordance wih he clien6s insructons.
. medium d
> useful sartng poin for becoming familiar wih he clien6s invenory is for he audior o: a. read he >)C?>6s )ndusry >udi Nuide. b. review accountng heory covering special problems' such as gas and oil accountng' or lease-purchase agreemens. c. read he clien6s >ccountng Manual. d. our he clien6s faciliy.
0. medium
> common invenory observaton procedure is o selec a random sample of ag numbers and identfy he ag wih ha number aEached o he acual invenory iem. "he audi obBectve
Arens/Elder/Beasley
6
a
being achieved by his procedure is: a. invenory as recorded on ags acually e&iss Oe&isenceP. b. e&istng invenory is couned and agged OcompleenessP. c. invenory is couned accuraely OaccuracyP. d. invenory is classi/ed correcly Oclassi/catonP.
2. medium c
)f a clien inends o coun invenory a an inerim dae' he audior should e&pec here o be all of he following e&cep: a. conrols over he preparaton and mainenance of perpeual invenory records. b. compeen personnel assigned o coun he invenory. c. hird-pary invenory countng specialiss. d. an adeuaely designed plan o coun he invenory.
5. medium c
> common invenory observaton procedure is o be aler for iems ha are damaged' rus- or dus-covered' or locaed in inappropriae places. "he balance-relaed audi obBectve being achieved by his procedure is: a. classi/caton. b. cuo+. c. reali8able value. d. righs.
7. medium d
"he es of deails of balance procedure which reuires he audior o accoun for unused invenory ag numbers o ma,e sure none have been deleed is associaed wih he audi obBectve of: a. accuracy. b. e&isence. c. deail te-in. d. compleeness.
9. medium d
"he es of deails of balance procedure which reuires he audior o perform ess of lowerof-cos-or-mar,e' selling price' and obsolescence is an aEemp o satsfy he obBectve of: a. e&isence. b. compleeness. c. accuracy. d. reali8able value.
0=. medium a
Mos of he audi estng of he sorage of /nished goods as well as he shipmen of merchandise a,es place during he estng of he: a. sales and collecton cycle. b. payroll and personnel cycle. c. acuisitons and paymens cycle. d. invenory and warehousing cycle.
01. medium b
"he audior6s main concerns in verifying ransfers of invenory do no include wheher: a. recorded ransfers e&is. b. ransfers represen appropriae uses of company resources. c. all acual ransfers are recorded. d. he deails of he ransfer are accuraely recorded.
0!. medium c
>$er accountng for a seuence of invenory ags' an audior races a sample of ags o he physical invenory listng o obain evidence ha all iems: a. included in he listng have been couned. b. represened by invenory ags acually e&is. c. represened by invenory ags are included in he listng. d. included in he listng are represened by invenory ags.
0(. medium d
>udiors es he uanty of maerials charged o wor,-in-process by racing hese uanttes o: a. cos ledgers. b. perpeual invenory records. c. receiving repors. d. maerial reuisitons.
0.
hich of he following siuatons would mos li,ely reuire special audi planning*
Arens/Elder/Beasley
7
medium a
a. b. c. d.
00. medium a
or several years' a clien6s physical invenory coun has been lower han wha was shown on he boo,s a he tme of he coun so ha downward adBusmens o he invenory accoun were reuired. Conributng o he invenory problem could be wea,nesses in inernal conrol ha led o he failure o adBus he accountng records for some: a. purchases reurned o vendors. b. sales reurns received. c. sales discouns allowed. d. cash purchases.
02.
"he physical countng of invenory may be performed a which of he following tmes*
medium a
a. b. c. d.
)nvenory consiss of precious sones. @ome iems of facory and o%ce euipmen do no bear ident/caton numbers. Jepreciaton mehods used on he clien6s a& reurn di+er from hose used on he boo,s. >sses costng less han 0== are e&pensed even hough heir e&peced life e&ceeds one year.
)nerim daes ;es
n a cycle basis during he year ;es
05. medium c
hen an audior observes ha personnel who are responsible for physically countng invenory are no following he invenory insructons' he audior should: a. conac a clien6s supervisor in an aEemp o correc he problem. b. modify he clien6s physical invenory insructons. c. no discuss he problem wih clien6s supervisor in order o mainain independence. d. assign audi sa+ o he invenory coun.
07. medium b
"he audior6s obBectve during an observaton of a clien6s physical invenory coun is o: a. discover wheher a clien has couned a partcular invenory iem or group of iems. b. obain direc ,nowledge ha he invenory e&iss and has been properly couned. c. provide an appraisal of he ualiy of he merchandise on hand on he day of he physical coun. d. allow he audior o supervise he conduc of he coun so as o obain assurance ha invenory uanttes are reasonably accurae.
09. medium a
"he audi of year-end physical invenories should include seps o verify ha he clien6s purchases and sales cuo+s were adeuae. "he audi seps should be designed o deec wheher merchandise included in he physical coun a year-end was no recorded as a : a. sale in he curren period. b. sale in he subseuen period. c. purchase in he curren period. d. purchase reurn in he subseuen period.
2=. medium b
hich one of he following procedures would no be appropriae for an audior in discharging his responsibilites concerning he clien6s physical invenories* a. Con/rmaton of goods in he hands of public warehouses. b. @upervising he a,ing of he annual physical invenory. c. Carrying ou physical invenory procedures a an inerim dae. d. baining wriEen represenaton from he clien as o he e&isence' ualiy' and dollar amoun of he invenory.
21. medium d
?ricing manufacured invenory is di%cul. >udiors mus evaluae he mehod of allocatng manufacuring overhead for all bu which of he following* a. reasonableness. b. compuatonal correcness. c. adherence o >@ pronouncemen d. consisency.
2!. medium c
)f he perpeual invenory maser /les show lower uanttes of invenory han he physical coun' an e&planaton of he di+erence migh be unrecorded: a. sales.
Arens/Elder/Beasley
8
b. c. d.
sales discouns. purchases. purchase discouns.
2(. easy b
hich of he following is no a generally recogni8ed invenory mehod* a. ) b. D c. D) d. @peci/c ident/caton
2. medium b
hich of he following conrol procedures would mos li,ely be used o mainain accurae perpeual invenory records* a. )ndependen soreroom coun of goods received. b. ?eriodic independen comparison of records wih goods on hand. c. ?eriodic independen reconciliaton of conrol and subsidiary records. d. )ndependen maching of purchase orders' receiving repors' and vendors6 invoices.
20. challenging c
Cos accountng conrols are hose relaed o he physical invenory and he conseuen coss from he poin a which: a. maerials are ordered for purchase untl he /nished produc is sold. b. he cusomer6s order is received untl he /nished produc is shipped. c. raw maerials are reuisitoned untl he /nished produc is sen o sorage. d. raw maerials are reuisitoned untl he /nished produc is compleely manufacured.
22. challenging d
)n valuing invenory' he audior mus consider all bu which of he following facors* a. "he valuaton mehod mus be in accordance wih N>>?. b. "he valuaton mehod mus be applied on a consisen basis. c. "he invenory mus be valued a he lower of cos or mar,e. d. >ll invenory mus be valued using he same valuaton mehod under N>>?.
25. challenging c
Conrols which provide a means of ensuring ha he physical couns are properly summari8ed' priced a he same amoun as he uni records' correcly e&ended and oaled' and included in he general ledger a he proper amoun are ,nown as: a. sandard cos conrols. b. pricing inernal conrols. c. compilaton inernal conrols. d. coun uanty inernal conrols.
27. challenging c
>ssume ha he clien6s valuaton of an invenory iem is 1= per uni for 1'=== unis' using /rs-in' /rs-ou O)P. )f he mos recen acuisiton of invenory was for 2== unis a 1= per uni and he immediaely preceding acuisiton was for 5== unis a 9 per uni' he invenory iem is in error and i is: a. undersaed ==. b. undersaed (==. c. oversaed ==. d. oversaed 5==. >ssume ha he clien6s valuaton of an invenory iem is 1= per uni for 1'=== unis' using D). )f he mos recen acuisiton of a layer of invenory was for 2== unis a 1= per uni and he immediaely preceding layer was for 5== unis a 9 per uni' he invenory iem is in error and i is: a. undersaed 5==. b. undersaed (==. c. oversaed ==. d. oversaed 5==.
29. challenging d
5=. challenging c
hen an ouside specialis has assumed full responsibiliy for a,ing he clien6s physical invenory' reliance on he specialis6s repor is accepable if: a. he audior6s repor conains a reference o he assumpton of full responsibiliy. b. he audior is sats/ed hrough applicaton of appropriae procedures as o he repuaton and compeence of he specialis. c. he audior conduced he same audi ess and procedures as would have been applicable if he clien6s employees oo, he physical invenory. d. circumsances made i impractcable or impossible for he audior eiher o do he wor, personally or observe he wor, done by he invenory /rm.
Arens/Elder/Beasley
9
51. challenging b
"o bes ascerain ha a company has properly included merchandise ha i owns in is ending invenory' he audior should review and es he: a. erms of he open purchase orders. b. purchase cuo+ procedures. c. conracual commimens made by he purchasing deparmen. d. purchase invoices received on or around year-end.
5!. challenging a
Aardy Company mass-produces eigh di+eren producs. "he conroller who is ineresed in srenghening inernal conrols over he accountng for maerials used in producton would be mos li,ely o implemen aOnP: a. perpeual invenory sysem. b. Bob order cos accountng sysem. c. economic order uanty sysem. d. separaton of dutes among producton personnel.
5(. challenging d
hich of he following is an inernal conrol wea,ness for a company whose invenory of supplies consiss of a large number of individual iems* a. "he cycle basis is used for physical couns. b. @upplies of relatvely liEle value are e&pensed when purchased. c. ?erpeual invenory records are mainained only for iems of signi/can value. d. "he sore,eeper is responsible for mainenance of perpeual invenory records.
5. challenging c
hen auditng a public warehouse' which of he following is he mos imporan audi procedure wih respec o disclosing unrecorded liabilites* a. bservaton of invenory. b. Review of ousanding receips. c. )nspecton of receiving and issuing procedures. d. Con/rmaton of negotable receips wih holders.
ssay Questons 50. easy
ha are wo facors a+ectng he comple&iy of he audi of invenory* >nswer: )nvenory is o$en he larges accoun in he wor,ing capial. )nvenory is o$en in di+eren locatons. Jiverse iems in invenory are o$en di%cul o value. )nvenory valuaton is di%cul due o he estmaes involved. "here are several accepable mehods of valuing invenory and some enttes use di+eren mehods for di+eren ypes of invenory.
52. easy
"he basis for he audior6s veri/caton of invenory pricing and compilaton is he clien6s invenory listng. Jescribe he informaton ha should be included in his listng. >nswer: "he invenory listng should include each invenory iem6s descripton' uanty' uni price' and e&ended value.
55. medium
)n pricing invenory' i is necessary o consider wheher replacemen cos is lower han hisorical cos. hen applying lower of cos or mar,e ess' wha basis should audiors use for each of he following caegories of invenory: Raw maerials or,-in-process ?urchased /nished goods
>nswer:
Arens/Elder/Beasley
Raw maerials G he mos recen cos as found on vendor invoices from he period subseuen o year-end or,-in-process G all manufacuring coss from producton records from he period subseuen o year-end ?urchased /nished goods G he mos recen cos as found on vendor invoices from
10
he period subseuen o year-end and he sales value of hese goods
57. medium
ha mus audiors do o mee heir obligatons under professional auditng sandards relaed o he observaton of invenory* >nswer: e presen a he tme he clien couns heir invenory for deermining year-end balances. bserve he clien6s countng procedures. Ma,e inuiries of clien personnel abou heir countng procedures. Ma,e heir own independen ess of he physical couns.
59. medium
Jiscuss he audior6s responsibilites for invenory mainained in public warehouses or wih oher ouside cusodians.
7=. medium
>nswer: rdinarily he audior will con/rm invenory held by ouside cusodians. Aowever' he audior may perform additonal procedures if he amouns involved are signi/can. "hese additonal procedures may include: an investgaton of he cusodian6s performance' reuestng an independen accounan6s repor on he cusodian6s conrol procedures over he cusody of goods' and observing he physical coun of goods held by he cusodian. Jiscuss he four aspecs of he audi of cos accountng wih which he audior is mos concerned. >nswer: "he audior is mos concerned wih:
71. medium
Physical controls over inventory. Documents and records for transferring inventory. "he audior6s primary concerns in
verifying he ransfer of invenory from one locaton o anoher are ha he recorded ransfers e&is' he ransfers ha have acually a,en place are recorded' and he uanty' descripton' and dae of all recorded ransfers are accurae. Perpetual inventory master les. "he adeuacy of perpeual invenory maser /les has a maBor e+ec on he tming and e&en of he audior6s physical e&aminaton of invenory. Unit cost records.
)dentfy hree analytcal procedures commonly used when auditng accouns in he invenory and warehousing cycle. >nswer: Common analytcal procedures for he invenory and warehousing cycle include: Compare gross margin percenage wih previous years6. Compare invenory urnover rato wih previous years6. Compare uni coss of invenory wih previous years6. Compare e&ended invenory value wih previous years6. Compare curren-year manufacuring coss wih previous years6.
7!. medium
Jiscuss he mehodology for designing ess of deails of balances for invenory. >nswer: "he mehodology for designing ess of deails of balances for invenory is: 1. @e maerialiy' and assess accepable audi ris, and inheren ris, for he invenory and warehousing cycle. !. >ssess conrol ris, for several cycles. "his ris, is assessed for he invenory and warehousing cycle' sales and collecton cycle' acuisiton and paymen cycle' and payroll and personnel cycle. (. Jesign and perform ess of conrols and subsantve ess of ransactons for several cycles. . Jesign and perform analytcal procedures for he invenory and warehousing cycle. 0. Jesign ess of deails of invenory o satsfy balance-relaed audi obBectves. Jesign
Arens/Elder/Beasley
11
sample si8e' tming of ess' iems o selec for estng' and audi procedures o be performed. 7(. medium
"he design of ess of deails of balances for invenory is a+eced by audi resuls from multple cycles. )dentfy he cycles' oher han he invenory and warehousing cycle ha a+ec he audi of invenory. >nswer: "ess of deails of balances for invenory are a+eced by he resuls of ess of conrols and subsantve ess of ransactons in he sales and collecton cycle' acuisiton and paymen cycle' and payroll and personnel cycle' as well as he invenory and warehousing cycle.
Arens/Elder/Beasley
12
7. medium
Jiscuss he ,ey conrol procedures relatng o he clien6s physical coun of invenory. >nswer: "he ,ey conrol procedures relatng o he clien6s physical coun of invenory include proper insructons for he physical coun' supervision by responsible personnel' independen inernal veri/caton of he couns' independen reconciliatons of he physical couns wih perpeual invenory maser /les' and adeuae conrol over coun shees or ags.
70. medium
&plain why he audi of wor,-in-process and /nished goods invenory is generally more comple& han he audi of purchased invenory. >nswer: "he need o verify he cos of raw maerials' direc labor' and manufacuring overhead in pricing wor,-in-process and /nished goods has he e+ec of ma,ing he audi of wor,-inprocess and /nished goods invenory more comple& han he audi of purchased invenory.
72. medium
ha ypes of ess are available o an audior who wishes o es he physical conrol over invenory* >nswer: "he audior may eiher use observaton or inuiry o obain evidence abou he physical conrol over invenory.
75. challenging
@ae he si& functons ha ma,e up he invenory and warehousing cycle and' for each functon' identfy he relaed documens andSor records ha would be used by a manufacuring company. >nswer: "he si& functons are:
Process purchase orders. Relaed documens are he purchase reuisiton and he
purchase order.
Receive raw materials. Relaed documens are he receiving repor and he vendor6s
invoice.
Store raw materials. Relaed record is he raw maerials perpeual invenory maser
/le.
Arens/Elder/Beasley
Process the goods. Relaed documens and records are he raw maerials reuisiton
and he cos accountng records. Store nished goods. Relaed records are he /nished goods perpeual invenory maser /le and he cos accountng records. Ship nished goods. Relaed documens and records are he shipping documen' he /nished goods perpeual invenory maser /le' and he cos accountng records.
13
77. challenging
"he audi of he invenory and warehousing cycle consiss of /ve pars. @ae he /ve pars and' for each par' identfy he cycle in which ha par is esed by he audior. >nswer: "he /ve pars are:
Acquire and record raw materials, laor, and overhead. "his is esed during he
audis of he acuisiton and paymen cycle' and he payroll and personnel cycle. !nternally transfer assets and costs. "his is esed in he invenory and warehousing cycle. Ship goods, and record revenue and costs. "his is esed during he audi of he sales and collecton cycle. Physically oserve inventory. "his is esed in he invenory and warehousing cycle. Price and compile inventory. "his is esed in he invenory and warehousing cycle.
her bBectve >nswer orma Questons 79. easy b
>udiors have been reuired o perform physical observaton ess of invenory since he early 199=s. a. "rue b. alse
9=. easy b
?erpeual invenory records should be mainained by persons have access o invenory. a. "rue b. alse
91. easy b
)nernal conrols over he ship nished goods functon in he invenory and warehousing cycle are no normally esed by he audior as a par of performing ess of conrols and subsantve ess of ransactons in he sales and collecton cycle. a. "rue b. alse
9!. easy b
)n he audi of invenory' he audior and clien are Boinly responsible for ma,ing and recording he coun of physical invenoryT while he audior is responsible for drawing conclusions abou he adeuacy of he physical invenory. a. "rue b. alse
9(. easy a
9. easy b
"he audi procedure 3?erform ess of lower-of-cos-or-mar,e' selling price' and obsolescence4 provides assurance mainly for he reali8able value obBectve for invenory pricing and compilaton. a. "rue b. alse )n process costng sysems' coss are accumulaed by individual Bobs. a. "rue b. alse
90. easy a
)n Bob cos sysems' coss are accumulaed by individual Bobs. a. "rue b. alse
92. easy b 95. easy a
>n approved purchase reuisiton form a uhori8es shipmen of goods o cusomers. a. "rue b. alse "he receip of raw maerials is a par of he a cuisiton and paymen cycle. a. "rue b. alse
97. easy b
hen /nished goods are compleed' hey are usually sored in he pac,ing area. a. "rue b. alse
Arens/Elder/Beasley
14
99. easy b
hen performing price ess for purchased invenory' he audior would no be concerned wih he mos recen vendors6 invoices if he clien uses he ) valuaton mehod. a. "rue b. alse
1==. easy a
> comparison of he curren year6s invenory urnover rato wih previous years6 may indicae he presence of obsolee invenory. a. "rue b. alse
1=1. easy a
"o es for proper sales cuo+' an audior would obain he number of he las bill of lading issued during he period under audi and verify ha he iem shipped had been e&cluded from he invenory listng. a. "rue b. alse
1=!. easy b
)f he perpeual invenory maser /les show lower uanttes of invenory han he physical coun' one e&planaton of he di+erence migh be unrecorded sales. a. "rue b. alse
1=(. medium a
) is accepable under generally acceped accountng principles for a company o use di+eren valuaton mehods for di+eren pars of is invenory. a. "rue b. alse
1=. medium a
)nernal conrols over he processing of purchase orders functon' he receipt of raw materials functon' and he storage of raw materials functon in he invenory and warehousing cycle are normally esed by he audior as a par of performing ess of conrols and subsantve ess of ransactons in he acuisiton and paymen cycle and he payroll and personnel cycle. a. "rue b. alse
1=0. medium a
"he maBor consideratons in evaluatng he reasonableness of cos allocatons are compliance wih N>>? and consisency wih prior years. a. "rue b. alse
1=2. medium a
hen verifying he ransfer of invenory from one locaton o anoher' he audi obBectves wih which he audior is primarily concerned are occurrence of recorded ransfers' completeness of recorded ransfers' and accuracy of recorded ransfers. a. "rue b. alse
1=5. medium b
hen he clien6s perpeual invenory maser /les are inadeuae' he audior will probably choose o es he physical invenory prior o he balance shee dae. a. "rue b. alse
1=7. medium a
hen par of he clien6s invenory is in a public warehouse or in he possession of oher ouside cusodians' he audior does no need o observe a physical coun of he invenory if a wriEen con/rmaton is obained direcly from he invenory cusodians. a. "rue b. alse
1=9. medium b
"he audi procedure 3oo he invenory listng schedules for raw maerials' wor,-in-process' and /nished goods4 provides assurance mainly for he accuracy obBectve for invenory pricing and compilaton. a. "rue b. alse
11=. medium b
"he audi procedure 3>ccoun for unused ag numbers shown in he audior6s wor,ing papers o ma,e sure no ags have been added4 provides assurance mainly for he e&isence obBectve for invenory pricing and compilaton.
Arens/Elder/Beasley
15
a. b.
"rue alse
111. medium a
hen performing audi ess of pricing and compilaton for invenory' he clien6s perpeual invenory maser /le may be used in place of vendors6 invoices if conrols over he perpeual invenory maser /le are adeuae. a. "rue b. alse
11!. medium b
?roducton personnel should ordinarily be responsible for mainaining perpeual invenory records. a. "rue b. alse
11(. medium a
"he e&en and tming of an audior6s physical e&aminaton of invenory is signi/canly inHuenced by he adeuacy of he clien6s perpeual invenory records. a. "rue b. alse
11. challenging a
hile separae perpeual invenory records are normally ,ep for raw maerials and /nished goods' mos companies do no use perpeuals for wor,-in-process. a. "rue b. alse
110. challenging b
)nheren ris, is ypically assessed a a moderae level for invenory due o he naure of he asse. a. "rue b. alse
Arens/Elder/Beasley
