Which of the following is not a reason for the special significance attached by the auditors to the verification?

Chapter 12 - Inventories and Cost of Goods Sold

Chapter 12

Inventories and Cost of Goods Sold

True / False Questions

1. Observation of inventories is a generally accepted auditing standard.

True False

2. The receiving department should accept only goods for which there is an approved

purchase order on hand.

True False

3. For good internal control over purchase transactions, purchases should be made from

approved vendors by the department needing the goods.

True False

4. Auditors should not review the client's planning of the physical inventory.

True False

5. The proper cutoff of inventories is best achieved when the client uses prenumbered

purchase orders.

True False

6. The lower of cost or market test by the auditors is generally designed to assure that

inventories are not valued above their net realizable values.

True False

7. When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a

material misstatement may exist, they normally may still give an unqualified opinion on the

client's income statement.

True False

12-1

Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories?

The existence of inventories is inherently difficult to substantiate.

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Chapter 12 Inventories and Cost of Goods Sold

Chapter 12 - Inventories and Cost of Goods Sold

Chapter 12

Inventories and Cost of Goods Sold

True / False Questions

1.Observation of inventories is a generally accepted auditing standard.TrueFalse

2.The receiving department should accept only goods for which there is an approved purchase order on hand.TrueFalse

3.For good internal control over purchase transactions, purchases should be made from approved vendors by the department needing the goods.TrueFalse

4.Auditors should not review the client's planning of the physical inventory.TrueFalse

5.The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders.TrueFalse

6.The lower of cost or market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values.TrueFalse

7.When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unqualified opinion on the client's income statement.TrueFalse

8.To test the client's cutoff of inventories, the auditors will make a record of the serial number of the final receiving and shipping documents used prior to the taking of the physical inventory.TrueFalse

9.The use of a tagging system for inventory taking is designed to prevent double counting of goods.TrueFalse

10.The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses.TrueFalse

Multiple Choice Questions

11.An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all:A.Cash disbursements.B.Approved vouchers.C.Receiving reports.D.Vendors' invoices.

12.Which of the following is not true relating to the auditors' observation of the client's physical inventory?A.The auditors should evaluate the client's planning of the physical inventory.B.The auditors should make certain that consigned items from suppliers are included in physical inventory totals.C.The auditors should evaluate the adequacy of the client's counting procedures.D.The auditors should take test counts of the client's inventory.

13.A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect:A.Deliveries for which no purchase order was issued.B.Unapproved sales orders.C.Partial deliveries.D.Deliveries of a greater quantity of items than those ordered.

14.To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into:A.Net sales.B.Cost of good sold.C.Operating income.D.Gross sales.

15.Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper?A.Testing the entity's computation of standard overhead rates.B.Obtaining confirmation of inventories pledged under loan agreements.C.Reviewing a cutoff procedure for inventories.D.Tracing test counts to the entity's inventory listing.

16.A client uses a periodic inventory system. Would one expect a credit to which of the following accounts at the point of sale?

A.Option AB.Option BC.Option CD.Option D

17.A client uses a perpetual inventory system. Would one expect a credit to which of the following accounts at the point of sale?

A.Option AB.Option BC.Option CD.Option D

18.Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?A.Factory supervisor salary.B.Indirect materials.C.Miscellaneous expense.D.Sales expense.

19.A "bill and hold" scheme is most likely to include:A.Shipment of items to a customer beyond what the customer has ordered.B.Recording as sales items that the company retains as of year-end.C.Billing of items that are held by customers for future revenue production purposes.D.Selling items at substantial discounts near year-end.

20.Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles?A.Valuing inventory at cost.B.Including in inventory items that are consigned out to vendors, but not yet sold.C.Using standard cost as the measure of inventory cost.D.Including in inventory items shipped subsequent to year-end, but for which valid orders did exist at year-end.

21.Which of the following is least likely to be accurate statement concerning characteristics of an audit?A.An analysis of inventory turnover addresses whether the proper method of determining inventory costs--as contrasted to market values--is being applied.B.Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed.C.The direction of tests for overstatement errors is generally directed from the recorded entry to source documents.D.Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end.

22.Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories?A.The determination of inventory valuation directly affects net income.B.The existence of inventories is inherently difficult to substantiate.C.Special valuation problems often exist for inventories.D.Inventories are often the largest current asset of an enterprise.

23.Which of the following is true about the auditors' observation of the client's physical inventory?A.The count must be made at year-end.B.The auditors should supervise the client's personnel.C.The auditors' observation addresses the existence assertion.D.The auditors should justify any omission of the observation in the audit report.

24.In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the:A.Purchases journal.B.Purchase requisitions.C.Purchase orders.D.Vendors' invoices.

25.In verifying credits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the:A.Shipping documents.B.Receiving reports.C.Purchase orders.D.Vendors' invoices.

26.The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record:A.Purchases.B.Purchase discounts.C.Sales.D.Sales discounts.

27.An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly?A.Completeness.B.Existence.C.Legality.D.Valuation.

28.The use of a "blind" purchase order is designed to prevent errors by the:A.Purchase department.B.Receiving department.C.Stores department.D.Accounting department.

29.An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:A.Merchandise received.B.Vendor's invoices.C.Canceled checks.D.Receiving reports.

30.To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to:A.The purchase requisition.B.The receiving report.C.The purchase order.D.The voucher.

31.Which of the following is true about the auditors' observation of the client's physical inventory?A.The auditors should plan the physical inventory.B.The auditors should segregate damaged and obsolete goods.C.The auditors should evaluate the adequacy of the client's counting procedures.D.The auditors should supervise the client's personnel.

32.Which of the following is not a procedure that typically is used by the auditors in their examination of a client's goods held in the custody of a public warehouse?A.Confirmation.B.Obtaining reports on internal control at the warehouse.C.Observation.D.Corresponding with the state agency regarding the authenticity of the public warehouse.

33.Which of the following best describes the reason that the auditors record their inventory test counts in the working papers?A.To document every test count.B.For subsequent comparison with the completed inventory listing.C.To document compliance with generally accepted accounting principles.D.For use in subsequent audits.

34.Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory?A.The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used.B.The auditors should qualify their opinion, because the client must perform a complete count of the inventory.C.The auditors should increase the extent of their test counts to compensate for the use of a statistical technique.D.The auditors should withdraw from the engagement.

35.Which of the following best describes the reason for the auditors' review of the client's cost accounting system?A.To obtain evidence regarding the quantities of good described as wor

Which of the following is not a reason for the special significance attached by the auditors to the?

Which of the following is not one of the independent auditor objectives regarding the audit of inventories?

Which of the following is true about the auditor's observation of the client's physical inventory?

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