To download the complete and accurate content document, go to: https://testbankbell.com/download/test-bank-for-auditing-and-assurance-services-1stedition-iris-stuart/
1. The inventory process involves the balance sheet accounts but not the income statements accounts.
True False
2. Automated inventory systems may be used to maintain control over inventory, but not to keep track of production quantities.
True False
3. According to FASB Concept Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, assets are recorded at the price paid on the date of recognition.
True False
4. Clients may understate inventory to reduce income tax expense.
True False
5. For the inventory process, management asserts that inventory exists at the income statement date and that the costs of goods sold transactions recorded in the inventory process occurred during the year.
True False
6. Because the most likely misstatement in the inventory process is an understatement misstatement, existence and valuation are often identified as relevant assertions for this process.
True False
7. The cost accounting system determines the cost of the inventory manufactured by the company.
True False
8. In the inventory process, the auditor typically uses only substantive testing due to the nature of the accounts in the business process.
True False
9. If the inventory count is done at a date other than the end of the year, the auditor does not have to observe the inventory count but should perform his own count at year end.
True False
10. The inventory physical count gives the company inventory quantities that must be priced to arrive at the ending inventory balance reported on the balance sheet.
True False
11. Management prepares the financial statements and footnotes but the auditor prepares the discussion of the inventory.
True False
12. On the income statement, the inventory process is related to
A. cost of goods sold
B. purchases of inventory
C. accounts payable
D. cash payments
13. In the inventory process, adjustments to the ending inventory balance are always recorded against
A. cost of goods sold
B. selling, general and administrative expenses
C. purchases of inventory
D. accounts payable
14. On the balance sheet, the inventory process includes which of the following accounts?
A. cost of goods sold
B. administrative expenses
C. inventory
D. allowance account for LIFO adjustments
E. allowance account for FIFO adjustments
F. both A and B
G. both C and D
15. As with all income statement accounts, the inventory process expense accounts begin the year with
A. a total equal to the amount in accounts payable
B. a total equal to the budgeted estimated expenses for the year
C. ending balance from prior year
D. a zero balance
16. The totals at the end of the year in the inventory process expense accounts reflect
A. all the business conducted during the year
B. only the transactions completed during the year
C. all the transactions recorded during the year
D. only the transactions initiated during the year
17. The auditor must determine whether the inventory process transactions recorded in the revenue and expense accounts during the year
A. have been properly recorded in accordance with GAAS
B. have been recorded in accordance with an applicable financial reporting framework
C. are capable of being transferred to the owners equity account
D. have comparable transactions on the balance sheet
18. The totals in the inventory process balance sheet accounts reflect
A. all the transactions recorded during the year
B. a beginning balance as of the last day of the current year
C. only the amounts in the accounts on the last day of the year
D. the total amount of the transactions recorded during the year
E. the net amount of the transactions recorded during the year
F. both A and B
G. both C and E
19. The auditor is responsible, in the inventory process, for determining
A. only if the ending balance in the balance sheet account is stated in accordance with the applicable financial reporting framework
B. only if the ending balance in the income statement account is stated in accordance with the applicable financial reporting framework
C. only if the beginning balance in the balance sheet account is stated in accordance with the applicable financial reporting framework
D. only if the beginning balance in the income statement account is stated in accordance with the applicable financial reporting framework
20. The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm. If LIFO inventory is greater than FIFO inventory,
A. cost of goods sold is credited
B. cost of goods sold is debited
C. the allowance account is debited
D. the allowance account is credited
E. the LIFO reserve account is debited
F. both A and C
G. both B and D
21. The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm. If LIFO inventory is greater than FIFO inventory,
A. this would be an unusual situation, but it might occur in a year when the company reduces the quantity of inventory on hand
B. this would be an unusual situation, but it might occur in a year when the company increases the quantity of inventory on hand
C. this would be a normal situation, and usually occurs in a year when the company reduces the quantity of inventory on hand
D. this would be a normal situation, and usually occurs in a year when the company increases the quantity of inventory on hand
22. The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm. If LIFO inventory is greater than FIFO inventory,
A. the loss account for a decline in market value of inventory could be credited rather than debited if the market value had increased from the previous year but was not greater than cost
B. the loss account for a decline in market value of inventory could be debited rather than credited if the market value had decreased from the previous year but was not less than cost
C. the loss account for a decline in market value of inventory could be debited rather than credited if the market value had increased from the previous year but was not greater than cost
D. the loss account for a decline in market value of inventory could be credited rather than debited if the market value had decreased from the previous year but was not greater than cost
23. Automated inventory systems may be used to maintain control over inventory
A. in terms of keeping track of production quality
B. in terms of keeping track of production quantities
C. in terms of maintaining correct purchase history balances
D. in terms of maintaining correct inventory balances
E. in terms of maintaining correct shipping balances
F. both A and B
G. both B and D
24. IT technology related to inventory can be very useful in maintaining accurate records for inventory balances if
A. the internal controls for the technology are effectively designed to prevent or detect misstatements of purchases
B. the internal controls for the technology are effectively designed to prevent or detect misstatements in the financial statements
C. the internal controls for the technology are effectively designed to prevent or detect misstatements of inventory
D. the internal controls for the technology are effectively designed to prevent or detect misstatements of costs of goods sold
25. Once inventory is recorded, it continues to be carried at the amount initially recognized unless
A. the market value increases over the initial cost
B. the market value decreases below the initial cost
C. the market value increases over the initial cost at year-end
D. the cost to replace the inventory at year-end is below the initial cost of the inventory
26. The accounting rule, "lower of cost or market," reflects
A. a logical approach to inventory valuation
B. a rational approach to inventory valuation
C. a conservative approach to inventory valuation
D. an aggressive approach to inventory valuation
27. The accounting rule, "lower of cost or market" could more clearly be stated
A. lower of the cost of inventory when purchased or the sale price of the inventory item at year-end
B. lower of the cost of inventory when purchased or the cost to replace the inventory item at year-end
C. lower of the cost of inventory when sold or the cost to replace the inventory item at yearend
D. lower of the cost of inventory when purchased or the cost to replace the inventory item at mid-year
28. Inventory is recorded at cost when purchased. The cost of the inventory is
A. the purchase price
B. the purchase price less any purchase discounts
C. all expenditures necessary to obtain the inventory
D. the purchase price less any discounts plus any financing charges
29. When an overstatement misstatement in inventory occurs
A. cost of goods sold is understated
B. net income is overstated
C. inventory is understated
D. cost of goods sold is overstated
E. net income is understated
F. both A and B
G. both C and D
30. When an understatement misstatement in inventory occurs
A. cost of goods sold is understated
B. net income is overstated
C. inventory is overstated
D. cost of goods sold is overstated
E. net income is understated
F. both A and B
G. both D and E
31. Overstatement and understatement misstatements about inventory have what effect on outsiders?
A. outsiders are mislead about the true value of the inventory sold
B. outsiders are mislead about the correct valuation when the inventory is sold
C. outsiders are mislead about the future cash flows when the inventory is sold
D. outsiders are mislead about the future prices when the inventory is sold
32. The client may use a variety of methods to overstate inventory. These include
A. inaccurate inventory counts
B. inaccurate inventory pricing
C. incorrect recognition of customer rebates
D. incorrect FIFO reserve calculations
E. revaluing inventory to market value
F. both A and B
G. both C and E
33. The client may use a variety of methods to overstate inventory. These include
A. inaccurate purchase history
B. inaccurate inventory pricing
C. incorrect recognition of manufacturer rebates
D. incorrect FIFO reserve calculations
E. writing off obsolete inventory
F. both A and B
G. both B and C
34. The client may use a variety of methods to overstate inventory. These include
A. inaccurate purchase history
B. inaccurate inventory expense recording
C. incorrect recognition of manufacturer rebates
D. incorrect LIFO reserve calculations
E. writing off obsolete inventory
F. both A and B
G. both C and D
35. The client may use a variety of methods to overstate inventory. These include
A. inaccurate purchase history
B. inaccurate inventory expense recording
C. incorrect recognition of customer rebates
D. incorrect LIFO reserve calculations
E. failure to write-off obsolete inventory
F. both A and C
G. both D and E
36. The client may use a variety of methods to overstate inventory. These include
A. inaccurate inventory counts
B. inaccurate inventory expense recording
C. incorrect recognition of customer rebates
D. incorrect FIFO reserve calculations
E. failure to write-off obsolete inventory
F. both A and E
G. both B and D
37. In planning the audit, members of the audit team are required to have a team meeting to discuss the potential for misstatement due to fraud in the inventory process, including
A. the pressure on management to commit fraud
B. the inevitability that fraud will be perpetuated in the company
C the general tone or environment in the company that may allow management to conceptualize committing fraud
D. the general tone or environment in the company that may allow management to rationalize committing fraud
E. the rationalization for fraud to be perpetrated in the company
F. both A and D
G. both C and E
38. Management assertions about the accounts in the inventory business process are
A. existence or occurrence - for both classes of transactions and account balances
B. completeness - for account balances
C. valuation and allocation - for both classes of transactions and account balances
D. rights and obligations - for classes of transactions
E. accuracy - for account balances
39. Management assertions about the accounts in the inventory business process are
A. existence or occurrence - for account balances
B. completeness - for both classes of transactions and account balances
C. valuation and allocation - for both classes of transactions and account balances
D. rights and obligations - for classes of transactions
E. accuracy - for both classes of transactions and account balances
40. Management assertions about the accounts in the inventory business process are
A. existence or occurrence - for account balances
B. completeness - for classes of transactions
C. valuation and allocation - for account balances
D. rights and obligations - for classes of transactions
E. accuracy - for both classes of transactions and account balances
41. Management assertions about the accounts in the inventory business process are
A. existence or occurrence - for account balances
B. completeness - for classes of transactions
C. valuation and allocation - for classes of transactions
D. rights and obligations - for account balances
E. accuracy - for both classes of transactions and account balances
42. Management assertions about the accounts in the inventory business process are
A. existence or occurrence - for account balances
B. completeness - for classes of transactions
C. valuation and allocation - for both classes of transactions and account balances
D. rights and obligations - for both classes of transactions and account balances
E. accuracy - for classes of transactions
43. Management assertions about the accounts in the inventory business process are
A. that the cost of goods sold is accurate
B. that the costs of goods is inaccurate
C. that the cutoff was done in accordance with GAAS
D. that the cost of goods sold is properly classified
E. that the cost of goods is properly classified
44. Because the most likely misstatement in the inventory process is an overstatement misstatement,
A. accuracy and valuation are often identified as relevant assertions for this process
B. cutoff and valuation are often identified as relevant assertions for this process
C. classification and valuation are often identified as relevant assertions for this process
D. existence and valuation are often identified as relevant assertions for this process
45. The cost accounting system determines
A. the cost of the inventory purchased by the company
B. the cost of the inventory sold by the company
C. the cost of the inventory shipped by the company
D. the cost of the inventory manufactured by the company
46. Auditing a cost accounting system will require the auditor to understand
A. the tracking of the costs through the cost accounting system
B. the recording of the costs through the cost accounting system
C. how the quantities of inventory are reflected in the periodic inventory files
D. how the costs of inventory are reflected in the periodic inventory files
E. how only the quantities of inventory are reflected in the perpetual inventory files
47. Inventory costs are assigned to the manufactured product
A. when the product is transferred to finished goods inventory
B. as it moves through the manufacturing process
C. when the product is moved to work in process
D. as soon as the product is removed from raw materials inventory
48. Accurate cost data for raw materials, direct labor, and overhead costs are obtained when
A. purchased materials are received
B. direct labor is paid
C. the appropriate overhead rate is calculated
D. direct material and direct labor are added to the product
E. overhead is added to the product
F. both A and C
G. both B and D
H. both D and E
49. When the auditor tests the inventory records,
A. he must understand how direct labor is charged
B. he must understand how raw materials are received
C. he must understand how overhead is incurred
D. he must understand the internal controls in the cost accounting system
50. Depending on the controls in the cost accounting system, the auditor may choose
A. to verify raw materials by reviewing purchase orders for raw materials
B. to verify raw materials by reviewing purchase invoices for raw materials
C. to verify direct labor by reviewing department records for direct labor costs
D. to verify direct labor by reviewing payroll budgets for direct labor costs
E. to verify direct labor by reviewing payroll records for direct labor costs
F. both A and C
G. both B and D
H. both B and E
51. The perpetual inventory files reflect
A. the inventory valuation at the end of the year
B. all additions and deletions to the inventory
C. the work in process at the beginning of the year
D. the work in process at the end of the year
E. the inventory at the beginning of the year
F. both A and C
G. both B and E
H. both D and E
52. If the perpetual inventory files are accurate, the auditor can
A. accept the client's inventory valuation as correct
B. assume that the stated quantities are present
C. test the physical inventory before the balance sheet date
D. test the physical inventory by reviewing receiving reports
53. The internal controls that determine the accuracy of the perpetual inventory file were tested in the revenue process and the purchase and acquisition process because
A. these processes involve movement of inventory in and out of the perpetual inventory account
B. these processes involve reconciliation of inventory in the perpetual inventory account
C. these processes involve verification of inventory in the perpetual inventory account
D. these processes involve observation of inventory in the perpetual inventory account
54. The transactions audited in the inventory process include
A. determining the correct quantity of the inventory
B. internal controls relevant to transactions
C. pricing the inventory according to accounting standards
D. internal controls relevant to balances
E. valuing the year-end inventory transactions
F. Both A and C
55. The transactions audited in the inventory process include
A. determining the correct quality of the inventory
B. internal controls relevant to transactions
C. pricing the inventory according to accounting standards
D. internal controls relevant to balances
E. valuing the year-end inventory transactions
56. The transactions audited in the inventory process include
A. determining the correct quality of the inventory
B. internal controls relevant to transactions
C. pricing the inventory according to client standards
D. internal controls relevant to balances
E. valuing the year-end inventory balance
57. Substantive audit procedures in the inventory process are
A. inspection of records, documents, or tangible assets
B. monitoring
C. inquiry
D. risk assessment
E. reviewing policies and procedures
F. both A and C
G. both B and D
H. both D and E
58. Substantive audit procedures in the inventory process are
A. reviewing policies and procedures
B. observation
C. monitoring
D. risk assessment
E. confirmation
F. both A and C
G. both B and E
H. both D and E
59. Substantive audit procedures in the inventory process are
A. inspection of records, documents, or tangible assets
B. reviewing policies and procedures
C. monitoring
D. risk assessment
E. confirmation
F. both A and B
G. both A and E
H. both C and D
60. Substantive audit procedures in the inventory process are
A. reviewing policies and procedures
B. monitoring
C. inquiry
D. recalculation
E. risk assessment
F. both A and C
G. both C and D
H. both D and E
61. Substantive audit procedures in the inventory process are
A. reviewing policies and procedures
B. observation
C. monitoring
D. recalculation
E. risk assessment
F. both A and C
G. both B and D
H. both D and E
62. In the inventory process, the auditor might perform the following analytical procedures
A. Compare inventory balances by category - raw material, work-in-process, and finished goods - for the current year with the prior year.
B. Compare inventory purchases by category - raw material, work-in-process, and finished goods - for the current year with the prior year.
C. Compute gross margin for the current year and compare with the prior year. Investigate any unexpected changes in the ratio.
D. Compute cost of goods sold with the current year with the prior year. Investigate any unexpected changes in the ratio.
E. Compute raw material turnover. Compare the current year's turnover to the prior year. Investigate any differences.
F. both A and C
G. both B and D
H. both D and E
63. In the inventory process, the auditor might perform the following analytical procedures
A. Compare inventory balances by category - raw material, work-in-process, and finished goods - for the current year with the prior year.
B. Compare inventory purchases by category - raw material, work-in-process, and finished goods - for the current year with the prior year.
C. Compute material margin with the current year with the prior year. Investigate any unexpected changes in the ratio.
D. Compute cost of goods sold with the current year with the prior year. Investigate any unexpected changes in the ratio.
E. Compute inventory turnover. Compare the current year's turnover to the prior year. Investigate any differences.
F. both A and C
G. both B and D
H. both A and E
64. In the inventory process, the auditor might perform the following analytical procedures
A. Compare inventory transactions by category - raw material, work-in-process, and finished goods - for the current year with the prior year.
B. Compare inventory purchases by category - raw material, work-in-process, and finished goods - for the current year with the prior year.
C. Compute gross margin for the current year and compare with the prior year. Investigate any unexpected changes in the ratio.
D. Compute cost of goods sold with the current year with the prior year. Investigate any unexpected changes in the ratio.
E. Compute inventory turnover. Compare the current year's turnover to the prior year. Investigate any differences.
F. both A and C
G. both B and D
H. both C and E
65. Analytical procedures are used by the auditor to:
A. focus his or her attention on accounts where possible fraud exists
B. focus his or her attention on accounts where the possibility of material misstatements is greatest
C. focus his or her attention on accounts where procedures are inadequate
D. focus his or her attention on accounts with unexpected change in the current year compared to the prior year
66. The auditor uses substantive tests of balances to gather evidence for
A. income statement accounts in the inventory process
B. income statement transactions in the inventory process
C. balance sheet accounts in the inventory process
D. balance sheet transactions in the inventory process
67. The accounts in the inventory process are
A. inventory
B. purchasing
C. allowance to reduce inventory to LIFO value
D. receiving
E. allowance to increase inventory to market value
F. both A and C
G. both B and D
H. both D and E
68. The accounts in the inventory process are
A. inventory returns
B. purchasing
C. allowance to reduce inventory to LIFO value
D. receiving
E. allowance to reduce inventory to market value
F. both A and B
G. both C and E
H. both D and E
69. The accounts in the inventory process are
A. inventory
B. purchasing
C. allowance to increase inventory to LIFO value
D. receiving
E. allowance to reduce inventory to market value
F. both A and C
G. both B and D
H. both A and E
70. If the inventory is material to the financial statements, the auditing standards require the auditor to obtain sufficient appropriate evidence regarding the existence and condition of inventory by
A. observing physical inventory
B. performing audit procedures over the company's final inventory to determine whether they accurately reflect the actual inventory count results
C. performing audit procedures over the company's interim inventory to determine whether they accurately reflect the actual inventory count results
D. performing audit procedures over the company's final inventory to determine whether they accurately reflect the estimated inventory count results
E. taking the physical inventory
F. both A and B
G. both B and D
H. both D and E
71. The perpetual inventory system records additions to inventory as inventory is manufactured or purchased and deletions from inventory as inventory is sold. But it does not record
A. obsolete items
B. one time special purchases
C. inventory shrinkage
D. inventory rebates
E. inventory returns
F. both A and C
G. both B and D
H. both D and E
72. The perpetual inventory system records additions to inventory as inventory is manufactured or purchased and deletions from inventory as inventory is sold. But they do not record
A. one time special purchases
B. stolen items
C. inventory rebates estimating inventory requirements
D. errors in recording inventory transactions
E. costs in the manufacturing process
F. both A and C
G. both B and D
H. both D and E
73. If attendance at physical inventory counting is impracticable, the auditor must
A. identify the locations of the inventory and amounts of inventory at each location.
B. evaluate whether the involvement of specialists is needed.
C. use alternative audit procedures to obtain sufficient appropriate evidence regarding the existence and condition of the inventory.
D. review the client's plans for taking inventory, including the process to count, control inventory tags or count sheets, the procedures for identifying obsolete items during the count, procedures for controlling the movement of inventory during the count, and the procedures for controlling shipping and receiving during the count.
74. The auditor performs the following procedures in preparation for attending the physical inventory counting
A. identify the locations of the inventory and amounts of inventory at each location.
B. evaluate whether the audit opinion should be modified.
C. use alternative audit procedures to obtain sufficient appropriate evidence regarding the existence and condition of the inventory.
D. determine that inventory items on hand that are not owned by the client are identified.
E. review the client's plans for taking inventory, including the process to count, control inventory tags or count sheets, the procedures for identifying obsolete items during the count, procedures for controlling the movement of inventory during the count, and the procedures for controlling shipping and receiving during the count.
F. both A and E
G. both B and C
H. both D and E
75. The auditor performs the following procedures during the physical inventory counting
A. identify the locations of the inventory and amounts of inventory at each location.
B. observe the performance of the count procedures.
C. use alternative audit procedures to obtain sufficient appropriate evidence regarding the existence and condition of the inventory.
D. determine that inventory items on hand that are not owned by the client are identified.
E. review the client's plans for taking inventory, including the process to count, control inventory tags or count sheets, the procedures for identifying obsolete items during the count, procedures for controlling the movement of inventory during the count, and the procedures for controlling shipping and receiving during the count.
F. both B and D
G. both C and D
H. both D and E
76. The inventory physical count gives the company
A. inventory quantities that must be priced to arrive at the ending inventory balance reported on the balance sheet
B. inventory quantities that must be priced to arrive at the ending inventory balance reported on the income statement
C. inventory value that must be verified to the ending inventory balance reported on the balance sheet
D. inventory value that must be verified to the ending inventory balance reported on the income statement
77. The client determines the cost of inventory at year-end using
A. LIFO, FIFO, or actual cost
B. FIFO, LIFO, or incurred cost
C. FIFO, LIFO, or average cost
D. FIFO, LISH, or average cost
78. The LIFO reserve is
A. the difference between the LIFO inventory cost and the average cost method
B. the difference between the LIFO inventory cost and the FIFO inventory cost
C. the income tax savings from using the LIFO method
D. the reserve set aside for income taxes for the LIFO method
79. Market value is determined by
A. what the inventory item can be sold for
B. what a competitor is selling the item for
C. what the advertised price of the item is
D. the cost of replacing the inventory item
80. The lower-of-cost-or-market account is
A. a temporary balance sheet account
B. a permanent income statement account
C. a temporary income statement account
D. a permanent balance sheet account
81. The disclosures related to the financial statements are usually found in
A. the auditor's work papers
B. the footnotes to the financial statements
C. a separate report attached to the financial statements
D. in the "Management Discussion and Analysis" section of the annual report
E. in the internal control report
F. both A and C
G. both B and D
H. both D and E
82. The auditor should plan the audit of the inventory business process with the following presumption:
A. there is a risk of material misstatement due to fraud relating to inventory transactions.
B. professional skepticism is necessary to find misstatements.
C. planning the audit requires a questioning mind.
D. the general environment or tone in the company may allow management to rationalize committing fraud.
83. At the end of the audit, the auditor will decide whether the accounts in the inventory business process are presented in accordance with the applicable financial reporting framework. If they are not, the auditor will:
A. issue a "subject to" audit report citing the incorrect accounts
B. issue an adverse report citing a GAAP non-compliance
C. propose audit adjustments to correct the accounts
D. assist the client in making adjustments to correct the accounts
84. Management often uses internal controls in the inventory process
A. Because the inventory process is highly susceptible to fraud.
B. Because this makes evidence gathering easier for the auditor.
C. Due to the large number of transactions in the process.
D. This statement is not true. Management does not use internal controls in the inventory process.
85. If the auditor selects the sample of inventory items to count from the inventory listing at year-end, the auditor gathers evidence about which assertion(s)?
A. existence and occurrence.
B. accuracy.
C. valuation or allocation.
D. completeness.
E. presentation and disclosure.
86. If the auditor selects the sample of inventory items to count from the inventory on the warehouse shelves, the auditor gathers evidence about which assertion(s)?
A. existence and occurrence.
B. accuracy.
C. valuation or allocation.
D. completeness.
E. presentation and disclosure.
87. If the auditor selects the sample of inventory items on the final inventory listing to perform price tests, the auditor gathers evidence about which assertion(s)?
A. existence and occurrence.
B. accuracy.
C. valuation or allocation.
D. completeness.
E. presentation and disclosure.
88. If the auditor reviews the lower of cost of market inventory adjustment made by the client, the auditor gathers evidence about which assertion(s)?
A. existence and occurrence.
B. accuracy.
C. valuation or allocation.
D. completeness.
E. presentation and disclosure.
89. After the auditor has completed the substantive tests of balances for the inventory process, he or she determines
A. whether the balance sheet accounts in the inventory process are prepared in accordance with the applicable financial reporting framework
B. whether the income statement accounts in the inventory process are prepared in accordance with the applicable financial reporting framework
C. whether the balance sheet accounts in the inventory process are audited in accordance with the applicable financial reporting framework
D. whether the income statement accounts in the inventory process are audited in accordance with the applicable financial reporting framework
90. The auditor uses substantive tests of balances in the inventory process to
A. gather evidence for income statement accounts in the business process
B. gather evidence for balance sheet accounts in the business process
C. determine the valuation of income statement accounts in the business process
D. determine the valuation for balance sheet accounts in the business process
E. Both B and D
91. Early substantive testing of inventory balances is only done when
A. the client has a good system of internal controls relating to expense account balances
B. the client has good policies and procedures relating to the account balances
C. the client has a good system of internal controls relating to the account balances
D. the client has good policies and procedures relating to the account balances
92. An inventory balance is immaterial when
A. knowing the correct balance would not change the decision of an outside user of the financial statements
B. the balance includes obsolete inventory
C. inventory is a long term asset
D. the cash balance exceeds the inventory balance
93. How does the auditor gather evidence during the physical inventory count?
A. The auditor determines that the items on hand that are not owned by the client are identified.
B. The auditor begins the test count process after the client has finished counting the inventory.
C. Management observes that all inventory has been tagged and counted. The auditor verifies that management has performed this practice.
D. The auditor observes that client personnel are performing test counts in the areas where they are most familiar with the inventory.
94. How does the auditor gather evidence during the physical inventory count?
A. The auditor determines that the items on hand that are not owned by the client are counted.
B. The auditor performs test counts at the same time the client is counting the inventory.
C. Management observes that all inventory has been tagged and counted. The auditor verifies that management has performed this task.
D. The auditor observes that client personnel are performing test counts in the areas where they are most familiar with the inventory.
95. How does the auditor gather evidence during the physical inventory count?
A. The auditor determines that the items on hand that are not owned by the client are counted.
B. The auditor begins the test count process after the client has finished counting the inventory.
C. The auditor observes that all inventory has been tagged and counted.
D. The auditor observes that client personnel are performing test counts in the areas where they are most familiar with the inventory.
96. How does the auditor gather evidence during the physical inventory count?
A. The auditor determines that the items on hand that are not owned by the client are counted.
B. The auditor begins the test count process after the client has finished counting the inventory.
C. Management determines if all inventory has been tagged and counted. The auditor asks management if this task has been done.
D. The auditor determines whether the inventory count tags are properly controlled and that all count tags are returned.
97. The applicable financial reporting framework allows the audit client to determine both the cost and market value of inventory. Select the correct item(s) from the following list regarding these determinations:
A. The client must use FIFO to determine the cost of inventory at year-end. With FIFO, the client determines the cost of good sold using the earliest inventory items purchased.
B. The client must use FIFO to determine the cost of inventory at year-end. With FIFO, the client determines the cost of good sold using the latest inventory items purchased.
C. The client can choose to use either FIFO or average cost to determine the cost of inventory at year-end (in the U.S. LIFO can also be used to determine the cost of inventory).
D. The client determines the market value of inventory by estimating the amount the sales price of inventory at the end of the year.
98. The applicable financial reporting framework allows the audit client to determine both the cost and market value of inventory. Select the correct item(s) from the following list regarding these determinations:
A. The client must use FIFO to determine the cost of inventory at year-end. With FIFO, the client determines the cost of good sold using the earliest inventory items purchased.
B. The client must use FIFO to determine the cost of inventory at year-end. With FIFO, the client determines the cost of good sold using the latest inventory items purchased.
C. The client determines the market value of the inventory by using the last purchase price of the inventory item to estimate the market value.
D. The client determines the market value of inventory by estimating the amount the inventory can be sold for at the end of the year.
99. The applicable financial reporting framework allows the audit client to determine both the cost and market value of inventory. Select the correct item(s) from the following list regarding these determinations:
A. The client must use FIFO to determine the cost of inventory at year-end. With FIFO, the client determines the cost of good sold using the earliest inventory items purchased.
B. The client must use FIFO to determine the cost of inventory at year-end. With FIFO, the client determines the cost of good sold using the latest inventory items purchased.
C. Because the market value of inventory is the most reliable measure of the value of the inventory, the market value of inventory is always stated at year-end.
D. The client determines the market value of inventory by estimating the amount the inventory can be sold for at the end of the year.
100. It is the auditor's job to review the client's estimate of obsolete inventory to evaluate whether the ending inventory balance has been determined in accordance with the applicable financial reporting framework. To do this, the auditor considers whether the inventory balance includes
A. only inventory the client expects to sell in the future
B. inventory that the client does not own
C. inventory that has not been paid for at the end of the year
D. inventory valued at the lower of cost or market
E. both A and C
F. both A and D
G. both D and E
Essay Questions
101. Assuming that internal controls are in place and operating effectively in the cost accounting system, how can the auditor verify direct material costs?
102. Assuming that internal controls are in place and operating effectively in the cost accounting system, how can the auditor verify direct labor costs?
103. When performing analytical procedures, what are "unexpected changes" and how does the auditor handle them?
104. Assume you are working on the audit of inventory at Ralph's Grocery Store.
105. Describe the following audit procedures, providing an example of how each procedure could be used to gather evidence for the inventory process.
Inventory Process Substantive tests
a. Inquiry
b. Observation
c. Inspection of documents
d. Analytical Procedures
106. Primal Elements, Inc is a new company that manufactures unique glycerin-blend soaps, which sell for between $7 and $9 a bar. The factory located in California in the United States has 55,000 square feet and 160 full time employees. The products are sold in 11,000 retail stores in 12 countries. 2011 sales were $70 million.
a. Assume you are the auditor in charge of the year-end physical inventory count for the factory. Describe what will happen during the physical inventory process; what does the client do; what does the auditor do?
b. Identify the assertions that you gather evidence for during the count and describe how you gather the evidence.
c. What assertions still need to be tested after the physical count? How will you gather this evidence?
107. Assume that you have received the following cut-off information for sales revenue at ABC Company. Gross margin is 45% for the company. The physical inventory count was done on December 31, 2012, the company's year-end. At this time book inventory was $1,348,000. Physical inventory was $1,231,000. All sales are shipped FOB shipping point. Inventory related to shipping documents 10,419 and 10,421 were counted during the physical count. Inventory related to shipping documents 10,418 and 10, 420 were not counted during the physical count.
a. Prepare the year-end adjusting entry to record the book inventory to the physical count adjustment.
b. Determine the inventory items that should be recorded at year-end. Prepare the entry needed to adjust the books after reviewing the cut-off information. Adjust each invoice with an individual entry, instead of combining the entries.
108. The balance sheet for BCS, Inc. for December 31, 2012 and December 31, 2011 is provided below. You are working on the audit for the 12/31/12 year-end. The 12/31/11 balance sheet numbers were audited by your CPA firm last year. Use the partial balance sheet for BCS provided below. You have been assigned to audit the ending inventory numbers.
a. Describe how the ending inventory numbers were determined.
b. What audit tests did the auditor perform to determine that the ending inventory numbers were accurate?
c. Describe an audit sampling test that you might use to gather evidence for the valuation assertion for inventory.
d. How would the auditor determine that inventory exists?
e. How would the auditor determine that the completeness assertion in regard to inventory is met?
f. Can you identify any "red flags" related to the inventory balance? How would you modify your audit procedures to gather evidence in light of the red flags?
109. In an annual audit at December 31, 2012, you find the following transactions near the closing date. For each transaction, state whether the merchandise should be included in the client's inventory (yes or no) and why:
a. Merchandise costing $1,822 was received on January 3, 2013 and the related invoice recorded on January 5th. The invoice showed the shipment was made on December 29, 2012, FOB destination.
b. Merchandise costing $625 was received on December 28, 2012 and the invoice was not recorded. You locate it in the hands of the purchasing agent. It was marked "on consignment".
c. A packing case containing products costing $816 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked "holding for shipping instructions." Your investigation revealed that the customer paid for the goods on December 18, but the case was shipped and the customer revenue was recognized on January 10, 2013.
d. Merchandise received on January 6, 2013, costing $720 was entered in the acquisitions journal on January 7, 2013. The invoice showed shipment was made FOB shipping point on December 31, 2012. Because it was not on hand at December 31st, it was not included in the inventory.
110. During your observation of the inventory count in the main warehouse, you found that most of the prenumbered tags that had been incorrectly filled out were being destroyed and thrown away. What is the significance of this procedure and what action should you take?
True / False Questions
1. The inventory process involves the balance sheet accounts but not the income statements accounts.
FALSE AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Easy
2. Automated inventory systems may be used to maintain control over inventory, but not to keep track of production quantities.
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Easy
3. According to FASB Concept Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, assets are recorded at the price paid on the date of recognition.
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Easy
4. Clients may understate inventory to reduce income tax expense.
TRUE AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom's: Knowledge
Difficulty: Easy
5. For the inventory process, management asserts that inventory exists at the income statement date and that the costs of goods sold transactions recorded in the inventory process occurred during the year.
FALSE AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Easy
6. Because the most likely misstatement in the inventory process is an understatement misstatement, existence and valuation are often identified as relevant assertions for this process.
FALSE AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Easy
7. The cost accounting system determines the cost of the inventory manufactured by the company.
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Easy
8. In the inventory process, the auditor typically uses only substantive testing due to the nature of the accounts in the business process.
TRUE AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making Bloom's: Knowledge
Difficulty: Easy
9. If the inventory count is done at a date other than the end of the year, the auditor does not have to observe the inventory count but should perform his own count at year end.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Easy
10. The inventory physical count gives the company inventory quantities that must be priced to arrive at the ending inventory balance reported on the balance sheet.
TRUE AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making Bloom's: Knowledge
Difficulty: Easy
11. Management prepares the financial statements and footnotes but the auditor prepares the discussion of the inventory.
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Easy
Multiple Choice Questions
12. On the income statement, the inventory process is related to
A. cost of goods sold
B. purchases of inventory
C. accounts payable
D. cash payments
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Easy
13. In the inventory process, adjustments to the ending inventory balance are always recorded against
A. cost of goods sold
B. selling, general and administrative expenses
C. purchases of inventory
D. accounts payable
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Easy
14. On the balance sheet, the inventory process includes which of the following accounts?
A. cost of goods sold
B. administrative expenses
C. inventory
D. allowance account for LIFO adjustments
E. allowance account for FIFO adjustments
F. both A and B
G. both C and D
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
15. As with all income statement accounts, the inventory process expense accounts begin the year with
A. a total equal to the amount in accounts payable
B. a total equal to the budgeted estimated expenses for the year
C. ending balance from prior year
D. a zero balance
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
16. The totals at the end of the year in the inventory process expense accounts reflect
A. all the business conducted during the year
B. only the transactions completed during the year
C. all the transactions recorded during the year
D. only the transactions initiated during the year
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
17. The auditor must determine whether the inventory process transactions recorded in the revenue and expense accounts during the year
A. have been properly recorded in accordance with GAAS
B. have been recorded in accordance with an applicable financial reporting framework
C. are capable of being transferred to the owners equity account
D. have comparable transactions on the balance sheet
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
18. The totals in the inventory process balance sheet accounts reflect
A. all the transactions recorded during the year
B. a beginning balance as of the last day of the current year
C. only the amounts in the accounts on the last day of the year
D. the total amount of the transactions recorded during the year
E. the net amount of the transactions recorded during the year
F. both A and B
G. both C and E
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
19. The auditor is responsible, in the inventory process, for determining
A. only if the ending balance in the balance sheet account is stated in accordance with the applicable financial reporting framework
B. only if the ending balance in the income statement account is stated in accordance with the applicable financial reporting framework
C. only if the beginning balance in the balance sheet account is stated in accordance with the applicable financial reporting framework
D. only if the beginning balance in the income statement account is stated in accordance with the applicable financial reporting framework
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Hard
20. The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm. If LIFO inventory is greater than FIFO inventory,
A. cost of goods sold is credited
B. cost of goods sold is debited
C. the allowance account is debited
D. the allowance account is credited
E. the LIFO reserve account is debited
F. both A and C
G. both B and D
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
21. The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm. If LIFO inventory is greater than FIFO inventory,
A. this would be an unusual situation, but it might occur in a year when the company reduces the quantity of inventory on hand
B. this would be an unusual situation, but it might occur in a year when the company increases the quantity of inventory on hand
C. this would be a normal situation, and usually occurs in a year when the company reduces the quantity of inventory on hand
D. this would be a normal situation, and usually occurs in a year when the company increases the quantity of inventory on hand
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
22. The appropriate journal entry for the transactions involving the LIFO reserve and market value adjustments is determined by the particular situation in the firm. If LIFO inventory is greater than FIFO inventory,
A. the loss account for a decline in market value of inventory could be credited rather than debited if the market value had increased from the previous year but was not greater than cost
B. the loss account for a decline in market value of inventory could be debited rather than credited if the market value had decreased from the previous year but was not less than cost
C. the loss account for a decline in market value of inventory could be debited rather than credited if the market value had increased from the previous year but was not greater than cost
D. the loss account for a decline in market value of inventory could be credited rather than debited if the market value had decreased from the previous year but was not greater than cost
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Hard
23. Automated inventory systems may be used to maintain control over inventory
A. in terms of keeping track of production quality
B. in terms of keeping track of production quantities
C. in terms of maintaining correct purchase history balances
D. in terms of maintaining correct inventory balances
E. in terms of maintaining correct shipping balances
F. both A and B
G. both B and D
AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Bloom's: Knowledge
Difficulty: Medium
24. IT technology related to inventory can be very useful in maintaining accurate records for inventory balances if
A. the internal controls for the technology are effectively designed to prevent or detect misstatements of purchases
B. the internal controls for the technology are effectively designed to prevent or detect misstatements in the financial statements
C. the internal controls for the technology are effectively designed to prevent or detect misstatements of inventory
D. the internal controls for the technology are effectively designed to prevent or detect misstatements of costs of goods sold
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
25. Once inventory is recorded, it continues to be carried at the amount initially recognized unless
A. the market value increases over the initial cost
B. the market value decreases below the initial cost
C. the market value increases over the initial cost at year-end
D. the cost to replace the inventory at year-end is below the initial cost of the inventory
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
26. The accounting rule, "lower of cost or market," reflects
A. a logical approach to inventory valuation
B. a rational approach to inventory valuation
C. a conservative approach to inventory valuation
D. an aggressive approach to inventory valuation
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
27. The accounting rule, "lower of cost or market" could more clearly be stated
A. lower of the cost of inventory when purchased or the sale price of the inventory item at year-end
B. lower of the cost of inventory when purchased or the cost to replace the inventory item at year-end
C. lower of the cost of inventory when sold or the cost to replace the inventory item at yearend
D. lower of the cost of inventory when purchased or the cost to replace the inventory item at mid-year
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
28. Inventory is recorded at cost when purchased. The cost of the inventory is
A. the purchase price
B. the purchase price less any purchase discounts
C. all expenditures necessary to obtain the inventory
D. the purchase price less any discounts plus any financing charges
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
29. When an overstatement misstatement in inventory occurs
A. cost of goods sold is understated
B. net income is overstated
C. inventory is understated
D. cost of goods sold is overstated
E. net income is understated
F. both A and B
G. both C and D
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
30. When an understatement misstatement in inventory occurs
A. cost of goods sold is understated
B. net income is overstated
C. inventory is overstated
D. cost of goods sold is overstated
E. net income is understated
F. both A and B
G. both D and E
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
31. Overstatement and understatement misstatements about inventory have what effect on outsiders?
A. outsiders are mislead about the true value of the inventory sold
B. outsiders are mislead about the correct valuation when the inventory is sold
C. outsiders are mislead about the future cash flows when the inventory is sold
D. outsiders are mislead about the future prices when the inventory is sold
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
32. The client may use a variety of methods to overstate inventory. These include
A. inaccurate inventory counts
B. inaccurate inventory pricing
C. incorrect recognition of customer rebates
D. incorrect FIFO reserve calculations
E. revaluing inventory to market value
F. both A and B
G. both C and E
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium
33. The client may use a variety of methods to overstate inventory. These include
A. inaccurate purchase history
B. inaccurate inventory pricing
C. incorrect recognition of manufacturer rebates
D. incorrect FIFO reserve calculations
E. writing off obsolete inventory
F. both A and B
G. both B and C
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Knowledge
Difficulty: Medium