Deck 15: Final Work: Specific Problems Relating to Inventories, Construction Contracts, Trade Payables and Financial Liabilities

Question 1

On what basis must overheads be allocated to inventory?

A) On the basis of normal production levels
B) On the basis of labour hours
C) On a random basis
D) On an arbitrary allocation of total overheads

Answer 1

On the basis of normal production levels

Question 2

Which of the following is NOT a reason inventory is generally considered to have a high inherent risk?

A) Demand for a company's products may alter significantly.
B) Many inventories are attractive and easily transportable.
C) Calculation of overheads can be complex.
D) Inventory must be continually tracked.

Answer 2

Inventory must be continually tracked.

Question 3

Using the terms below, complete the following extract from paragraph A17 of ISA500 referring to observations of inventory counts:
1. analytical data
2. audit evidence
3. audit staff
4. others
5. point in time at
6. year in
-Observation consists of looking at a process or procedure being performed by ________________ …. Observation provides ________________ about the performance of a process or procedure, but is limited to the ________________which the observation takes place.

Answer 3

others, audit evidence, point in time at.

Question 4

What is the definition of Net Realizable Value (NRV)?

A) The amount that an item of inventory could be sold for in an arm's length transaction.
B) The estimated selling price less all further costs of production and costs yet to be incurred in marketing, selling and distributing the item of inventory.
C) The expected value in use of an inventory item.
D) The aggregate costs incurred to date to produce the item of inventory, plus all further costs of production and costs yet to be incurred in marketing, selling and distributing it.

Question 5

When considering recorded trade payables why is segregation of duties particularly important?

A) Suppliers may try and argue they have already paid the invoice, when funds have not in fact been received.
B) It reduces the chances that a supplier will be double-billed for the same transaction.
C) It addresses the risk of the organization underreporting the liability.
D) It reduces the risk of a staff member creating fraudulent payables for their own benefit.

Question 6

If accounts payable are denominated in foreign currency at balance date, they should be:

A) translated at the spot rate on that day with any difference from related inventory purchase date spot rate being recognized in profit or loss.
B) translated at the average rate over the period from the related inventory purchase date to balance date.
C) translated at the spot rate in effect on the day the related inventory was purchased.
D) translated at the spot rate on that day with any difference from related inventory purchase date spot rate being recognized in other comprehensive income.

Question 7

Using analytical procedures based on inventory purchases, trade payables were 10 per cent higher than expected. Which of the following explanations from management would help explain this difference from expectations?

A) "This year we have been able to sell inventory for a higher price."
B) "The cost of inventory has significantly increased this year."
C) "We have changed our cash management strategy, instead of paying invoices as soon as they are received, we take full advantage of the 30-day payment terms."
D) "We have had to return a higher than expected amount of inventory to suppliers this year and therefore purchases are actually understated compared to trade payables."