Deck 9: Production Cycle

Question 1

An auditor selected an invoice for a large inventory purchase and vouched the invoice to the receiving report.Which ASB transaction assertion is the auditor most likely testing?

A) Occurrence
B) Completeness
C) Rights and obligations
D) Valuation

Answer 1

A

Question 2

A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records.This situation could be the result of the failure to record

A) Sales.
B) Sales discounts.
C) Purchases.
D) Purchase discounts.

Answer 2

C

Question 3

Mary Monitor,CPA,noted that ABC Co.received goods prior to year-end that were included in physical inventory but had not been recorded.In this case,which of the following adjustments should be made?

A) Debit Purchases/credit Cost of Goods Sold.
B) None.
C) Debit Inventory/credit Accounts Payable.
D) Debit Cost of Goods Sold/credit Accounts Payable.

Answer 3

C

Question 4

The audit procedures for inventory and related cost of sales accounts frequently are typically extensive in an audit engagement.

Question 5

An auditor who wished to test for the existence or occurrence of inventory would most likely select a sample of inventory items from the perpetual records and

A) Trace additions to the general ledger.
B) Vouch additions to receiving reports.
C) Vouch additions to sales invoices.
D) Trace receipts to receiving reports.

Question 6

An auditor selected an inventory item on the warehouse floor,test counted it,and traced the count to the final inventory compilation.The auditor most likely was testing the PCAOB assertion of

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

Question 7

L.Martinez,CPA,was auditing a client,Marvelous Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports.This procedure was intended to satisfy which POCAOB assertion?

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

Question 8

If control risk is assessed very low,cost accumulations will require additional substantive procedures to lower the risk of failing to detect material misstatements in inventory.

Question 9

Based on the production orders,management develops a plan for the amount and timing of production.

Question 10

Production planning interacts with inventory planning to produce production orders.

Question 11

The auditors must be present during some counting operations to evaluate cycle inventory counting plans and the execution.

Question 12

When inventory is counted on a date other than the balance-sheet date,no additional procedures would normally be required to satisfy generally accepted auditing standards.

Question 13

When inventory quantities are determined solely by means of a physical count,it is necessary for the auditor to be present at the time of the count.

Question 14

If inventory located off the client's premise,the auditor might confirm the amount with the custodian to satisfy evidence requirements.

Question 15

Standard costing of inventory is a generally accepted accounting principle.

Question 16

If an auditor was not present at a new client's inventory count,the auditor has no obligation to test the inventory.

Question 17

Most businesses try to estimate sales levels and seasonal timing and then try to plan production schedules to meet customer demand.

Question 18

In general,the auditors' best opportunity to detect inventory errors and frauds is during the physical observation of the inventory count.

Question 19

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to

A) Test and observe the client's physical count of inventory.
B) Verify independently the physical counts obtained by the client.
C) Assist the client in taking test counts of year-end inventory.
D) Determine whether inventory contains obsolete goods.

Question 20

Forecasts of the following year can be used in connection with valuing the inventory at lower of cost or market,which influences the amount of cost of goods sold that is shown in the financial statements.

Question 21

Periodic or cycle counts of selected inventory items are made at various times during the year rather than during a single inventory count at year-end.Which of the following is necessary if the auditor plans to observe inventories at interim dates?

A) Complete recounts by independent teams are performed.
B) Perpetual inventory records are maintained.
C) Unit cost records are integrated with production accounting records.
D) Inventory balances are rarely at low levels.

Question 22

Which of the following steps would not normally be included in a program for a physical inventory observation?

A) Vouch unit prices to vendors' invoices or other cost records.
B) Obtain the client's inventory counting instructions and review them for completeness.
C) Inspect the tags used and unused and record the tag numbers used.
D) Obtain the numbers of the last five receiving reports and last five shipping documents.

Question 23

Selecting a sample of cost accounting reports for labor and vouching it to time records is a procedure designed to test the ASB transaction assertion of

A) Occurrence.
B) Valuation.
C) Completeness.
D) Presentation and disclosure.

Question 24

To test the control assertion of completeness in the area of work-in-process inventory,the auditor most likely would

A) Select a sample of open and closed production cost reports and recalculate all costs entered.
B) Select a sample of issue slips from the raw materials stores file and trace materials-used reports to production cost reports.
C) Select a sample of open and closed production cost reports and vouch overhead charges to overhead analysis schedules.
D) Select a sample of production orders and determine whether the production orders were authorized.

Question 25

An auditor selected a product recorded in the finished goods perpetual inventory subsidiary account.The auditor went to the warehouse and counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account.Which ASB balance assertion is the auditor most likely testing?

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

Question 26

Counting inventory on the warehouse floor and tracing the count to the inventory compilation provides evidence to support which management (PCAOB)assertion?

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

Question 27

Which of the following is not an acceptable method of determining inventory cost under GAAP?

A) FIFO.
B) LIFO.
C) Average cost.
D) All of the above are acceptable.

Question 28

Inventory count tags are controlled

A) To prevent counting errors.
B) To test cutoff.
C) To prevent subsequent addition of goods to the inventory.
D) For all of the above reasons.

Question 29

A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts.This reconciliation is most likely performed to provide assurance that

A) Recorded production transactions are valid and documented.
B) Valid production transactions are recorded and none omitted.
C) Production accounting and posting is complete.
D) Production transactions are recorded in the proper period.

Question 30

Which of the following methods for determining inventory cost is not allowed by GAAP?

A) Average cost.
B) FIFO.
C) LIFO.
D) Standard cost.

Question 31

If overhead is miscalculated so that it is underabsorbed,the result if the error is not corrected will be that

A) Inventory will be understated and net income will be overstated.
B) Inventory and net income will be overstated.
C) Inventory will be overstated and net income will be understated.
D) Inventory and net income will be understated.

Question 32

An auditor selected a product maintained in the finished goods warehouse.The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account.Which ASB balance assertion is the auditor most likely testing?

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

Question 33

While observing a client's annual physical inventory,an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records.This situation could be the result of the client's failure to record

A) Purchase discounts.
B) Purchase returns.
C) Sales.
D) Sales returns.

Question 34

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement (PCAOB)assertion of

A) Valuation or allocation.
B) Rights and obligations.
C) Existence or occurrence.
D) Presentation and disclosure.

Question 35

An auditor's tests of controls over the issuance of raw materials to production would most likely include

A) Reconciling raw materials and work-in-process perpetual inventory records to general ledger balances.
B) Inquiring of the custodian about the procedures followed when defective materials are received from vendors.
C) Observing that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual.
D) Examining material requisitions and reperforming client controls designed to process and record issuances.

Question 36

Generally accepted accounting principles (GAAP)require that inventory be recorded at

A) The lower of cost or fair market value.
B) The lower of cost or net realizable value.
C) The higher of cost or net realizable value less a normal profit (floor).
D) None of the above.

Question 37

Your client plans to count inventory at several locations on the same day.No location is material in amount,but the total of inventory is quite material.How is an auditor likely to plan to observe?

A) Observe all counts at all locations by using the required number of auditors.
B) Insist the inventory be counted on separate days so the auditor can be present at all locations.
C) Work with the client to determine which locations to observe.
D) Observe a sample of locations on a surprise basis.

Question 38

Counting different parts of inventory at different times of the year is called

A) LIFO inventory.
B) Inventory cutoff.
C) Cycle counting.
D) Just-in-time inventory.

Question 39

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

A) Inventory tags noted during the auditor's observation to items in the inventory listing schedule.
B) Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices.
C) Items in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.
D) Items in receiving reports and vendors' invoices to the inventory listing schedule.

Question 40

Auditors record the last bill of lading used at the time of the inventory count to

A) Search for unrecorded sales.
B) Test cutoff.
C) Verify ownership.
D) All of the above.

Question 41

To make a year-to-year comparison of inventory turnover most meaningful,the auditor will perform the analysis

A) For the company as a whole.
B) By division.
C) By product.
D) All of the above.

Question 42

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about

A) Existence.
B) Rights and obligations.
C) Completeness.
D) Accuracy and valuation.

Question 43

Which cycle is not directly linked to the production cycle?

A) Acquisition and expenditure cycle.
B) Payroll cycle.
C) Revenue and collection cycle.
D) Finance and investment cycle.

Question 44

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

A) Supplies of relatively little value are expensed when purchased.
B) The cycle basis is used for physical counts.
C) The warehouse manager is responsible for maintenance of perpetual inventory records.
D) Perpetual inventory records are maintained only for items of significant value.

Question 45

A retailer's physical count of inventory was higher than that shown by the perpetual records.Which of the following could explain the difference?

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

Question 46

An auditor reviews job cost sheets to test which transaction assertion?

A) Occurrence.
B) Completeness.
C) Accuracy.
D) Classification.

Question 47

When auditing inventories,an auditor would least likely verify that

A) All inventory owned by the client is on hand at the time of the count.
B) The client has used proper inventory pricing.
C) The financial statement presentation of inventories is appropriate.
D) Damaged goods and obsolete items have been properly accounted for.

Question 48

An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a final inventory compilation.This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

A) Owned by the client.
B) Not obsolete.
C) Physically present at the time of the preparation of the final inventory schedule.
D) Included in the final inventory schedule.

Question 49

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

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

Question 50

To determine the client's planned amount and timing of production of a product,the auditor will review the

A) Sales forecast.
B) Inventory reports.
C) Production plan.
D) Purchases journal.

Question 51

Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

A) Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record.
B) Have an independent accounting firm prepare an internal control report on the effectiveness of the controls over inventory.
C) Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records.
D) Require a manager's signature for the removal of any inventory item with a value above $50.

Question 52

An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about

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

Question 53

A client maintains perpetual inventory records in quantities and in dollars.If the assessed control risk is high,an auditor would probably

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

Question 54

When evaluating inventory controls,an auditor would be least likely to

A) Inspect documents.
B) Make inquiries.
C) Observe procedures.
D) Consider policy and procedure manuals.

Question 55

Your client counts inventory three months before the end of the fiscal year.Internal controls over inventory are excellent.Which procedure is not necessary for the inventory roll-forward?

A) Check that shipping documents for the last three months agree with perpetual records.
B) Tracing receiving reports for the last three months to perpetual records.
C) Compare gross margin percentages for the last three months.
D) Request the client to recount inventory at the end of the year.

Question 56

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

A) Rights and obligations.
B) Completeness.
C) Existence.
D) Accuracy and valuation.

Question 57

Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

A) Trace test counts noted during the entity's physical count to the entity's summarization of quantities.
B) Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.
C) Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales.
D) Inspect the open purchase order file for significant commitments that should be considered for disclosure.

Question 58

Which of the following internal control activities most likely addresses the completeness assertion for inventory?

A) The work-in-process account is periodically reconciled with subsidiary inventory records.
B) Employees responsible for custody of finished goods do not perform the receiving function.
C) Receiving reports are prenumbered and the numbering sequence is checked periodically.
D) There is a separation of duties between the payroll department and inventory accounting personnel.

Question 59

From the auditors' point of view,inventory counts are more acceptable prior to the year end when

A) Internal control is weak.
B) Accurate perpetual inventory records are maintained.
C) Inventory is slow moving.
D) Significant amounts of inventory are held on a consignment basis.

Question 60

When testing a company's cost accounting system,the auditor uses procedures that are primarily designed to determine that

A) Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand.
B) Physical inventories agree substantially with book inventories.
C) The system is in accordance with generally accepted accounting principles and is functioning as planned.
D) Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

Question 61

The function of _________________________________ refers to comparing the physical count of inventory to the perpetual inventory records.

Question 62

An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls.Under which of the following conditions should the auditor perform tests of controls?

A) Significant weaknesses were found in the company's internal control.
B) The auditor hopes to reduce the amount of work to be done in assessing inherent risk.
C) The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.
D) Tests of controls are always performed when the auditor begins to assess control risk.

Question 63

Specific assertions typical of inventory and cost of sales accounts would not include that inventory

A) Shown in the accounts is on hand, in outside warehouses, or on consignment.
B) On hand is owned by the company.
C) Is valued at estimated sales value.
D) Is properly classified in the balance sheet.

Question 64

Tracing production cost accumulation forward into the production cost reports in the cost accounting department is a test for ____________________________.

Question 65

The overall production starts with production planning,which usually is based on a _______________________________________.

Question 66

Materials requisitions should be compared in the __________________________________ department with the ______________________________________ on the production order.

Question 67

Which of the following would not be an example of an inventory record error or fraud?

A) Unrecorded receipts or shipments.
B) Incorrect date of recording.
C) Fictitious sales or adjustments.
D) Incorrect sales price.

Question 68

The typical functions of the production and conversion cycle do not include

A) Production planning and control.
B) Inventory planning and control.
C) Purchase order and control.
D) Reduction of inventory records for goods shipped.

Question 69

When a job is completed,the foreperson typically prepares a completion report,a copy of which is sent to or kept in the following departments except

A) Finished goods stores accompanying the finished goods.
B) Sales department indicating goods available for sale.
C) Cost accounting to transfer the job from work-in-process to finished goods inventory.
D) Production department, which retains a copy for its own file.

Question 70

A production order usually includes a ________________________________.

Question 71

Tracing a sample of inventory receiving reports to the perpetual inventory record entry achieves the specific ASB balance assertion of

A) Completeness.
B) Occurrence.
C) Presentation.
D) Valuation.

Question 72

To execute job production,a foreperson would typically not need

A) Sales orders.
B) Production orders.
C) Bills of materials.
D) Manpower needs.

Question 73

The functions typically related to inventory flow of transactions and control would not include

A) Inventory record keeping.
B) Physical count of inventory.
C) Sale of inventory.
D) Reconciliation of physical count to perpetual inventory records.

Question 74

________________________________ are used by the purchasing department to place orders for materials.

Question 75

A cutoff test reveals goods received and counted in inventory but not recorded in purchases.The effect on the financial statements is

A) Net income is overstated.
B) Net income is understated.
C) There is no effect because the inventory records were adjusted to the physical count.
D) Net income is not affected until the subsequent period.

Question 76

The information for inventory record keeping typically comes from all of the following sources except

A) Shipping department when goods have been shipped.
B) Accounting department when accounts payable are paid.
C) Receiving department when customers return goods.
D) Inventory stores when purchased goods are received.

Question 77

Production planning interacts with the preparation of ____________________________________.

Question 78

Production reports of finished units should be signed by the __________________________________ and finished goods inventory custodian and forwarded to _______________________________.

Question 79

_____________________________ can be used in connection with knowledge of the shape of management's plans for the year under audit.

Question 80

An increase in inventory turnover probably indicates

A) An increase in inventory obsolescence.
B) A decrease in collections from customers.
C) An improvement in inventory management.
D) A difference between standard and actual materials costs.