Question 1

What are the five distinct activities used during the audit of the inventory cycle?

Accepted Answer

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Question 2

Reconciling the open production cost reports to the work-in-process inventory control account is a procedure designed to test the control objective of

Accepted Answer

Reconciling the open production cost reports to the work-in-process inventory control account is a procedure designed to ensure that all production costs are recorded in the work-in-process inventory control account. This addresses the completeness control objective, which is concerned with ensuring that all transactions and events that should be recorded in the financial statements are indeed recorded.

Question 3

You are conducting the audit of Files R Us Inc.(FRI),a family-owned business that manufactures a variety of different wooden and metal file cabinets.In business for over twenty years,FRI has a reputation for providing high-quality products on time or even ahead of schedule.FRI does not sell to the public,but only to fine furniture stores and to a variety of office supply chains.
As of the current year-end,the company has a total of $6.3 million in assets.Inventory information is as follows:
  
File cabinet production is intensely competitive,primarily due to imports from Asia and Mexico.To help manage costs,FRI uses a job-order,standard cost system.Standard costs are assessed quarterly.Each job is costed and compared to standard.Inventory is counted only at the end of the year.There is no perpetual inventory system.
Due to problems with raw material quality and new staff,losses have been incurred in the last six months of the year.Your review of last year's audit file indicated that there were numerous inventory adjustments required last year.
Required:
Using the audit risk model,assess the risks associated with the audit of inventory.

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Question 4

A well-designed computerized system of perpetual inventory data files includes information about the

Accepted Answer

A well-designed computerized system of perpetual inventory data files should include information about both the units and unit costs of inventory purchased, sold, and on hand. This allows for accurate tracking of inventory levels and costs, as well as providing data for financial reporting and decision making. Option A only includes units, which is not sufficient for cost analysis. Option B only includes unit costs, which does not provide a complete picture of inventory levels. Option D refers to a different inventory classification system and is not relevant to the question.

Question 5

XYZ Company uses standard costs for allocating costs to work-in-process and finished goods inventory.What internal control is required with respect to these costs to ensure proper valuation of inventory?

Accepted Answer

Procedures must be designed to keep the standards updated for changes in production processes and costs. This internal control is necessary to ensure that the standard costs used for allocating costs to inventory are accurate and reflective of the actual production processes and costs. Without regular updates, the standard costs may become outdated and result in inaccurate inventory valuations. The other options may be helpful for ensuring accurate data entry or calculation of standard costs, but they do not address the need for regular updates and maintenance of the standard costs themselves.

Question 6

If the auditor concludes that the physical controls over inventory are so inadequate that inventory will be difficult to count,the auditor should

Accepted Answer

If the auditor determines that physical controls over inventory are inadequate, it is important to expand the observation of physical inventory tests to ensure a more accurate count. This may involve testing a larger sample size, performing additional procedures to verify the existence and condition of inventory, and confirming the accuracy of any perpetual inventory records. Inquiring about additional controls or relying solely on perpetual inventory records may not provide the necessary assurance and could result in a material misstatement of inventory. Conducting control tests over pricing and compilation may also not address the issue of inadequate physical controls.

Question 7

The existence of an adequate storeroom with a competent custodian in charge results in the orderly storage of inventory and can protect inventory from theft and misuse.How would an auditor assess these controls?

Accepted Answer

The best way for an auditor to assess the controls surrounding the storeroom and its custodian is to observe the inventory count and inquire of inventory personnel. This will allow the auditor to physically see the condition of the storeroom, observe how inventory is being handled, and ask specific questions about the role of the custodian in protecting inventory from theft and misuse. This is a more direct and reliable way to assess the effectiveness of these controls compared to relying on statistics or accounting staff inquiries.

Question 8

Which one of the following analytical procedures would be most helpful in alerting the auditor to the possibility of obsolete inventory?

Accepted Answer

Comparing inventory turnover with previous years would be most helpful in alerting the auditor to the possibility of obsolete inventory. If inventory turnover has decreased significantly in comparison to previous years, it may indicate obsolete inventory or slow-moving inventory, which can lead to potential write-offs or adjustments in the valuation of inventory. Comparing gross margin percentage or current year manufacturing costs with previous years may not necessarily indicate obsolete inventory, while comparing unit costs may not capture the impact of changes in sales volume.

Question 9

The auditor's tests of the adequacy of the physical controls over raw materials,work-in-process,and finished goods are usually limited to

Accepted Answer

Auditors typically use observation and inquiry to assess the adequacy of physical controls, as these methods allow them to see the controls in action and ask questions to understand the processes.

Question 10

What are inventory price tests and inventory compilation tests? Provide an example of each.

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Question 11

Segregation of duties between production,inventory control,and accounting are important controls in the inventory and distribution cycle.How would the auditor test these controls?

Accepted Answer

The auditor would use observation to see how duties are actually segregated and inquiry to understand the processes and controls in place.

Question 12

It is frequently possible to test the physical inventory prior to the balance sheet date when

Accepted Answer

Testing the physical inventory prior to the balance sheet date is feasible when there are accurate perpetual inventory master files, as they allow for reliable tracking and reconciliation of inventory levels throughout the year.

Question 13

The auditor must verify whether the physical counts were correctly summarized,the inventory quantities and prices were correctly extended,and the extended inventory was correctly footed.These tests are called

Accepted Answer

The tests described in the question are commonly referred to as compilation tests, which include verifying the accuracy of the physical count, extending quantities and prices correctly, and footing the total inventory value. Price tests and cost tests are more specific types of tests that may be included in compilation tests, but they do not encompass all of the steps described in the question. Mechanical tests do not accurately describe the tests being performed, as they typically refer to the use of automated processes or controls.

Question 14

To protect the inventory,Globus Corp wants to assign the custody of inventory to a specific responsible individual.Globus can accomplish this by

Accepted Answer

Assigning a designated employee to authorize movement of inventory will ensure that only authorized individuals have access to the inventory, thus protecting it from theft, damage or loss. While B, C and D may also improve security, they do not directly address the issue of assigning custody of inventory to a responsible individual.

Question 15

Selecting a sample of job orders from the job cost summary and matching them to bills of material and the schedule of production labour requirements is a procedure designed to test the control objective of

Accepted Answer

This procedure is designed to test the validity control objective, which ensures that transactions or data in a system are genuine and authorized. By matching job orders to bills of material and labour requirements, the auditor is verifying that the job orders are legitimate and have been properly authorized.

Question 16

Outline the key controls relating to compilation and pricing in the inventory cycle.

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Question 17

The costs used to value the physical inventory must be tested to determine whether the client has correctly followed an inventory method that is in accordance with an acceptable financial reporting framework and is consistent with previous years.The audit procedures used to verify these costs are referred to as inventory

Accepted Answer

Inventory price tests are audit procedures used to verify that the costs used to value the physical inventory are accurate and in accordance with an acceptable financial reporting framework, ensuring consistency with previous years.

Question 18

The auditor has determined that the perpetual inventory master files are high quality,assessing control risk related to physical observation of inventory as low.How does this affect audit testing? The auditor may

Accepted Answer

Since the auditor has determined that the perpetual inventory master files are of high quality, control risk related to physical observation of inventory can be assessed as low. This means that there is less need to perform extensive tests of physical inventory, as the risk of material misstatement is low. However, this does not necessarily mean that control tests over data entry should be reduced, as data entry errors can still occur and affect inventory balances. Similarly, control tests with respect to program change controls should still be performed to ensure the integrity of the master files. Increasing assessed inherent risks over the tests of physical inventory would not be appropriate, as the risk of material misstatement is already low. Therefore, option B is the best choice.

Question 19

XYZ Company uses standard costs for allocating costs to work-in-process and finished goods inventory.For the last few months,there have been high variances between total standard costs and actual costs.What is one of the likely reasons for this variance?

Accepted Answer

High variances between total standard costs and actual costs indicate that something is different than what was expected. One reason for this could be that production quantities are different than expected, leading to differences in the costs incurred. Other options provided are unlikely to cause such variances.

Question 20

Cost accounting controls are those related to the physical inventory and the consequent costs from the point at which

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Quiz 14: Audit of the Inventory and Distribution Cycle