Question 1

A public accountant observes his client's physical inventory count on December 31.There are eight inventory-taking teams and a tag system is used.The public accountant's observation normally may be expected to result in detection of which of the following inventory errors?

Accepted Answer

The public accountant's observation can help detect if the inventory takers forgot to count all the items in one room, as they are physically present to oversee the counting process.

Question 2

If the auditor is appointed after the year-end of the client,the auditor

Accepted Answer

If the auditor is appointed after the year-end of the client, they can attend a current perpetual inventory count and roll backward with records to gain sufficient audit evidence. Doing an inventory count as soon as they are appointed may not be feasible or practical. Inquiring with management about the inventory count may not provide sufficient evidence. Qualifying the audit opinion for inventory balance and cost of sales is not necessary if the auditor can obtain sufficient evidence through alternative procedures such as attending a current perpetual inventory count.

Question 3

Which analytical procedures will help an auditor identify possible misstatements in compilation,unit costs,or extensions that affect inventory and cost of goods sold?

Accepted Answer

The answer of Which analytical procedures will help an auditor...

Question 4

The test of details of balance procedure that requires the auditor to account for unused inventory tag numbers to make sure none have been omitted is an attempt to satisfy the objective of

Accepted Answer

The procedure of accounting for unused inventory tag numbers is aimed at determining the completeness objective of the inventory balance. This procedure ensures that all the inventory tags have been accounted for, and none have been omitted, ensuring completeness. Therefore, option C is the correct answer. The other options, allocation, existence, and accuracy, are not directly related to this procedure.

Question 5

To detect an overstatement or understatement of inventory and cost of goods sold,the auditor may perform an analytical procedure such as comparing

Accepted Answer

The answer of To detect an overstatement or understatement of...

Question 6

Identify three analytical procedures commonly used when auditing accounts in the inventory and distribution cycle.

Accepted Answer

The answer of Identify three analytical procedures commonly used when...

Question 7

A common inventory observation procedure is to record in the working papers for subsequent follow-up the last shipping document number used at year-end.The audit objective being achieved by this procedure is

Accepted Answer

The audit objective being achieved by this procedure is to obtain information to make sure sales and inventory purchases are recorded in the proper period. By recording the last shipping document number used at year-end, the auditor can compare it with the subsequent year's shipping documents to ensure that sales and inventory purchases are properly recorded in the current year, and not backdated to the previous year. This helps to ensure that the financial statements are fairly presented and comply with accounting standards.

Question 8

When auditing merchandise inventory at year-end,the auditor performs a purchase cutoff test to obtain evidence that

Accepted Answer

A purchase cutoff test ensures that all transactions for goods that the company owns as of the year-end are recorded in the correct accounting period. This includes ensuring that goods owned at year-end are included in the inventory balance, regardless of whether they have been physically received.

Question 9

When a physical count of inventory is permitted at an interim date,the auditor observes it at that time,and also tests the perpetual inventory for transactions

Accepted Answer

When a physical count of inventory is permitted at an interim date, the auditor observes it at that time and also tests the perpetual inventory for transactions from the date of the count to year-end. This is to ensure that the inventory records accurately reflect the actual inventory on hand at year-end.

Question 10

A common inventory observation procedure is to be alert for items that are damaged,rust- or dust-covered,or located in inappropriate places.The balance-related audit objective achieved by this procedure is

Accepted Answer

The balance-related audit objective achieved by the procedure of being alert for damaged or inappropriate items is valuation. This is because damaged or misplaced items may not be valued correctly, and identifying such items helps ensure accurate inventory valuation on the balance sheet.

Question 11

Analytical procedures applied to management's production cost reports provide evidence for which assertion(s)?

Accepted Answer

Analytical procedures applied to management's production cost reports can provide evidence for the assertions of existence, valuation, and completeness. These procedures involve comparing trends and ratios from the current period to prior periods, as well as industry benchmarks, to identify any unusual fluctuations or inconsistencies in production costs. This can help the auditor determine whether the inventory recorded in the production cost reports actually exists, is valued correctly, and includes all applicable costs. However, these procedures do not provide evidence for ownership or physical inspection assertions, and do not involve the auditor recomputing inventory extensions.

Question 12

An inventory observation procedure that compares physical counts with the perpetual inventory master file is an attempt to satisfy the audit objective of

Accepted Answer

Comparing physical counts with the perpetual inventory master file helps ensure that the inventory quantities recorded in the accounting records accurately reflect the actual physical inventory counts, thus satisfying the audit objective of accuracy.

Question 13

From which of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?

Accepted Answer

Observation of physical inventory counts would provide the auditor the highest level of assurance regarding the existence of inventories. This is because the auditor directly observes the physical existence of the inventory and can compare it to the inventory records to ensure that all items have been counted and included in the records. Written representations from management and confirmation of inventories in a public warehouse may provide some assurance but not as high as observation of physical inventory counts. Auditor's recomputation of inventory extensions only verifies the mathematical accuracy of the inventory records and does not provide evidence regarding the physical existence of the inventory.

Question 14

CAS for audit procedures for inventory indicate that the auditor

Accepted Answer

The correct choice is C because according to CAS (Canadian Auditing Standards), the auditor must be present at the inventory count to observe and evaluate the methods followed by the entity in determining the quantities and values of inventory, ensuring they comply with the applicable financial reporting framework. This presence allows the auditor to assess the effectiveness of the inventory counting procedures and the accuracy of the inventory records.

Question 15

Sample size in physical observation of inventory is

Accepted Answer

The sample size in physical observation of inventory is difficult to specify because the emphasis is on observing the client's procedures, rather than on the attributes or variables of the inventory items themselves.

Question 16

Dishware Distribution Limited uses average costing to cost its inventory.It keeps a perpetual inventory file that is linked to its sales systems.It orders inventory in for specific customers as needed,and traditionally has a slow time just before its year-end.Accordingly,inventory at the year-end is about $2000,while materiality is about $30 000.How should the auditor approach the audit of physical inventory?

Accepted Answer

The inventory value is significantly below the materiality threshold, so the auditor may decide to exclude testing of physical inventory from the audit program due to its immaterial impact on the financial statements.

Question 17

The test of details of balance procedure that requires the auditor to review contracts with suppliers and customers and inquire of management for the possibility of the inclusion of consigned or other non-owned inventory is an attempt to satisfy the objective of

Accepted Answer

Reviewing contracts and inquiring about the possibility of consigned or other non-owned inventory primarily addresses the auditor's concern about whether the entity has the rights to the inventory it reports. This relates to the rights and obligations assertion, ensuring that the entity actually owns or has rights to the assets reported on its balance sheet.

Question 18

The client has a perpetual inventory system,and takes an inventory count of 100 items every two weeks for comparison to the perpetual records.There are no plans to have a complete year-end physical count of inventory.How will the auditor conduct the audit of physical inventory?

Accepted Answer

Since there is no plan for a complete year-end physical count, the auditor should conduct test counts and compare the perpetual records with a cyclical count during the interim audit. This will help ensure that the perpetual records are accurate and reliable. The other options, such as selecting a sample of items for comparison or using roll-forwards, may not be as effective in verifying the accuracy of the perpetual records.

Question 19

The auditor has evaluated the effectiveness of the client's procedures to count inventory,and has provided constructive suggestions for improvement.However,the client has not implemented the suggestions,so the auditor has concluded that the inventory instructions do not provide adequate controls.This means that the auditor

Accepted Answer

The auditor must spend more time ensuring that the physical count is accurate because the lack of adequate controls increases the risk of inventory misstatement.

Question 20

The auditor has determined that the inventory procedures are highly automated with limited use of a paper or physical trail.Rather than having people count inventory (since all inventory has RFID tags attached),inventory is being read using the wireless mesh network.To provide assurance with respect to ending inventory,the auditor should

Accepted Answer

Since the inventory procedures are highly automated, it is important for the auditor to test the quality of the controls over the program in use and over tagging inventory items. This will help to ensure the accuracy and completeness of the inventory records. Option A is not necessary since the inventory procedures are automated. Option B is not ideal as it may be time-consuming to physically count high-dollar inventory items. Option D is also not necessary since manual rotating counts may not provide better assurance than the automated system in use.

Quiz 14: Audit of the Inventory and Distribution Cycle