Question 1

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.

Accepted Answer

Vouching additions to receiving reports helps verify that the inventory recorded in the perpetual records actually exists and has been received, confirming its occurrence.

Question 2

At the completion of the physical inventory,the auditors should inspect the inventory area to ensure that all inventory has been counted.

Accepted Answer

Auditors should inspect the inventory area to ensure that all inventory has been counted and there is no discrepancy in physical inventory count.

Question 3

The Bill of Materials provides pricing information on all materials used in production.

Accepted Answer

The Bill of Materials (BOM) lists the components and quantities needed for production but does not typically include pricing information.

Question 4

Cost accounting is responsible for reconciling inventory usage with production.

Accepted Answer

Cost accounting is responsible for tracking, analyzing, and allocating costs associated with production processes. This includes reconciling inventory usage with production to ensure that costs are accurately recorded and accounted for.

Question 5

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.

Accepted Answer

Vouching additions to receiving reports from perpetual records helps to ensure that the inventory actually exists and occurred in the company's operations, which corresponds to the existence or occurrence assertion of the POCAOB framework.

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.

Accepted Answer

The answer of An auditor selected an inventory item on...

Question 7

Inventory observation must be observed if inventory is one of the major assets listed on the balance sheet.

Accepted Answer

The answer of Inventory observation must be observed if inventory...

Question 8

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

Accepted Answer

If control risk is assessed as high, it means that the internal controls in place are not effective enough to prevent or detect material misstatements in inventory. Therefore, additional substantive procedures (such as physical inventory counts or extensive sample testing) are necessary to lower the risk of failing to detect such misstatements. This can increase the overall cost of the audit.

Question 9

The sales forecast is the document that production uses to determine what to produce and when to produce it.

Accepted Answer

The answer of The sales forecast is the document that...

Question 10

Inventory that is not used to produce finished goods should be accounted for as scrap inventory.

Accepted Answer

Inventory that is not used to produce finished goods should be accounted for as raw materials inventory, work-in-progress inventory, or finished goods inventory, depending on the stage of production. Scrap inventory is inventory that results from unusable or defective materials during the manufacturing process.

Question 11

Items held on consignment with another company should not be included in a company's inventory.

Accepted Answer

The answer of Items held on consignment with another company...

Question 12

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

Accepted Answer

By vouching the inventory purchase invoice to the receiving report, the auditor is testing the occurrence assertion, which ensures that the recorded transaction actually happened and items were received. This is to make sure that the company has not overstated its inventory or accounts payable balance.

Question 13

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.

Accepted Answer

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to test and observe the client's physical count of inventory. This includes observing the procedures followed by the client, verifying the counts made by the client, and obtaining evidence regarding the effectiveness of the client's inventory counting procedures. The objective of this audit procedure is to determine whether the physical inventory taking process is accurate and reliable.

Question 14

The production order is the document used to authorize the movement of raw materials from inventory to the production line.

Accepted Answer

The answer of The production order is the document used...

Question 15

An inventory roll back is required when inventory is counted prior to the end of the year.

Accepted Answer

An inventory roll back is not necessarily required just because inventory is counted before the end of the year. It depends on the accounting method and the company's policies for inventory management and financial reporting.

Question 16

If an auditor was not present at a new client's inventory count,the auditor should require the client to perform another inventory count.

Accepted Answer

The auditor should perform alternative procedures to verify the inventory, such as reviewing documentation or observing a subsequent count, rather than requiring a new count.

Question 17

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.

Accepted Answer

The adjustment required is to recognize the inventory that was received but not recorded. To do this, we need to debit Inventory and credit Accounts Payable. This will increase Inventory by the amount of the goods received and decrease the liability of Accounts Payable, as these goods have now been recognized as received. Option A would increase Purchases and decrease Cost of Goods Sold, which is not appropriate in this situation. Option B, None, is not correct as there is a need for adjustment. Option D would decrease Accounts Payable and increase Cost of Goods Sold, which is not appropriate either as we want to increase Inventory, not decrease it.

Question 18

The auditors must be present when instructions are given to company personnel for conducting the physical inventory.

Accepted Answer

The auditors must be present when instructions are given to company personnel for conducting the physical inventory to ensure that the instructions are clear and complete and that the personnel understand their responsibilities.

Question 19

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.

Accepted Answer

If the physical count of inventories is higher than the inventory quantities shown in the perpetual records, it means that some purchases might have been omitted from the records. This could be the result of the failure to record purchases. Sales, sales discounts, and purchase discounts are irrelevant in this situation.

Question 20

A comparison of the prior year's sales forecast with actual sales may provide an indication of slow moving inventory.

Accepted Answer

Comparing the prior year's sales forecast with actual sales can help identify if inventory is moving slower than expected, which could indicate the need to take action to sell or reduce the inventory.

Quiz 9: Production Cycle

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

At the completion of the physical inventory,the auditors should inspect the inventory area to ensure that all inventory has been counted.

The Bill of Materials provides pricing information on all materials used in production.

Cost accounting is responsible for reconciling inventory usage with production.

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?

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