Question 1

Your audit client, Wigley, is a retail department store that does not produce any products. You are currently working on the inventory portion of the audit. In obtaining audit evidence in support of financial statement assertions, the auditor develops specific audit objectives in response to those assertions. Audit procedures are then selected to accomplish audit objectives.
For each specific inventory audit objective listed (Audit Objectives tab) select the most closely related account balance financial statement assertion and the most appropriate audit procedure. Financial statement assertions and audit procedures may be selected once, more than once, or not at all.  $\begin{array}{|l|l|l|l|l|l|l|l|l|l|l|l|l|}
\hline &\text { Specific audit objectives } & \text { (A) } &  \text { (B) } & \text { (C) } & \text { (D) } & \text { (E) } & \text { (F) } & \text { (G) } & \text { (H) } & \text { (I) } & \text { (J) } & (\mathrm{K}) \
\hline 1.&\text {  The entity has legal title to inventories. } & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0&0 \
\hline 2. &\text { Recorded inuentory quantities include all products on hand. } & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0&0 \
\hline 3. &\text{Inventories are reduced, when appropriate, to replacement}\
&\text{ costs or net realizable value.}& 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0&0 \
\hline 4. &\text{Cost of imentories is properly calculated.}& 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0&0 \
\hline 5. &\text{The major categories of inventories and their basis of}\
&\text{valuation are adequately reported in the financial statements.}& 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0&0 \
\hline
\end{array}$

Accepted Answer

The answer of Your audit client, Wigley, is a retail...

Question 2

Observation of a client's inventory is a presumptively mandatory audit procedure.
a. What part should the auditors play in planning the physical inventory?
b. Describe the procedures performed by the auditors during their observation of a client's physical inventory.
c. Why do the auditors document their inventory test counts in their working papers?

Accepted Answer

The answer of Observation of a client's inventory is a...

Question 3

In auditing a client's inventory, the auditors must be concerned with the detection of goods that are both damaged and obsolete.
a. Why are the auditors concerned with detecting damaged and obsolete goods?
b. How do the auditors test for damaged goods in the client's inventory?
c. How do the auditors test for obsolete goods in the client's inventory?

Accepted Answer

The answer of In auditing a client's inventory, the auditors...

Question 4

The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with:

Accepted Answer

Perpetual inventory records can be compared with receiving reports to check the accuracy of inventory levels. Receiving reports contain details of goods received and are generated after a shipment is checked for accuracy and quantity. Comparing this with the perpetual inventory records helps in identifying any discrepancies in inventory levels. Purchase requisitions, purchase orders, and vendor payments do not provide information about actual goods received and therefore cannot be compared with perpetual inventory records for accuracy.

Question 5

Assume that you have completed your procedures on the audit of Glick Corporation and have found the following audit issues. Indicate the account balance financial statement assertion that is likely to be most impacted by each of the issues, using the following key:
A.Completeness
B.Existence
C.Rights and Obligations
D.Valuation and Allocation

Accepted Answer

The answer of Assume that you have completed your procedures...

Question 6

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received?

Accepted Answer

Excluding quantities ordered from the receiving department copy of the purchase order encourages personnel to count and inspect all merchandise received, as they cannot rely on the purchase order for quantity information and must verify the actual quantities received.

Question 7

Tracing copies of computer-generated sales invoices to copies of the corresponding computer-generated shipping documents provides evidence that:

Accepted Answer

Tracing copies of computer-generated sales invoices to copies of the corresponding computer-generated shipping documents provides evidence that the sales billed to customers were actually shipped.

Question 8

Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories?

Accepted Answer

The answer of Which one of the following procedures would...

Question 9

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

Accepted Answer

If the physical count is higher than the perpetual records, it could be because some purchases have not been recorded. This means that there are items in stock that are not reflected in the system, leading to a higher count than expected. Sales, sales discounts, and purchase returns would not result in a higher physical count than perpetual records.

Question 10

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the:

Accepted Answer

Purchase cutoff procedures ensure that transactions are recorded in the correct accounting period. Testing these helps auditors verify that merchandise owned by the company at year-end is accurately included in the ending inventory, by ensuring that purchases made before year-end are included and those made after are not.

Question 11

Which of the following is not a part of the auditors' responsibility regarding a client's count of its inventory?

Accepted Answer

The auditors are responsible for evaluating the condition of the inventory, observing compliance with management's instructions for the count, and making some test counts. However, determining which counts they will make and which counts the client will make is a management responsibility.

Question 12

An inventory turnover analysis is useful to the auditor because it may detect:

Accepted Answer

An inventory turnover analysis can help the auditor detect the existence of obsolete merchandise by identifying slow-moving inventory that may no longer be in demand. This can help prevent overvaluing inventory and potential write-offs in the future.

Question 13

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items:

Accepted Answer

Tracing inventory tags to the physical inventory listing helps ensure that all items represented by tags are indeed included in the listing, verifying the completeness of the inventory records.

Question 14

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

Accepted Answer

The answer of In auditing a manufacturing entity, which of...

Question 15

The auditor determines that each of the following objectives will be part of your audit of Bozington Co., Inc. For each audit objective, select a substantive procedure that would help to achieve that objective. Each of the procedures may be used once, more than once, or not at all.
Audit Objective
1. Establish the completeness of inventories.
2. Establish the accuracy of cost amounts of inventories.
3. Determine that the presentation and disclosure of inventories and cost of goods sold is adequate.
4. Establish that the client has rights to the recorded inventories.
5. Establish the existence of ending inventory. Substantwe Proceciures
a. Examine current vendors' price lists.
b. Review drafts of the financial statements.
c. Select a sample of items during the physical inventory count and determine that they have been included on count sheets.
d. Select a sample of rec orded items and examine supporting vendors' inwoices and contracts.
e. Select a sample of rec orded tems on count sheets during the physical inventory count and determine that itemsare on hand.
t. Test the reasonableness of general and administrative labor rates.

Accepted Answer

The answer of The auditor determines that each of the...

Question 16

Purchase cutoff procedures should be designed to test whether all inventory:

Accepted Answer

Purchase cutoff procedures are designed to ensure that all inventory owned by the company was recorded. This includes inventory that has been shipped but not yet received or recorded, as well as inventory that has been received but not yet recorded. It is important to ensure that all inventory is properly recorded in the company's books and records to ensure accurate financial reporting. Options B, C, and D may also be important considerations in inventory management, but they are not directly related to purchase cutoff procedures.

Question 17

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:

Accepted Answer

The most reliable procedure for testing the existence of inventory at an outside location is to physically observe the inventory counts. This ensures that the inventory actually exists and helps to prevent fraud or errors in the inventory records. Tracing the inventory total to the general ledger does not provide evidence of the actual existence of inventory, obtaining a confirmation is not as reliable as physical observation, and analytical comparison may not identify discrepancies in the physical inventory count.

Question 18

Which statement is correct relating to the count of inventory when a company that specializes in taking such counts ("the company") is involved with counting a client's inventory?

Accepted Answer

The auditor should not solely rely on the counts by the company as sufficient appropriate audit evidence because the auditor is responsible for obtaining sufficient appropriate audit evidence to draw reasonable conclusions on which to base the auditor's opinion. This includes evaluating the methods and accuracy of the counts conducted by the company and possibly supplementing them with additional audit procedures.

Question 19

Which of the following is not one of the independent auditor's objectives regarding the examination of inventories?

Accepted Answer

The independent auditor's objective is to verify that inventory counted is owned by the client, ascertain the physical quantities of inventory on hand, and verify that the client has used proper inventory pricing. However, the auditor is not required to verify that all inventory owned by the client is on hand at the time of the count. Some inventory may be in transit or on consignment, for example.

Quiz 12: Inventories and Cost of Goods Sold