Chapter 12 - Inventories and Cost of Goods Sold

Chapter 12
Inventories and Cost of Goods Sold

True / False Questions

1. Observation of inventories is a generally accepted auditing standard.
True False

2. The receiving departent should accept only goods for !hich there is an approved
purchase order on hand.
True False

". For good internal control over purchase transactions# purchases should be ade fro
approved vendors by the departent needing the goods.
True False

$. %uditors should not revie! the client&s planning of the physical inventory.
True False

'. The proper cutoff of inventories is best achieved !hen the client uses prenubered
purchase orders.
True False

(. The lo!er of cost or ar)et test by the auditors is generally designed to assure that
inventories are not valued above their net reali*able values.
True False

+. ,hen the auditors cannot satisfy theselves as to the accuracy of ending inventory and a
aterial isstateent ay e-ist# they norally ay still give an un.ualified opinion on the
client&s incoe stateent.
True False

12-1
Chapter 12 - Inventories and Cost of Goods Sold
/. To test the client&s cutoff of inventories# the auditors !ill a)e a record of the serial nuber
of the final receiving and shipping docuents used prior to the ta)ing of the physical
inventory.
True False

0. The use of a tagging syste for inventory ta)ing is designed to prevent double counting of
goods.
True False

11. The e-aination of !arehouse receipts is not sufficient verification of a aterial aount
of goods stored in public !arehouses.
True False


Multiple Choice Questions

11. %n auditor suspects that certain client eployees are ordering erchandise for theselves
over the Internet !ithout recording the purchase or receipt of the erchandise. ,hen vendors&
invoices arrive# one of the eployees approves the invoices for payent. %fter the invoices
are paid# the eployee destroys the invoices and the related vouchers. In gathering evidence
regarding the fraud# the auditor ost li)ely !ould select ites for testing fro the file of all
%. Cash disburseents.
2. %pproved vouchers.
C. 3eceiving reports.
4. 5endors& invoices.

12. ,hich of the follo!ing is not true relating to the auditors& observation of the client&s
physical inventory6
%. The auditors should evaluate the client&s planning of the physical inventory.
2. The auditors should a)e certain that consigned ites fro suppliers are included in
physical inventory totals.
C. The auditors should evaluate the ade.uacy of the client&s counting procedures.
4. The auditors should ta)e test counts of the client&s inventory.

12-2
Chapter 12 - Inventories and Cost of Goods Sold
1". % receiving departent copares inventory ites received !ith copies of purchase
orders. The purchase orders list the nae of the vendor and do not list the .uantities of the
aterial ordered. 7sing the purchase orders# the receiving departent is ost li)ely to detect8
%. 4eliveries for !hich no purchase order !as issued.
2. 7napproved sales orders.
C. 9artial deliveries.
4. 4eliveries of a greater .uantity of ites than those ordered.

1$. To easure ho! effectively a client eploys its assets# an auditor calculates inventory
turnover by dividing the average inventory into8
%. :et sales.
2. Cost of good sold.
C. Operating incoe.
4. Gross sales.

1'. ,hich of the follo!ing audit procedures ost li)ely !ould provide assurance that a
anufacturing entity&s inventory valuation is proper6
%. Testing the entity&s coputation of standard overhead rates.
2. Obtaining confiration of inventories pledged under loan agreeents.
C. 3evie!ing a cutoff procedure for inventories.
4. Tracing test counts to the entity&s inventory listing.

1(. % client uses a periodic inventory syste. ,ould one e-pect a credit to !hich of the
follo!ing accounts at the point of sale6

%. Option %
2. Option 2
C. Option C
4. Option 4

12-"
Chapter 12 - Inventories and Cost of Goods Sold
1+. % client uses a perpetual inventory syste. ,ould one e-pect a credit to !hich of the
follo!ing accounts at the point of sale6

%. Option %
2. Option 2
C. Option C
4. Option 4

1/. ,hich of the follo!ing !ould an auditor ost li)ely .uestion included in calculation of
the overhead rate for a copany that anufactures a product6
%. Factory supervisor salary.
2. Indirect aterials.
C. ;iscellaneous e-pense.
4. Sales e-pense.

10. % <bill and hold< schee is ost li)ely to include8
%. Shipent of ites to a custoer beyond !hat the custoer has ordered.
2. 3ecording as sales ites that the copany retains as of year-end.
C. 2illing of ites that are held by custoers for future revenue production purposes.
4. Selling ites at substantial discounts near year-end.

21. ,hich of the follo!ing is an auditor least li)ely to consider a departure fro generally
accepted accounting principles6
%. 5aluing inventory at cost.
2. Including in inventory ites that are consigned out to vendors# but not yet sold.
C. 7sing standard cost as the easure of inventory cost.
4. Including in inventory ites shipped subse.uent to year-end# but for !hich valid orders
did e-ist at year-end.

12-$
Chapter 12 - Inventories and Cost of Goods Sold
21. ,hich of the follo!ing is least li)ely to be accurate stateent concerning characteristics
of an audit6
%. %n analysis of inventory turnover addresses !hether the proper ethod of deterining
inventory costs--as contrasted to ar)et values--is being applied.
2. Characteristics of the double entry boo))eeping syste a)e it possible to test for
overstated sales !hen tests of accounts receivable are being perfored.
C. The direction of tests for overstateent errors is generally directed fro the recorded entry
to source docuents.
4. 7se of a perpetual rather than a periodic inventory syste is li)ely to affect the nature of
cutoff errors ade at year-end.

22. ,hich of the follo!ing is not a reason for the special significance attached by the auditors
to the verification of inventories6
%. The deterination of inventory valuation directly affects net incoe.
2. The e-istence of inventories is inherently difficult to substantiate.
C. Special valuation probles often e-ist for inventories.
4. Inventories are often the largest current asset of an enterprise.

2". ,hich of the follo!ing is true about the auditors& observation of the client&s physical
inventory6
%. The count ust be ade at year-end.
2. The auditors should supervise the client&s personnel.
C. The auditors& observation addresses the e-istence assertion.
4. The auditors should =ustify any oission of the observation in the audit report.

2$. In verifying debits to perpetual inventory records of a non-anufacturing fir# the auditor
!ould be ost interested in e-aining the8
%. 9urchases =ournal.
2. 9urchase re.uisitions.
C. 9urchase orders.
4. 5endors& invoices.

12-'
Chapter 12 - Inventories and Cost of Goods Sold
2'. In verifying credits to perpetual inventory records of a non-anufacturing fir# the
auditor !ould be ost interested in e-aining the8
%. Shipping docuents.
2. 3eceiving reports.
C. 9urchase orders.
4. 5endors& invoices.

2(. The client&s physical count of inventories is lo!er than the inventory .uantities in the
perpetual records. This could be the result of a failure to record8
%. 9urchases.
2. 9urchase discounts.
C. Sales.
4. Sales discounts.

2+. %n auditor has accounted for a se.uence of inventory tags and is no! going to trace
inforation on a representative nuber of tags to the inventory suary sheets. ,hich
assertion does this procedure relate to ost directly6
%. Copleteness.
2. >-istence.
C. ?egality.
4. 5aluation.

2/. The use of a <blind< purchase order is designed to prevent errors by the8
%. 9urchase departent.
2. 3eceiving departent.
C. Stores departent.
4. %ccounting departent.

20. %n auditor perfors a test to deterine !hether all erchandise for !hich the client !as
billed !as received. The population for this test consists of all8
%. ;erchandise received.
2. 5endor&s invoices.
C. Canceled chec)s.
4. 3eceiving reports.

12-(
Chapter 12 - Inventories and Cost of Goods Sold
"1. To assure that all purchases are authori*ed before payent is ade# accounting
departent personnel should atch the vendor&s invoice to8
%. The purchase re.uisition.
2. The receiving report.
C. The purchase order.
4. The voucher.

"1. ,hich of the follo!ing is true about the auditors& observation of the client&s physical
inventory6
%. The auditors should plan the physical inventory.
2. The auditors should segregate daaged and obsolete goods.
C. The auditors should evaluate the ade.uacy of the client&s counting procedures.
4. The auditors should supervise the client&s personnel.

"2. ,hich of the follo!ing is not a procedure that typically is used by the auditors in their
e-aination of a client&s goods held in the custody of a public !arehouse6
%. Confiration.
2. Obtaining reports on internal control at the !arehouse.
C. Observation.
4. Corresponding !ith the state agency regarding the authenticity of the public !arehouse.

"". ,hich of the follo!ing best describes the reason that the auditors record their inventory
test counts in the !or)ing papers6
%. To docuent every test count.
2. For subse.uent coparison !ith the copleted inventory listing.
C. To docuent copliance !ith generally accepted accounting principles.
4. For use in subse.uent audits.

12-+
Chapter 12 - Inventories and Cost of Goods Sold
"$. ,hich of the follo!ing best describes the auditors& response to a client&s use of statistical
sapling techni.ues to estiate the inventory6
%. The auditors should satisfy theselves as to the statistical validity of the techni.ue# and the
reasonableness of the allo!ance for sapling ris) and sapling error used.
2. The auditors should .ualify their opinion# because the client ust perfor a coplete
count of the inventory.
C. The auditors should increase the e-tent of their test counts to copensate for the use of a
statistical techni.ue.
4. The auditors should !ithdra! fro the engageent.

"'. ,hich of the follo!ing best describes the reason for the auditors& revie! of the client&s
cost accounting syste6
%. To obtain evidence regarding the .uantities of good described as !or)-in-process.
2. To obtain evidence about the valuation of !or)-in-process# finished goods# and cost of
goods sold.
C. To obtain evidence about the profit argin on specific =obs.
4. To obtain evidence about copliance !ith Cost Accounting Standards.

"(. >ffective internal control for purchases generally can be achieved in a !ell-planned
organi*ational structure !ith a separate purchasing departent that has8
%. The ability to prepare payent vouchers based on the inforation on a vendor&s invoice.
2. The responsibility of revie!ing purchase orders issued by user departents.
C. The authority to a)e purchases of re.uisitioned aterials and services.
4. % direct reporting responsibility to controller of the organi*ation.

"+. 9urchase cutoff procedures should be designed to test that erchandise is included in the
inventory of the client copany# if the copany8
%. @as paid for the erchandise.
2. @as physical possession of the erchandise.
C. @olds legal title to the erchandise.
4. @olds the shipping docuents for the erchandise issued in the copany&s nae.

12-/
Chapter 12 - Inventories and Cost of Goods Sold
"/. ,hich of the follo!ing is an internal control !ea)ness for a copany !hose inventory of
supplies consists of a large nuber of individual ites6
%. Supplies of relatively little value are e-pensed !hen purchased.
2. The cycle basis is used for physical counts.
C. The store)eeper is responsible for aintenance of perpetual inventory records.
4. 9erpetual inventory records are aintained only for ites of significant value.

"0. The auditors !ill usually trace the details of the test counts ade during the observation of
the physical inventory ta)ing to a final inventory schedule. This audit procedure is underta)en
to provide evidence that ites physically present and observed by the auditors at the tie of
the physical inventory count are8
%. O!ned by the client.
2. :ot obsolete.
C. 9hysically present at the tie of the preparation of the final inventory schedule.
4. Included in the final inventory schedule.

$1. %n internal control .uestionnaire indicates that an approved receiving report is re.uired to
accopany every chec) re.uest for payent of erchandise. ,hich of the follo!ing
procedures provides the greatest assurance that this control is operating effectively6
%. Select and e-aine receiving reports and ascertain that the related canceled chec)s are
dated no earlier than the receiving reports.
2. Select and e-aine receiving reports and ascertain that the related canceled chec)s are
dated no later than the receiving reports.
C. Select and e-aine canceled chec)s and ascertain that the related receiving reports are
dated no earlier than the chec)s.
4. Select and e-aine canceled chec)s and ascertain that the related receiving reports are
dated no later than the chec)s.

$1. % client&s physical count of inventories !as higher than the inventory .uantities per the
perpetual records. This situation could be the result of the failure to record8
%. Sales.
2. Sales discounts.
C. 9urchases.
4. 9urchase returns.

12-0
Chapter 12 - Inventories and Cost of Goods Sold
$2. ,hich one of the follo!ing procedures !ould not be appropriate for the auditors in
discharging their responsibilities concerning the client&s physical inventories6
%. Confiration of goods in the hands of public !arehouses.
2. Supervising the ta)ing of the annual physical inventory.
C. Carrying out physical inventory procedures at an interi date.
4. Obtaining !ritten representation fro the client as to the e-istence# .uality# and dollar
aount of the inventory.

$". To best ascertain that a copany has properly included erchandise that it o!ns in its
ending inventory# the auditors should revie! and test the8
%. Ters of the open purchase orders.
2. 9urchase cutoff procedures.
C. Contractual coitents ade by the purchasing departent.
4. 9urchase invoices received on or around year end.

$$. ,hich of the follo!ing is not one of the independent auditor&s ob=ectives regarding the
e-aination of inventories6
%. 5erifying that inventory counted is o!ned by the client.
2. 5erifying that the client has used proper inventory pricing.
C. %scertaining the physical .uantities of inventory on hand.
4. 5erifying that all inventory o!ned by the client is on hand at the tie of the count.

$'. 9urchase cutoff procedures should be designed to test !hether all inventory8
%. O!ned by the copany !as recorded.
2. On the year end balance sheet !as carried at lo!er of cost or ar)et.
C. On the year end balance sheet !as paid for by the copany.
4. O!ned by the copany is in the possession of the copany.

12-11
Chapter 12 - Inventories and Cost of Goods Sold
$(. ,hich of the follo!ing is an effective control that encourages receiving departent
personnel to count and inspect all erchandise received6
%. Auantities ordered are e-cluded fro the receiving departent copy of the purchase order.
2. 5ouchers are prepared by accounts payable departent personnel only after they atch
ite counts on the receiving report !ith the purchase order.
C. 3eceiving departent personnel are e-pected to atch and reconcile the receiving report
!ith the purchase order.
4. Internal auditors periodically e-aine# on a surprise basis# the receiving departent copies
of receiving reports.

$+. The accuracy of perpetual inventory records ay be established# in part# by coparing
perpetual inventory records !ith8
%. 9urchase re.uisitions.
2. 3eceiving reports.
C. 9urchase orders.
4. 5endor payents.

$/. %n inventory turnover analysis is useful to the auditor because it ay detect8
%. Inade.uacies in inventory pricing.
2. ;ethods of avoiding cyclical holding cost.
C. The optiu autoatic reorder points.
4. The e-istence of obsolete erchandise.

$0. %fter accounting for a se.uence of inventory tags# an auditor traces a saple of tags to the
physical inventory listing to obtain evidence that all ites8
%. Included in the listing have been counted.
2. 3epresented by inventory tags are included in the listing.
C. Included in the listing are represented by inventory tags.
4. 3epresented by inventory tags are bona fide.

12-11
Chapter 12 - Inventories and Cost of Goods Sold
'1. The ost reliable procedure for an auditor to use to test the e-istence of a client&s
inventory at an outside location !ould be to
%. Observe physical counts of the inventory ites.
2. Trace the total on the inventory listing to the general ledger inventory account.
C. Obtain a confiration fro the client indicating inventory o!nership.
4. %nalytically copare the current-year inventory balance to the prior-year balance.

'1. Tracing copies of coputer-prepared sales invoices to copies of the corresponding
coputer-prepared shipping docuents provides evidence that
%. Shipents to custoers !ere properly billed.
2. >ntries in the accounts receivable subsidiary ledger !ere for sales actually shipped.
C. Sales billed to custoers !ere actually shipped.
4. :o duplicate shipents to custoers !ere ade.

'2. In auditing a anufacturing entity# !hich of the follo!ing procedures !ould an auditor
least li)ely perfor to deterine !hether slo!-oving# defective# and obsolete ites
included in inventory are properly identified6
%. Test the coputation of standard overhead rates.
2. Tour the anufacturing plant or production facility.
C. Copare inventory balances to anticipated sales volue.
4. 3evie! inventory e-perience and trends.


Essay Questions

'". In auditing a client&s inventory# the auditors ust be concerned !ith the detection of goods
that are both daaged and obsolete.
a. ,hy are the auditors concerned !ith detecting daaged and obsolete goods6
b. @o! do the auditors test for daaged goods in the client&s inventory6
c. @o! do the auditors test for obsolete goods in the client&s inventory6




12-12
Chapter 12 - Inventories and Cost of Goods Sold
'$. Observation of a client&s inventory is a generally accepted auditing procedure that should
be perfored !henever it is possible.
a. ,hat part should the auditors play in planning the physical inventory6
b. 4escribe the procedures perfored by the auditors during their observation of a client&s
physical inventory.
c. ,hy do the auditors docuent their inventory test counts in their !or)ing papers6




12-1"
Chapter 12 - Inventories and Cost of Goods Sold
Chapter 12 Inventories and Cost of Goods Sold %ns!er Bey


True / False Questions

1. Observation of inventories is a generally accepted auditing standard.
FASE

Difficulty: Easy

2. The receiving departent should accept only goods for !hich there is an approved
purchase order on hand.
T!"E

Difficulty: Medium

". For good internal control over purchase transactions# purchases should be ade fro
approved vendors by the departent needing the goods.
FASE

Difficulty: Medium

$. %uditors should not revie! the client&s planning of the physical inventory.
FASE

Difficulty: Medium

'. The proper cutoff of inventories is best achieved !hen the client uses prenubered
purchase orders.
FASE

Difficulty: Medium

12-1$
Chapter 12 - Inventories and Cost of Goods Sold
(. The lo!er of cost or ar)et test by the auditors is generally designed to assure that
inventories are not valued above their net reali*able values.
T!"E

Difficulty: Easy

+. ,hen the auditors cannot satisfy theselves as to the accuracy of ending inventory and a
aterial isstateent ay e-ist# they norally ay still give an un.ualified opinion on the
client&s incoe stateent.
FASE

Difficulty: Medium

/. To test the client&s cutoff of inventories# the auditors !ill a)e a record of the serial nuber
of the final receiving and shipping docuents used prior to the ta)ing of the physical
inventory.
T!"E

Difficulty: Medium

0. The use of a tagging syste for inventory ta)ing is designed to prevent double counting of
goods.
T!"E

Difficulty: Easy

11. The e-aination of !arehouse receipts is not sufficient verification of a aterial aount
of goods stored in public !arehouses.
T!"E

Difficulty: Medium


Multiple Choice Questions

12-1'
Chapter 12 - Inventories and Cost of Goods Sold
11. %n auditor suspects that certain client eployees are ordering erchandise for theselves
over the Internet !ithout recording the purchase or receipt of the erchandise. ,hen vendors&
invoices arrive# one of the eployees approves the invoices for payent. %fter the invoices
are paid# the eployee destroys the invoices and the related vouchers. In gathering evidence
regarding the fraud# the auditor ost li)ely !ould select ites for testing fro the file of all
A# Cash disburseents.
2. %pproved vouchers.
C. 3eceiving reports.
4. 5endors& invoices.

Difficulty: Medium
Source: AICPA

12. ,hich of the follo!ing is not true relating to the auditors& observation of the client&s
physical inventory6
%. The auditors should evaluate the client&s planning of the physical inventory.
$# The auditors should a)e certain that consigned ites fro suppliers are included in
physical inventory totals.
C. The auditors should evaluate the ade.uacy of the client&s counting procedures.
4. The auditors should ta)e test counts of the client&s inventory.

Difficulty: Easy

1". % receiving departent copares inventory ites received !ith copies of purchase
orders. The purchase orders list the nae of the vendor and do not list the .uantities of the
aterial ordered. 7sing the purchase orders# the receiving departent is ost li)ely to detect8
A# 4eliveries for !hich no purchase order !as issued.
2. 7napproved sales orders.
C. 9artial deliveries.
4. 4eliveries of a greater .uantity of ites than those ordered.

Difficulty: Hard

12-1(
Chapter 12 - Inventories and Cost of Goods Sold
1$. To easure ho! effectively a client eploys its assets# an auditor calculates inventory
turnover by dividing the average inventory into8
%. :et sales.
$# Cost of good sold.
C. Operating incoe.
4. Gross sales.

Difficulty: Medium

1'. ,hich of the follo!ing audit procedures ost li)ely !ould provide assurance that a
anufacturing entity&s inventory valuation is proper6
A# Testing the entity&s coputation of standard overhead rates.
2. Obtaining confiration of inventories pledged under loan agreeents.
C. 3evie!ing a cutoff procedure for inventories.
4. Tracing test counts to the entity&s inventory listing.

Difficulty: Hard

1(. % client uses a periodic inventory syste. ,ould one e-pect a credit to !hich of the
follo!ing accounts at the point of sale6

%. Option %
$# Option 2
C. Option C
4. Option 4

Difficulty: Easy

12-1+
Chapter 12 - Inventories and Cost of Goods Sold
1+. % client uses a perpetual inventory syste. ,ould one e-pect a credit to !hich of the
follo!ing accounts at the point of sale6

A# Option %
2. Option 2
C. Option C
4. Option 4

Difficulty: Easy

1/. ,hich of the follo!ing !ould an auditor ost li)ely .uestion included in calculation of
the overhead rate for a copany that anufactures a product6
%. Factory supervisor salary.
2. Indirect aterials.
C. ;iscellaneous e-pense.
%# Sales e-pense.

Difficulty: Easy

10. % <bill and hold< schee is ost li)ely to include8
%. Shipent of ites to a custoer beyond !hat the custoer has ordered.
$# 3ecording as sales ites that the copany retains as of year-end.
C. 2illing of ites that are held by custoers for future revenue production purposes.
4. Selling ites at substantial discounts near year-end.

Difficulty: Hard

12-1/
Chapter 12 - Inventories and Cost of Goods Sold
21. ,hich of the follo!ing is an auditor least li)ely to consider a departure fro generally
accepted accounting principles6
%. 5aluing inventory at cost.
$# Including in inventory ites that are consigned out to vendors# but not yet sold.
C. 7sing standard cost as the easure of inventory cost.
4. Including in inventory ites shipped subse.uent to year-end# but for !hich valid orders
did e-ist at year-end.

Difficulty: Medium

21. ,hich of the follo!ing is least li)ely to be accurate stateent concerning characteristics
of an audit6
A# %n analysis of inventory turnover addresses !hether the proper ethod of deterining
inventory costs--as contrasted to ar)et values--is being applied.
2. Characteristics of the double entry boo))eeping syste a)e it possible to test for
overstated sales !hen tests of accounts receivable are being perfored.
C. The direction of tests for overstateent errors is generally directed fro the recorded entry
to source docuents.
4. 7se of a perpetual rather than a periodic inventory syste is li)ely to affect the nature of
cutoff errors ade at year-end.

Difficulty: Hard

22. ,hich of the follo!ing is not a reason for the special significance attached by the auditors
to the verification of inventories6
%. The deterination of inventory valuation directly affects net incoe.
$# The e-istence of inventories is inherently difficult to substantiate.
C. Special valuation probles often e-ist for inventories.
4. Inventories are often the largest current asset of an enterprise.

Difficulty: Hard

12-10
Chapter 12 - Inventories and Cost of Goods Sold
2". ,hich of the follo!ing is true about the auditors& observation of the client&s physical
inventory6
%. The count ust be ade at year-end.
2. The auditors should supervise the client&s personnel.
C# The auditors& observation addresses the e-istence assertion.
4. The auditors should =ustify any oission of the observation in the audit report.

Difficulty: Medium

2$. In verifying debits to perpetual inventory records of a non-anufacturing fir# the auditor
!ould be ost interested in e-aining the8
%. 9urchases =ournal.
2. 9urchase re.uisitions.
C. 9urchase orders.
%# 5endors& invoices.

Difficulty: Hard

2'. In verifying credits to perpetual inventory records of a non-anufacturing fir# the
auditor !ould be ost interested in e-aining the8
A# Shipping docuents.
2. 3eceiving reports.
C. 9urchase orders.
4. 5endors& invoices.

Difficulty: Hard

2(. The client&s physical count of inventories is lo!er than the inventory .uantities in the
perpetual records. This could be the result of a failure to record8
%. 9urchases.
2. 9urchase discounts.
C# Sales.
4. Sales discounts.

Difficulty: Medium

12-21
Chapter 12 - Inventories and Cost of Goods Sold
2+. %n auditor has accounted for a se.uence of inventory tags and is no! going to trace
inforation on a representative nuber of tags to the inventory suary sheets. ,hich
assertion does this procedure relate to ost directly6
A# Copleteness.
2. >-istence.
C. ?egality.
4. 5aluation.

Difficulty: Medium

2/. The use of a <blind< purchase order is designed to prevent errors by the8
%. 9urchase departent.
$# 3eceiving departent.
C. Stores departent.
4. %ccounting departent.

Difficulty: Medium

20. %n auditor perfors a test to deterine !hether all erchandise for !hich the client !as
billed !as received. The population for this test consists of all8
%. ;erchandise received.
$# 5endor&s invoices.
C. Canceled chec)s.
4. 3eceiving reports.

Difficulty: Medium
Source: AICPA

"1. To assure that all purchases are authori*ed before payent is ade# accounting
departent personnel should atch the vendor&s invoice to8
%. The purchase re.uisition.
2. The receiving report.
C# The purchase order.
4. The voucher.

Difficulty: Medium

12-21
Chapter 12 - Inventories and Cost of Goods Sold
"1. ,hich of the follo!ing is true about the auditors& observation of the client&s physical
inventory6
%. The auditors should plan the physical inventory.
2. The auditors should segregate daaged and obsolete goods.
C# The auditors should evaluate the ade.uacy of the client&s counting procedures.
4. The auditors should supervise the client&s personnel.

Difficulty: Medium

"2. ,hich of the follo!ing is not a procedure that typically is used by the auditors in their
e-aination of a client&s goods held in the custody of a public !arehouse6
%. Confiration.
2. Obtaining reports on internal control at the !arehouse.
C. Observation.
%# Corresponding !ith the state agency regarding the authenticity of the public !arehouse.

Difficulty: Medium

"". ,hich of the follo!ing best describes the reason that the auditors record their inventory
test counts in the !or)ing papers6
%. To docuent every test count.
$# For subse.uent coparison !ith the copleted inventory listing.
C. To docuent copliance !ith generally accepted accounting principles.
4. For use in subse.uent audits.

Difficulty: Medium

12-22
Chapter 12 - Inventories and Cost of Goods Sold
"$. ,hich of the follo!ing best describes the auditors& response to a client&s use of statistical
sapling techni.ues to estiate the inventory6
A# The auditors should satisfy theselves as to the statistical validity of the techni.ue# and the
reasonableness of the allo!ance for sapling ris) and sapling error used.
2. The auditors should .ualify their opinion# because the client ust perfor a coplete
count of the inventory.
C. The auditors should increase the e-tent of their test counts to copensate for the use of a
statistical techni.ue.
4. The auditors should !ithdra! fro the engageent.

Difficulty: Medium

"'. ,hich of the follo!ing best describes the reason for the auditors& revie! of the client&s
cost accounting syste6
%. To obtain evidence regarding the .uantities of good described as !or)-in-process.
$# To obtain evidence about the valuation of !or)-in-process# finished goods# and cost of
goods sold.
C. To obtain evidence about the profit argin on specific =obs.
4. To obtain evidence about copliance !ith Cost Accounting Standards.

Difficulty: Medium

"(. >ffective internal control for purchases generally can be achieved in a !ell-planned
organi*ational structure !ith a separate purchasing departent that has8
%. The ability to prepare payent vouchers based on the inforation on a vendor&s invoice.
2. The responsibility of revie!ing purchase orders issued by user departents.
C# The authority to a)e purchases of re.uisitioned aterials and services.
4. % direct reporting responsibility to controller of the organi*ation.

Difficulty: Hard
Source: AICPA

12-2"
Chapter 12 - Inventories and Cost of Goods Sold
"+. 9urchase cutoff procedures should be designed to test that erchandise is included in the
inventory of the client copany# if the copany8
%. @as paid for the erchandise.
2. @as physical possession of the erchandise.
C# @olds legal title to the erchandise.
4. @olds the shipping docuents for the erchandise issued in the copany&s nae.

Difficulty: Medium
Source: AICPA

"/. ,hich of the follo!ing is an internal control !ea)ness for a copany !hose inventory of
supplies consists of a large nuber of individual ites6
%. Supplies of relatively little value are e-pensed !hen purchased.
2. The cycle basis is used for physical counts.
C# The store)eeper is responsible for aintenance of perpetual inventory records.
4. 9erpetual inventory records are aintained only for ites of significant value.

Difficulty: Hard
Source: AICPA

"0. The auditors !ill usually trace the details of the test counts ade during the observation of
the physical inventory ta)ing to a final inventory schedule. This audit procedure is underta)en
to provide evidence that ites physically present and observed by the auditors at the tie of
the physical inventory count are8
%. O!ned by the client.
2. :ot obsolete.
C. 9hysically present at the tie of the preparation of the final inventory schedule.
%# Included in the final inventory schedule.

Difficulty: Medium
Source: AICPA

12-2$
Chapter 12 - Inventories and Cost of Goods Sold
$1. %n internal control .uestionnaire indicates that an approved receiving report is re.uired to
accopany every chec) re.uest for payent of erchandise. ,hich of the follo!ing
procedures provides the greatest assurance that this control is operating effectively6
%. Select and e-aine receiving reports and ascertain that the related canceled chec)s are
dated no earlier than the receiving reports.
2. Select and e-aine receiving reports and ascertain that the related canceled chec)s are
dated no later than the receiving reports.
C. Select and e-aine canceled chec)s and ascertain that the related receiving reports are
dated no earlier than the chec)s.
%# Select and e-aine canceled chec)s and ascertain that the related receiving reports are
dated no later than the chec)s.

Difficulty: Hard
Source: AICPA

$1. % client&s physical count of inventories !as higher than the inventory .uantities per the
perpetual records. This situation could be the result of the failure to record8
%. Sales.
2. Sales discounts.
C# 9urchases.
4. 9urchase returns.

Difficulty: Medium
Source: AICPA

$2. ,hich one of the follo!ing procedures !ould not be appropriate for the auditors in
discharging their responsibilities concerning the client&s physical inventories6
%. Confiration of goods in the hands of public !arehouses.
$# Supervising the ta)ing of the annual physical inventory.
C. Carrying out physical inventory procedures at an interi date.
4. Obtaining !ritten representation fro the client as to the e-istence# .uality# and dollar
aount of the inventory.

Difficulty: Medium
Source: AICPA

12-2'
Chapter 12 - Inventories and Cost of Goods Sold
$". To best ascertain that a copany has properly included erchandise that it o!ns in its
ending inventory# the auditors should revie! and test the8
%. Ters of the open purchase orders.
$# 9urchase cutoff procedures.
C. Contractual coitents ade by the purchasing departent.
4. 9urchase invoices received on or around year end.

Difficulty: Medium
Source: AICPA

$$. ,hich of the follo!ing is not one of the independent auditor&s ob=ectives regarding the
e-aination of inventories6
%. 5erifying that inventory counted is o!ned by the client.
2. 5erifying that the client has used proper inventory pricing.
C. %scertaining the physical .uantities of inventory on hand.
%# 5erifying that all inventory o!ned by the client is on hand at the tie of the count.

Difficulty: Medium
Source: AICPA

$'. 9urchase cutoff procedures should be designed to test !hether all inventory8
A# O!ned by the copany !as recorded.
2. On the year end balance sheet !as carried at lo!er of cost or ar)et.
C. On the year end balance sheet !as paid for by the copany.
4. O!ned by the copany is in the possession of the copany.

Difficulty: Medium
Source: AICPA

12-2(
Chapter 12 - Inventories and Cost of Goods Sold
$(. ,hich of the follo!ing is an effective control that encourages receiving departent
personnel to count and inspect all erchandise received6
A# Auantities ordered are e-cluded fro the receiving departent copy of the purchase order.
2. 5ouchers are prepared by accounts payable departent personnel only after they atch
ite counts on the receiving report !ith the purchase order.
C. 3eceiving departent personnel are e-pected to atch and reconcile the receiving report
!ith the purchase order.
4. Internal auditors periodically e-aine# on a surprise basis# the receiving departent copies
of receiving reports.

Difficulty: Easy
Source: AICPA

$+. The accuracy of perpetual inventory records ay be established# in part# by coparing
perpetual inventory records !ith8
%. 9urchase re.uisitions.
$# 3eceiving reports.
C. 9urchase orders.
4. 5endor payents.

Difficulty: Medium
Source: AICPA

$/. %n inventory turnover analysis is useful to the auditor because it ay detect8
%. Inade.uacies in inventory pricing.
2. ;ethods of avoiding cyclical holding cost.
C. The optiu autoatic reorder points.
%# The e-istence of obsolete erchandise.

Difficulty: Medium
Source: AICPA

12-2+
Chapter 12 - Inventories and Cost of Goods Sold
$0. %fter accounting for a se.uence of inventory tags# an auditor traces a saple of tags to the
physical inventory listing to obtain evidence that all ites8
%. Included in the listing have been counted.
$# 3epresented by inventory tags are included in the listing.
C. Included in the listing are represented by inventory tags.
4. 3epresented by inventory tags are bona fide.

Difficulty: Medium
Source: AICPA

'1. The ost reliable procedure for an auditor to use to test the e-istence of a client&s
inventory at an outside location !ould be to
A# Observe physical counts of the inventory ites.
2. Trace the total on the inventory listing to the general ledger inventory account.
C. Obtain a confiration fro the client indicating inventory o!nership.
4. %nalytically copare the current-year inventory balance to the prior-year balance.

Difficulty: Medium
Source: AICPA

'1. Tracing copies of coputer-prepared sales invoices to copies of the corresponding
coputer-prepared shipping docuents provides evidence that
%. Shipents to custoers !ere properly billed.
2. >ntries in the accounts receivable subsidiary ledger !ere for sales actually shipped.
C# Sales billed to custoers !ere actually shipped.
4. :o duplicate shipents to custoers !ere ade.

Difficulty: Medium
Source: AICPA

12-2/
Chapter 12 - Inventories and Cost of Goods Sold
'2. In auditing a anufacturing entity# !hich of the follo!ing procedures !ould an auditor
least li)ely perfor to deterine !hether slo!-oving# defective# and obsolete ites
included in inventory are properly identified6
%. Test the coputation of standard overhead rates.
$# Tour the anufacturing plant or production facility.
C. Copare inventory balances to anticipated sales volue.
4. 3evie! inventory e-perience and trends.

Difficulty: Hard
Source: AICPA


Essay Questions

'". In auditing a client&s inventory# the auditors ust be concerned !ith the detection of goods
that are both daaged and obsolete.
a. ,hy are the auditors concerned !ith detecting daaged and obsolete goods6
b. @o! do the auditors test for daaged goods in the client&s inventory6
c. @o! do the auditors test for obsolete goods in the client&s inventory6
a. %uditors are concerned about detecting daaged and obsolete inventory because the
recorded cost of these goods ay be significantly greater than their net reali*able value.
b. %uditors test for daaged goods by in.uiry of client personnel and observation during the
client&s physical inventory.
c. Tests for obsolescence include8
1. 3evie! of perpetual inventory records#
2. %nalytical procedures# such as calculation of ratios# such as inventory turnover# and
". In.uiry of client personnel.

Difficulty: Medium

12-20
Chapter 12 - Inventories and Cost of Goods Sold
'$. Observation of a client&s inventory is a generally accepted auditing procedure that should
be perfored !henever it is possible.
a. ,hat part should the auditors play in planning the physical inventory6
b. 4escribe the procedures perfored by the auditors during their observation of a client&s
physical inventory.
c. ,hy do the auditors docuent their inventory test counts in their !or)ing papers6
a. The auditors should revie! the client&s planning of the physical inventory and a)e
suggestions for iproveent.
b. 4uring the inventory observation the auditors8
1. >valuate !hether the inventory procedures are follo!ed that assure that all ites are
counted and nothing is counted t!ice.
2. 2e alert for goods that appear to be daaged or obsolete.
". Obtain inforation to test the client&s cutoff of purchases and sales.
$. ;a)e test counts and record the in their !or)ing papers.
'. ;a)e in.uiries regarding goods on consignent.
(. Obtain tag control inforation and record the inforation in the !or)ing papers.
c. The auditors docuent their test counts in the !or)ing papers to later test the accuracy of
the final inventory listing.

Difficulty: Medium

12-"1