inventories and cogs

8/11/2019 Inventories and COGS

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Chapter 12 - Inventories and Cost of Goods Sold

Chapter 12Inventories and Cost of Goods Sold

True / False Questions

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

2. The receiving depart ent 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 froapproved vendors by the depart ent 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 prenu bered purchase orders.True False

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

+. ,hen the auditors cannot satisfy the selves as to the accuracy of ending inventory and aaterial isstate ent ay e ist# they nor ally ay still give an un ualified opinion on the

client&s inco e state ent.True False

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/. To test the client&s cutoff of inventories# the auditors !ill a)e a record of the serial nu ber of the final receiving and shipping docu ents used prior to the ta)ing of the physicalinventory.True False

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

1 . The e a ination of !arehouse receipts is not sufficient verification of a aterial a ountof goods stored in public !arehouses.

True False

Multiple Choice Questions

11. %n auditor suspects that certain client e ployees are ordering erchandise for the selvesover the Internet !ithout recording the purchase or receipt of the erchandise. ,hen vendors&invoices arrive# one of the e ployees approves the invoices for pay ent. %fter the invoicesare paid# the e ployee destroys the invoices and the related vouchers. In gathering evidence

regarding the fraud# the auditor ost li)ely !ould select ite s for testing fro the file of all%. Cash disburse ents.

. %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.

. The auditors should a)e certain that consigned ite s 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.

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1". % receiving depart ent co pares inventory ite s received !ith copies of purchaseorders. The purchase orders list the na e of the vendor and do not list the uantities of the

aterial ordered. 7sing the purchase orders# the receiving depart ent is ost li)ely to detect8%. 4eliveries for !hich no purchase order !as issued.

. 7napproved sales orders.C. 9artial deliveries.4. 4eliveries of a greater uantity of ite s than those ordered.

1$. To easure ho! effectively a client e ploys its assets# an auditor calculates inventoryturnover by dividing the average inventory into8%. :et sales.

. Cost of good sold.C. Operating inco e.

4. Gross sales.

1'. ,hich of the follo!ing audit procedures ost li)ely !ould provide assurance that aanufacturing entity&s inventory valuation is proper6

%. Testing the entity&s co putation of standard overhead rates.. Obtaining confir ation of inventories pledged under loan agree ents.

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 thefollo!ing accounts at the point of sale6

%. Option %

. Option C. Option C4. Option 4

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1+. % client uses a perpetual inventory syste . ,ould one e pect a credit to !hich of thefollo!ing accounts at the point of sale6

%. Option %


1/. ,hich of the follo!ing !ould an auditor ost li)ely uestion included in calculation ofthe overhead rate for a co pany that anufactures a product6%. Factory supervisor salary.

. Indirect aterials.C. ;iscellaneous e pense.4. Sales e pense.

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2'. In verifying credits to perpetual inventory records of a non- anufacturing fir # theauditor !ould be ost interested in e a ining the8%. Shipping docu ents.

. 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.

. 9urchase discounts.C. Sales.4. Sales discounts.

2+. %n auditor has accounted for a se uence of inventory tags and is no! going to traceinfor ation on a representative nu ber of tags to the inventory su ary sheets. ,hichassertion does this procedure relate to ost directly6%. Co pleteness.

. > istence.C. ?egality.4. 5aluation.

2/. The use of a


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" . To assure that all purchases are authori*ed before pay ent is ade# accountingdepart ent personnel should atch the vendor&s invoice to8%. The purchase re uisition.

. 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 physicalinventory6%. The auditors should plan the physical inventory.

. The auditors should segregate da aged 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 theire a ination of a client&s goods held in the custody of a public !arehouse6%. Confir ation.

. 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 inventorytest counts in the !or)ing papers6%. To docu ent every test count.

. For subse uent co parison !ith the co pleted inventory listing.C. To docu ent co pliance !ith generally accepted accounting principles.4. For use in subse uent audits.

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"$. ,hich of the follo!ing best describes the auditors& response to a client&s use of statisticalsa pling techni ues to esti ate the inventory6%. The auditors should satisfy the selves as to the statistical validity of the techni ue# and thereasonableness of the allo!ance for sa pling ris) and sa pling error used.

. The auditors should ualify their opinion# because the client ust perfor a co pletecount of the inventory.C. The auditors should increase the e tent of their test counts to co pensate for the use of astatistical techni ue.4. The auditors should !ithdra! fro the engage ent.

"'. ,hich of the follo!ing best describes the reason for the auditors& revie! of the client&scost accounting syste 6%. 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 ofgoods sold.C. To obtain evidence about the profit argin on specific =obs.4. To obtain evidence about co pliance !ith Cost Accounting Standards .

"(. >ffective internal control for purchases generally can be achieved in a !ell-plannedorgani*ational structure !ith a separate purchasing depart ent that has8%. The ability to prepare pay ent vouchers based on the infor ation on a vendor&s invoice.

. The responsibility of revie!ing purchase orders issued by user depart ents.

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 theinventory of the client co pany# if the co pany8%. @as paid for the erchandise.

. @as physical possession of the erchandise.C. @olds legal title to the erchandise.4. @olds the shipping docu ents for the erchandise issued in the co pany&s na e.

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"/. ,hich of the follo!ing is an internal control !ea)ness for a co pany !hose inventory ofsupplies consists of a large nu ber of individual ite s6%. Supplies of relatively little value are e pensed !hen purchased.

. 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 ite s 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)ento provide evidence that ite s physically present and observed by the auditors at the ti e ofthe physical inventory count are8%. O!ned by the client.

. :ot obsolete.

C. 9hysically present at the ti e of the preparation of the final inventory schedule.4. Included in the final inventory schedule.

$ . %n internal control uestionnaire indicates that an approved receiving report is re uired toacco pany every chec) re uest for pay ent of erchandise. ,hich of the follo!ing

procedures provides the greatest assurance that this control is operating effectively6%. Select and e a ine receiving reports and ascertain that the related canceled chec)s aredated no earlier than the receiving reports.

. Select and e a ine receiving reports and ascertain that the related canceled chec)s are

dated no later than the receiving reports.C. Select and e a ine canceled chec)s and ascertain that the related receiving reports aredated no earlier than the chec)s.4. Select and e a ine canceled chec)s and ascertain that the related receiving reports aredated 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.

. Sales discounts.C. 9urchases.4. 9urchase returns.

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$2. ,hich one of the follo!ing procedures !ould not be appropriate for the auditors indischarging their responsibilities concerning the client&s physical inventories6%. Confir ation 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 dollara ount of the inventory.

$". To best ascertain that a co pany has properly included erchandise that it o!ns in itsending inventory# the auditors should revie! and test the8%. Ter s of the open purchase orders.

. 9urchase cutoff procedures.C. Contractual co it ents ade by the purchasing depart ent.

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 thee a ination of inventories6%. 5erifying that inventory counted is o!ned by the client.

. 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 ti e of the count.

$'. 9urchase cutoff procedures should be designed to test !hether all inventory8%. O!ned by the co pany !as recorded.

. 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 co pany.4. O!ned by the co pany is in the possession of the co pany.

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$(. ,hich of the follo!ing is an effective control that encourages receiving depart ent personnel to count and inspect all erchandise received6%. Auantities ordered are e cluded fro the receiving depart ent copy of the purchase order.

. 5ouchers are prepared by accounts payable depart ent personnel only after they atch

ite counts on the receiving report !ith the purchase order.C. 3eceiving depart ent personnel are e pected to atch and reconcile the receiving report!ith the purchase order.4. Internal auditors periodically e a ine# on a surprise basis# the receiving depart ent copiesof receiving reports.

$+. The accuracy of perpetual inventory records ay be established# in part# by co paring perpetual inventory records !ith8%. 9urchase re uisitions.

. 3eceiving reports.C. 9urchase orders.4. 5endor pay ents.

$/. %n inventory turnover analysis is useful to the auditor because it ay detect8%. Inade uacies in inventory pricing.

. ;ethods of avoiding cyclical holding cost.C. The opti u auto atic reorder points.4. The e istence of obsolete erchandise.

$0. %fter accounting for a se uence of inventory tags# an auditor traces a sa ple of tags to the physical inventory listing to obtain evidence that all ite s8%. 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.

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' . The ost reliable procedure for an auditor to use to test the e istence of a client&sinventory at an outside location !ould be to%. Observe physical counts of the inventory ite s.

. Trace the total on the inventory listing to the general ledger inventory account.

C. Obtain a confir ation fro the client indicating inventory o!nership.4. %nalytically co pare the current-year inventory balance to the prior-year balance.

'1. Tracing copies of co puter-prepared sales invoices to copies of the correspondingco puter-prepared shipping docu ents provides evidence that%. Ship ents to custo ers !ere properly billed.

. >ntries in the accounts receivable subsidiary ledger !ere for sales actually shipped.C. Sales billed to custo ers !ere actually shipped.4. :o duplicate ship ents to custo ers !ere ade.

'2. In auditing a anufacturing entity# !hich of the follo!ing procedures !ould an auditorleast li)ely perfor to deter ine !hether slo!- oving# defective# and obsolete ite sincluded in inventory are properly identified6%. Test the co putation of standard overhead rates.

. Tour the anufacturing plant or production facility.C. Co pare inventory balances to anticipated sales volu e.4. 3evie! inventory e perience and trends.

Essay Questions

'". In auditing a client&s inventory# the auditors ust be concerned !ith the detection of goodsthat are both da aged and obsolete.a. ,hy are the auditors concerned !ith detecting da aged and obsolete goods6

b. @o! do the auditors test for da aged goods in the client&s inventory6c. @o! do the auditors test for obsolete goods in the client&s inventory6

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'$. Observation of a client&s inventory is a generally accepted auditing procedure that should be perfor ed !henever it is possible.a. ,hat part should the auditors play in planning the physical inventory6

b. 4escribe the procedures perfor ed by the auditors during their observation of a client&s

physical inventory.c. ,hy do the auditors docu ent their inventory test counts in their !or)ing papers6

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

True / False Questions

1. Observation of inventories is a generally accepted auditing standard.FA SE

Difficulty: Easy

2. The receiving depart ent 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 froapproved vendors by the depart ent needing the goods.FA SE

Difficulty: Medium

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

Difficulty: Medium

'. The proper cutoff of inventories is best achieved !hen the client uses prenu bered purchase orders.FA SE

Difficulty: Medium

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(. The lo!er of cost or ar)et test by the auditors is generally designed to assure thatinventories are not valued above their net reali*able values.T!"E

Difficulty: Easy

+. ,hen the auditors cannot satisfy the selves as to the accuracy of ending inventory and aaterial isstate ent ay e ist# they nor ally ay still give an un ualified opinion on the

client&s inco e state ent.FA SE

Difficulty: Medium

/. To test the client&s cutoff of inventories# the auditors !ill a)e a record of the serial nu ber of the final receiving and shipping docu ents used prior to the ta)ing of the physicalinventory.T!"E

Difficulty: Medium

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

Difficulty: Easy

1 . The e a ination of !arehouse receipts is not sufficient verification of a aterial a ountof goods stored in public !arehouses.T!"E

Difficulty: Medium

Multiple Choice Questions

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1$. To easure ho! effectively a client e ploys its assets# an auditor calculates inventoryturnover by dividing the average inventory into8%. :et sales.$# Cost of good sold.

C. Operating inco e.4. Gross sales.

Difficulty: Medium

1'. ,hich of the follo!ing audit procedures ost li)ely !ould provide assurance that aanufacturing entity&s inventory valuation is proper6

A# Testing the entity&s co putation of standard overhead rates.. Obtaining confir ation of inventories pledged under loan agree ents.

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 thefollo!ing accounts at the point of sale6

%. Option %$# Option C. Option C4. Option 4

Difficulty: Easy

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1+. % client uses a perpetual inventory syste . ,ould one e pect a credit to !hich of thefollo!ing accounts at the point of sale6

A# Option %


Difficulty: Easy

1/. ,hich of the follo!ing !ould an auditor ost li)ely uestion included in calculation ofthe overhead rate for a co pany that anufactures a product6%. Factory supervisor salary.

. Indirect aterials.C. ;iscellaneous e pense.%# Sales e pense.

Difficulty: Easy

10. %


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2 . ,hich of the follo!ing is an auditor least li)ely to consider a departure fro generallyaccepted accounting principles6%. 5aluing inventory at cost.$# Including in inventory ite s that are consigned out to vendors# but not yet sold.

C. 7sing standard cost as the easure of inventory cost.4. Including in inventory ite s shipped subse uent to year-end# but for !hich valid ordersdid e ist at year-end.

Difficulty: Medium

21. ,hich of the follo!ing is least li)ely to be accurate state ent concerning characteristicsof an audit6A# %n analysis of inventory turnover addresses !hether the proper ethod of deter ining

inventory costs--as contrasted to ar)et values--is being applied.. Characteristics of the double entry boo))eeping syste a)e it possible to test for

overstated sales !hen tests of accounts receivable are being perfor ed.C. The direction of tests for overstate ent errors is generally directed fro the recorded entryto source docu ents.4. 7se of a perpetual rather than a periodic inventory syste is li)ely to affect the nature ofcutoff errors ade at year-end.

Difficulty: Hard

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

Difficulty: Hard

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2". ,hich of the follo!ing is true about the auditors& observation of the client&s physicalinventory6%. The count ust be ade at year-end.

. The auditors should supervise the client&s personnel.

C# The auditors& observation addresses the e istence assertion.4. The auditors should =ustify any o ission 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 a ining the8%. 9urchases =ournal.

. 9urchase re uisitions.

C. 9urchase orders.%# 5endors& invoices.

Difficulty: Hard

2'. In verifying credits to perpetual inventory records of a non- anufacturing fir # theauditor !ould be ost interested in e a ining the8A# Shipping docu ents.

. 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.

. 9urchase discounts.C# Sales.4. Sales discounts.

Difficulty: Medium

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2+. %n auditor has accounted for a se uence of inventory tags and is no! going to traceinfor ation on a representative nu ber of tags to the inventory su ary sheets. ,hichassertion does this procedure relate to ost directly6A# Co pleteness.

. > istence.C. ?egality.4. 5aluation.

Difficulty: Medium

2/. The use of a


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"1. ,hich of the follo!ing is true about the auditors& observation of the client&s physicalinventory6%. The auditors should plan the physical inventory.

. The auditors should segregate da aged 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 theire a ination of a client&s goods held in the custody of a public !arehouse6%. Confir ation.

. 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 inventorytest counts in the !or)ing papers6%. To docu ent every test count.$# For subse uent co parison !ith the co pleted inventory listing.

C. To docu ent co pliance !ith generally accepted accounting principles.4. For use in subse uent audits.

Difficulty: Medium

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"$. ,hich of the follo!ing best describes the auditors& response to a client&s use of statisticalsa pling techni ues to esti ate the inventory6A# The auditors should satisfy the selves as to the statistical validity of the techni ue# and thereasonableness of the allo!ance for sa pling ris) and sa pling error used.

. The auditors should ualify their opinion# because the client ust perfor a co pletecount of the inventory.C. The auditors should increase the e tent of their test counts to co pensate for the use of astatistical techni ue.4. The auditors should !ithdra! fro the engage ent.

Difficulty: Medium

"'. ,hich of the follo!ing best describes the reason for the auditors& revie! of the client&s

cost accounting syste 6%. 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 ofgoods sold.C. To obtain evidence about the profit argin on specific =obs.4. To obtain evidence about co pliance !ith Cost Accounting Standards .

Difficulty: Medium

"(. >ffective internal control for purchases generally can be achieved in a !ell-plannedorgani*ational structure !ith a separate purchasing depart ent that has8%. The ability to prepare pay ent vouchers based on the infor ation on a vendor&s invoice.

. The responsibility of revie!ing purchase orders issued by user depart ents.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

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"+. 9urchase cutoff procedures should be designed to test that erchandise is included in theinventory of the client co pany# if the co pany8%. @as paid for the erchandise.

. @as physical possession of the erchandise.

C# @olds legal title to the erchandise.4. @olds the shipping docu ents for the erchandise issued in the co pany&s na e.

Difficulty: MediumSource: AICPA

"/. ,hich of the follo!ing is an internal control !ea)ness for a co pany !hose inventory ofsupplies consists of a large nu ber of individual ite s6%. Supplies of relatively little value are e pensed !hen purchased.

. 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 ite s 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)ento provide evidence that ite s physically present and observed by the auditors at the ti e ofthe physical inventory count are8%. O!ned by the client.

. :ot obsolete.C. 9hysically present at the ti e of the preparation of the final inventory schedule.%# Included in the final inventory schedule.


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$ . %n internal control uestionnaire indicates that an approved receiving report is re uired toacco pany every chec) re uest for pay ent of erchandise. ,hich of the follo!ing

procedures provides the greatest assurance that this control is operating effectively6%. Select and e a ine receiving reports and ascertain that the related canceled chec)s are

dated no earlier than the receiving reports.. Select and e a ine receiving reports and ascertain that the related canceled chec)s aredated no later than the receiving reports.C. Select and e a ine canceled chec)s and ascertain that the related receiving reports aredated no earlier than the chec)s.%# Select and e a ine canceled chec)s and ascertain that the related receiving reports aredated 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.

. Sales discounts.C# 9urchases.4. 9urchase returns.


$2. ,hich one of the follo!ing procedures !ould not be appropriate for the auditors indischarging their responsibilities concerning the client&s physical inventories6%. Confir ation of goods in the hands of public !arehouses.$# 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 dollara ount of the inventory.


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$". To best ascertain that a co pany has properly included erchandise that it o!ns in itsending inventory# the auditors should revie! and test the8%. Ter s of the open purchase orders.$# 9urchase cutoff procedures.

C. Contractual co it ents ade by the purchasing depart ent.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 thee a ination of inventories6%. 5erifying that inventory counted is o!ned by the client.

. 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 ti e of the count.


$'. 9urchase cutoff procedures should be designed to test !hether all inventory8A# O!ned by the co pany !as recorded.

. 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 co pany.4. O!ned by the co pany is in the possession of the co pany.


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$(. ,hich of the follo!ing is an effective control that encourages receiving depart ent personnel to count and inspect all erchandise received6A# Auantities ordered are e cluded fro the receiving depart ent copy of the purchase order.

. 5ouchers are prepared by accounts payable depart ent personnel only after they atch

ite counts on the receiving report !ith the purchase order.C. 3eceiving depart ent personnel are e pected to atch and reconcile the receiving report!ith the purchase order.4. Internal auditors periodically e a ine# on a surprise basis# the receiving depart ent copiesof receiving reports.

Difficulty: EasySource: AICPA

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


$/. %n inventory turnover analysis is useful to the auditor because it ay detect8%. Inade uacies in inventory pricing.

. ;ethods of avoiding cyclical holding cost.C. The opti u auto atic reorder points.%# The e istence of obsolete erchandise.


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$0. %fter accounting for a se uence of inventory tags# an auditor traces a sa ple of tags to the physical inventory listing to obtain evidence that all ite s8%. Included in the listing have been counted.$# 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.


' . The ost reliable procedure for an auditor to use to test the e istence of a client&sinventory at an outside location !ould be toA# Observe physical counts of the inventory ite s.

. Trace the total on the inventory listing to the general ledger inventory account.C. Obtain a confir ation fro the client indicating inventory o!nership.4. %nalytically co pare the current-year inventory balance to the prior-year balance.


'1. Tracing copies of co puter-prepared sales invoices to copies of the correspondingco puter-prepared shipping docu ents provides evidence that%. Ship ents to custo ers !ere properly billed.

. >ntries in the accounts receivable subsidiary ledger !ere for sales actually shipped.C# Sales billed to custo ers !ere actually shipped.4. :o duplicate ship ents to custo ers !ere ade.


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'2. In auditing a anufacturing entity# !hich of the follo!ing procedures !ould an auditorleast li)ely perfor to deter ine !hether slo!- oving# defective# and obsolete ite sincluded in inventory are properly identified6%. Test the co putation of standard overhead rates.

$# Tour the anufacturing plant or production facility.C. Co pare inventory balances to anticipated sales volu e.4. 3evie! inventory e perience and trends.


Essay Questions

'". In auditing a client&s inventory# the auditors ust be concerned !ith the detection of goodsthat are both da aged and obsolete.a. ,hy are the auditors concerned !ith detecting da aged and obsolete goods6

b. @o! do the auditors test for da aged goods in the client&s inventory6c. @o! do the auditors test for obsolete goods in the client&s inventory6

a. %uditors are concerned about detecting da aged and obsolete inventory because therecorded cost of these goods ay be significantly greater than their net reali*able value.

b. %uditors test for da aged goods by in uiry of client personnel and observation during theclient&s physical inventory.

c. Tests for obsolescence include81. 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


30/30


'$. Observation of a client&s inventory is a generally accepted auditing procedure that should be perfor ed !henever it is possible.a. ,hat part should the auditors play in planning the physical inventory6

b. 4escribe the procedures perfor ed by the auditors during their observation of a client&s

physical inventory.c. ,hy do the auditors docu ent their inventory test counts in their !or)ing papers6

a. The auditors should revie! the client&s planning of the physical inventory and a)esuggestions for i prove ent.

b. 4uring the inventory observation the auditors81. >valuate !hether the inventory procedures are follo!ed that assure that all ite s arecounted and nothing is counted t!ice.2. e alert for goods that appear to be da aged or obsolete.". Obtain infor ation 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 consign ent.(. Obtain tag control infor ation and record the infor ation in the !or)ing papers.c. The auditors docu ent their test counts in the !or)ing papers to later test the accuracy ofthe final inventory listing.

Difficulty: Medium

inventories and cogs

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