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Exam 21: Audit of the Inventory and Warehousing Cycle

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Question 51

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You are auditing the inventory account and are concerned about the possibility of an inventory overstatement. What is the best audit procedure to detect damaged inventory?

A) observe the condition of inventory during the client's physical count
B) compare the condition of inventory from the previous year's count to the current year
C) compare inventory turnover from the previous year's inventory to the current year's inventory
D) reconcile the inventory counts to the cost accounting records

E) A) and B)
F) B) and D)

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Question 52

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Pricing manufactured inventory is difficult. Auditors must evaluate the method of allocating manufacturing overhead for all but which of the following?

A) reasonableness
B) computational correctness
C) compliance with accounting standards
D) consistency

E) All of the above
F) C) and D)

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Question 53

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The audit of the inventory and warehousing cycle will be affected by the results from other business processes. Identify the "other" business cycles and how they impact the audit of inventory.

The audit procedure "Account for unused tag numbers shown in the auditor's working papers to make sure no tags have been added" provides assurance mainly for the existence objective for inventory pricing and compilation.

Hardy Company mass-produces eight different products. The controller who is interested in strengthening internal controls over the accounting for materials used in production would be most likely to implement a(n) :

Almost all companies need physical controls over their assets to prevent loss. Which of the following is not an example of such a control?

While separate perpetual inventory records are normally kept for raw materials and finished goods, most companies do not use perpetual for work-in-process.

When part of the client's inventory is in a public warehouse or in the possession of other outside custodians, the auditor does not need to observe a physical count of the inventory if a written confirmation is obtained directly from the inventory custodians.

The auditor's main concerns in verifying transfers of inventory do not include whether:

Master files, worksheets, and reports that accumulate material, labor, and overhead as the costs are incurred are:

The major considerations in evaluating the reasonableness of cost allocations are compliance with GAAP and consistency with prior years.

Which of the following statements is correct regarding the auditor's responsibility with respect to the year-end inventory procedures of an audit client?

Cost accounting controls are those related to the physical inventory and the consequent costs from the point at which:

When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing unrecorded liabilities?

State the six functions that make up the inventory and warehousing cycle and, for each function, identify the related documents and/or records that would be used by a manufacturing company.

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

Johnson Co.'s physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record:

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

McKesson & Robbins Company is a well-known audit case involving auditor responsibility. What occurred at the McKesson & Robbins Company to change the way in which auditors audit inventory?

When verifying the transfer of inventory from one location to another, the audit objectives with which the auditor is primarily concerned are occurrence of recorded transfers, completeness of recorded transfers, and accuracy of recorded transfers.