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| 1 | |
Fleming, the purchasing manager at Sparks Hardware Wholesalers, has a relative named Patterson who owns a retail hardware store. Fleming arranged for hardware to be delivered by manufacturers directly to the retail store on a C.O.D. (cash-on-delivery) basis to enable Patterson to buy at lower wholesale prices. Fleming was most likely able to do this because of Sparks’ poor internal control regarding |
| | A) | Perpetual inventory records. |
| | B) | Processing of cash receipts. |
| | C) | Processing of purchase orders. |
| | D) | Processing of invoices. |
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| 2 | |
The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that |
| | A) | Independent internal verification of activity reports is established. |
| | B) | Transfers to the finished goods department are documented by a completed production report and a quality control report. |
| | C) | Production orders are prenumbered and signed by a supervisor. |
| | D) | Custody of work in process and finished goods is properly maintained. |
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| 3 | |
Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions? |
| | A) | Inventory manager does not have ability to record inventory transactions. |
| | B) | Summary of the receiving reports is independently compared to the inventory status report. |
| | C) | Inventory is periodically reviewed for slow-moving or obsolete items, which may require a write-down. |
| | D) | Subsidiary ledgers are periodically reconciled with inventory control accounts. |
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| 4 | |
Which of the following is not a typical document included in the Inventory Management Process? |
| | A) | Receiving report. |
| | B) | Purchase order. |
| | C) | Inventory status report. |
| | D) | Shipping order. |
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| 5 | |
Which of the following is not a major function in the inventory management process? |
| | A) | Inventory management. |
| | B) | Manufacturing. |
| | C) | Receiving. |
| | D) | Cost accounting. |
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| 6 | |
Which of the following is not a role of the inventory management function (not the inventory management process as a whole)? |
| | A) | Authorization of production. |
| | B) | Maintenance of the cost of manufacturing in cost records. |
| | C) | Maintenance of inventory at appropriate levels. |
| | D) | Issuance of purchase requisitions. |
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| 7 | |
Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory? |
| | A) | Periodic reconciliation of work in process with job cost sheets. |
| | B) | Segregation of functions between general accounting and cost accounting. |
| | C) | Independent comparisons of finished goods records with counts of goods on hand. |
| | D) | Approval of inventory journal entries by the storekeeper. |
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| 8 | |
Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who |
| | A) | Issue raw materials obtain materials requisitions for each issue and prepare daily totals of materials issued. |
| | B) | Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory. |
| | C) | Obtain receipts for the transfer of completed work to finished goods prepare a completed production report. |
| | D) | Are independent of issuing production orders update records from completed job cost sheets and production cost reports on a timely basis. |
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| 9 | |
Key segregations of duties in the inventory management process include separation of all of the following except: |
| | A) | Inventory management from cost accounting. |
| | B) | Cost accounting from the general ledger function. |
| | C) | Supervision of physical inventory from perpetual inventory recordkeeping. |
| | D) | Cost accounting from review of variance reports. |
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| 10 | |
Which of the following is not an inherent risk factor in the audit of the inventory management process? |
| | A) | The lack of prenumbered materials requisition forms. |
| | B) | Industry competition. |
| | C) | The acquisition of raw materials from related parties. |
| | D) | Technology changes. |
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| 11 | |
Which of the following control activities would be most effective in maintaining accurate perpetual inventory records? |
| | A) | Independent matching of purchase orders, receiving reports, and vendor invoices prior to payment. |
| | B) | Independent count of goods received by storeroom personnel. |
| | C) | Periodic independent reconciliation of inventory control account with the subsidiary detailed records. |
| | D) | Periodic independent reconciliation of perpetual records with actual goods on hand. |
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| 12 | |
The most effective control for preventing fictitious inventory is |
| | A) | Using a perpetual inventory system. |
| | B) | Using a periodic inventory system. |
| | C) | Segregation of duties. |
| | D) | Periodic review of inventory levels by those in charge of inventory requisitions. |
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| 13 | |
An auditor’s tests of controls over the issuance of raw materials to production would most likely include |
| | A) | Reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances. |
| | B) | Inquiry of the custodian about the procedures followed when defective materials are received from vendors. |
| | C) | Observation that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual. |
| | D) | Examination of materials requisitions and reperformance of entity controls designed to process and record issuances. |
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| 14 | |
Which of the following internal control activities is most likely to address the completeness assertion for inventory? |
| | A) | The work-in-process account is periodically reconciled with subsidiary records. |
| | B) | Employees responsible for custody of finished goods do not perform the receiving function. |
| | C) | Receiving reports are prenumbered and periodically reconciled. |
| | D) | There is a separation of duties between payroll department and inventory accounting personnel. |
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| 15 | |
An entity maintains perpetual inventory records in both quantities and monetary amounts. If the level of control risk were set at high, an auditor would probably |
| | A) | Insist that the entity perform physical counts of inventory items several times during the year. |
| | B) | Apply gross profit tests to ascertain the reasonableness of the physical counts. |
| | C) | Increase the extent of tests of controls of the inventory system. |
| | D) | Request that the entity schedule the physical inventory count at the end of the year. |
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| 16 | |
An entity maintains perpetual inventory records in terms of both quantities and monetary amounts. If the assessed level of control risk is high, the auditor would probably |
| | A) | Insist that the entity take a physical count of inventory at least four times a year. |
| | B) | Request that the entity take the physical count on or very near year-end. |
| | C) | Rely mainly on tests of controls in the inventory and warehousing area. |
| | D) | Rely on analytical procedures (i.e. gross profit test and inventory turnover) to ascertain the reasonableness of the physical count. |
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| 17 | |
A decrease in inventory turnover that is not consistent with the change in sales may signal to the auditor |
| | A) | An overstatement of ending inventory. |
| | B) | The existence of many open purchase orders. |
| | C) | Purchases from related parties. |
| | D) | Duplicate payments on inventory orders. |
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| 18 | |
While observing an entity’s annual physical inventory count, an auditor recorded test counts for several inventory items and noticed that certain test counts were higher than recorded quantities in the entity’s perpetual records. This situation could be the result of the entity’s failure to record |
| | A) | Purchase returns. |
| | B) | Sales returns. |
| | C) | Sales. |
| | D) | Either sales or purchase returns. |
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| 19 | |
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 |
| | A) | Included in the listing have been counted. |
| | B) | Represented by inventory tags are included in the listing. |
| | C) | Included in the listing are represented by inventory tags. |
| | D) | Represented by inventory tags are bona fide. |
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| 20 | |
When auditing merchandise inventory at year-end, the auditor performs a purchase cut-off test to obtain evidence that |
| | A) | All goods purchased before year-end are received before the physical inventory count. |
| | B) | No goods held on consignment for customers are included in the inventory balance. |
| | C) | Goods observed during the physical count are pledged or sold. |
| | D) | All goods owned at year-end are included in the inventory balance. |
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| 21 | |
Inquiries of warehouse personnel concerning possibly obsolete or slowmoving inventory items provide assurance about management’s assertion of |
| | A) | Completeness. |
| | B) | Existence. |
| | C) | Presentation. |
| | D) | Valuation. |
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| 22 | |
Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates? |
| | A) | Complete recounts are performed by independent teams. |
| | B) | Perpetual inventory records are maintained. |
| | C) | Unit cost records are integrated with production-accounting records. |
| | D) | Inventory balances are rarely at low levels. |
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| 23 | |
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 of the selected items |
| | A) | Represented by inventory tags are actual inventory owned by the entity (Rights and obligations). |
| | B) | Included on the inventory listing have been counted. |
| | C) | Represented by inventory tags are included in the entity’s inventory balance (Completeness). |
| | D) | Included in the listing are represented by inventory tags (Existence). |
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| 24 | |
Which of the following is not one of the auditor’s objectives relating to the examination of inventories in a financial statement audit? |
| | A) | Verifying that the entity has used proper inventory pricing. |
| | B) | Verifying that the inventory counted is actually owned by the entity. |
| | C) | Verifying that all inventory owned by the entity is on hand at the main warehousing location for the physical count. |
| | D) | Ascertaining the physical quantities of inventory on hand. |
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| 25 | |
An auditor would most likely make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management’s assertion of |
| | A) | Rights and obligations. |
| | B) | Presentation and disclosure. |
| | C) | Existence or occurrence. |
| | D) | Valuation and allocation. |
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| 26 | |
Inventory obsolescence relates to |
| | A) | Completeness. |
| | B) | Occurrence. |
| | C) | Valuation and allocation. |
| | D) | Classification. |
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| 27 | |
An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file? |
| | A) | Economic reorder quantity. |
| | B) | Warehouse location. |
| | C) | Date of last purchase. |
| | D) | Quantity sold. |
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| 28 | |
Which of the following audit procedures would probably provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventory? |
| | A) | Tracing of test counts noted during the entity’s physical count to the entity’s summarization of quantities. |
| | B) | Inquiry of management to determine whether there are significant purchase commitments that should be considered for disclosure. |
| | C) | Selection of the last few shipping advices used before the physical count and determination of whether the shipments were recorded as sales. |
| | D) | During physical observation of inventory verify that ‘bill-and-hold’ inventory is segregated and not included in the ending inventory count. |
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