Chapter 11 - Substantive Test of Inventories and Cost of Sales

CHAPTER 11: REVIEW QUESTIONS-THEORETICAL

1. What is the most likely course of action that an auditor would take after determining that
performing substantive tests on inventory will take less time than performing tests of
controls?
a. Assess control risk at a low level.
b. Perform both tests of controls and substantive tests on inventory.
c. Perform only substantive tests on inventory.
d. Perform only tests of controls on inventory.

2. Which of the following is not one of the independent auditor's objectives regarding the
examination of inventories?
a. Verifying that inventory counted is owned by the client.
b. Verifying that the client has used proper inventory pricing.
c. Ascertaining the physical quantities of inventory on hand.
d. Verifying that all inventory owned by the client is on hand at the time the count.

3. Which of the following is not a reason for the special significance attached by the auditors
to the verification of inventories?
a. The determination of inventory valuation directly affects net income.
b. The existence of inventories is inherently difficult to substantiate.
c. Special valuation problems often exist for inventories.
d. Inventories are often the largest current asset of an enterprise.

4. From the auditor's point of view, inventory counts are more acceptable prior to the year-
end when
a. Internal control is weak.
b. Accurate perpetual inventory records are maintained.
c. Inventory is slow-moving.
d. Significant amounts of inventory are held on a consignment basis.
e.
5. Which of the following is not true relating to the auditor's observation of the client's physical
inventory?
a. The auditors should evaluate the client's planning of the physical inventory.
b. The auditors should make certain that consigned items from suppliers are included in
physical inventory totals.
c. The auditors should evaluate the adequacy of the client's counting procedures.
d. The auditors should take test counts of the client's inventory.
6. Which of the following is the best audit procedure for the discovery of damage
merchandise in a client's ending inventory?
a. Compare the physical quantities of slow-moving items with corresponding quantities
of the prior year.
b. Observe merchandise and raw materials during the client's physical inventory taking.
c. Review the management's inventory representation letter for accuracy.
d. Test overall fairness of inventory values by comparing the company's turnover ratio
with the industry average.

7. Which of the following is true about the auditor's observation of the client's physical
inventory?
a. The count must be made at year-end.
b. The auditor should supervise the client's personnel.
c. The auditor's observation addresses the existence assertion.
d. The auditor should justify any omission of the observation in the audit report.

8. Which of the following audit procedures most likely would provide assurance that a
manufacturing entity's inventory valuation is proper?
a. Testing the entity's computation of standard overhead rates.
b. Obtaining confirmation of inventories pledged under loan agreements.
c. Reviewing a cutoff procedure for inventories.
d. Tracing test counts to the entity's inventory listing.

9. The client's physical count of inventories is lower than the inventory quantities in the
perpetual records. This could be the result of a failure to record:
a. Purchases.
b. Sales.
c. Purchase discounts.
d. Sales discounts.

10. Your client performed the physical count of inventory as of November 30, one month prior
to year-end. Subsequently, your client closed the sales journal on 12/29/2021, two days
before year end, and reported those two days' credit sales in January of the next year.
Assuming the client uses a perpetual inventory system which of the following is most likely
to be overstated relating to the year 2021 financial statements?
a. Sales.
b. Inventory.
c. Cash.
d. Accounts receivable.

11. Which of the following best describes the reason that the auditors record their inventory
test counts in the working papers?
a. To document every test count.
b. For subsequent comparison with the completed inventory listing.
c. To document compliance with generally accepted accounting principles.
d. For use in subsequent audits.
12. The auditors will usually trace the details of the test counts made during the observation
of the physical inventory taking to a final inventory schedule. This audit procedure is
undertaken to provide evidence that items physically present and observed by the auditors
at the time of the physical inventory count are:
a. Owned by the client.
b. Not obsolete.
c. Physically present at the time of the preparation of the final inventory schedule.
d. Included in the final inventory schedule.

13. Which of the following is not a procedure that is typically used by the auditors in their
examination of a client's goods held in the custody of a public warehouse?
a. Confirmation.
b. Obtaining reports on internal control at the warehouse.
c. Observation.
d. Corresponding with the government regulator regarding the authenticity of the
warehousing logistic company.

14. 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.

15. An auditor has accounted for a sequence of inventory tags and is now going to trace
information on a representative number of tags to the inventory summary sheets. Which
assertion does this procedure relate to most directly?
a. Completeness.
b. Legality.
c. Existence.
d. Valuation.

16. An auditor performs a test to determine whether all merchandise for which the client was
billed was received. The population for this test consists of all:
a. Merchandise received.
b. Canceled checks.
c. Vendor's invoices.
d. Receiving reports.
17. To best ascertain that a company has properly included merchandise that it owns in its
ending inventory, the auditors should review and test the:
a. Terms of the open purchase orders.
b. Purchase cutoff procedures.
c. Contractual commitments made by the purchasing department.
d. Purchase invoices received on or around year end.

18. Purchase cutoff procedures should be designed to test that merchandise is included in the
inventory of the client company, if the company:
a. Has paid for the merchandise.
b. Has physical possession of the merchandise.
c. Has control to the merchandise.
d. Holds the shipping documents for the merchandise issued in the company's name.

19. 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?
a. Test the computation of standard overhead rates.
b. Tour the manufacturing plant or production facility.
c. Compare inventory balances to anticipated sales volume.
d. Review inventory experience and trends.

20. A "bill and hold" scheme is most likely to include:

a. Shipment of items to a customer beyond what the customer has ordered.
b. Recording as sales items that the company retains as of year-end.
c. Billing of items that are held by customers for future revenue production purposes.
d. Selling items at substantial discounts near year-end.
CHAPTER 14 – Substantive Test of Investment
CHAPTER 14: REVIEW QUESTIONS – THEORITICAL

1. Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory

items provide assurance about management's assertion of:
a. Completeness.
b. Rights and obligations.
c. Existence.
d. Valuation.

2. The accuracy of perpetual inventory records may be established, in part, by comparing

perpetual inventory records with
a. Purchase requisitions.
b. Purchase orders.
c. Receiving reports.
d. Vendor payments.

3. The auditor tests the quantity of materials charged to work in process by tracing these
quantities to
a. Cost ledgers.
b. Receiving reports.
c. Perpetual inventory records.
d. Material requisitions.

4. To measure how effectively a client employs its assets, an auditor calculates inventory
turnover by dividing the average inventory into:
a. Net sales.
b. Operating income.
c. Cost of goods sold.
d. Gross sales.

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

a. Inadequacies in inventory pricing.
b. Methods of avoiding cyclical holding cost.
c. The optimum automatic reorder points.
d. The existence of obsolete merchandise.

6. An auditor testing long-term investments would ordinarily use analytical procedures to

ascertain the reasonableness of the:
a. Completeness of recorded investment income.
b. Classification between current and noncurrent portfolios.
c. Valuation marketable equity securities
d. Existence of unrealized gains or losses in the portfolio.
7. Of the following, which is the most efficient audit procedure for verification of interest
earned on bond investments?
a. Tracing interest declarations to an independent record book.
b. Recomputing interest earned.
c. Confirming interest rate with the issuer of the bonds.
d. Vouching the receipts and deposit of interest checks.

8. Which of the following is the most effective audit procedure for verification of dividends
earned on the investments in equity securities?
a. Tracing deposit of dividend checks to the cash receipts book.
b. Reconciling amounts received with published dividend records.
c. Comparing the amounts received with preceding year dividends received.
d. Recomputing selected extensions and footing of dividend schedules and comparing
totals to the general ledger.

9. Ensuring that investments and related investment income accounts are properly classified,
described, and disclosed in the financial statements, including notes, in accordance with
the applicable PFRS satisfies the assertion of?
a. Valuation or allocation.
b. Rights and obligations.
c. Completeness.
d. Presentation and disclosure.

10. An auditor compares annual revenues and expenses with similar amounts from the prior
year and investigates all changes exceeding 10%. This procedure most likely could
indicate that
a. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid
until early in the subsequent year.
b. Unrealized gains from increases in the value of FVTOCI securities were recorded in
the income account for FVTPL securities.
c. The annual provision for uncollectible accounts expense was inadequate because of
worsening economic conditions.
d. Notice of an increase in property tax rates was received by management, but was not
recorded until early in the subsequent year.