ACC 550 CH. 12 MC QUESTIONS AND VERIFIED
ANSWERS
From which of the following evidence gathering audit procedures would an auditor
obtain most assurance concerning the existence of inventories?
a. Observation of physical inventory counts.
b. Written inventory representations from management.
c. Confirmation of inventories in a public warehouse.
d. Auditor's recomputation of inventory extensions. - Answers - a
A client'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. sales.
b. sales returns.
c. purchases.
d. purchase discounts. - Answers - a
An inventory turnover analysis is useful to the auditor because it may detect:
a. inadequacies in inventory disclosures.
b. methods of avoiding cyclical holding costs.
c. the optimum automatic reorder points.
d. the existence of obsolete merchandise. - Answers - d
When an auditor tests a client's cost accounting system, the auditors' tests are primarily
designed to determine that:
a. quantities on hand have been computed based on acceptable cost accounting
techniques that reasonably approximate actual quantities on hand.
b. physical inventories are in substantial agreement with book inventories.
c. the system is in accordance with generally accepted accounting principles and is
functioning as planned.
d. costs have been properly assigned to finished goods, work-in-process, and cost of
goods sold. - Answers - d
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 physical inventory sheets. The
purpose of this procedure is to obtain assurance that:
a. the final inventory is valued at cost.
b. all inventory represented by an inventory tag is listed on the inventory sheets.
c. all inventory represented by an inventory tag is bona fide.
, d. inventory sheets do not include untagged inventory items. - Answers - b
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. - Answers - b
Purchase cutoff procedures should be designed to test whether purchases recorded
near year-end:
a. is owned by the company.
b. on the year-end balance sheet was carried at lower of cost or market.
c. on the year-end balance sheet was paid for by the company.
d. is in the possession of the company. - Answers - a
Which of the following is an effective control that encourages receiving department
personnel to count and inspect all merchandise received?
a. Quantities ordered are excluded from the receiving department copy of the purchase
order.
b. Vouchers are prepared by accounts payable department personnel only after they
match item counts on the receiving report with the purchase order.
c. Receiving department personnel are expected to match and reconcile the receiving
report with the purchase order.
d. Internal auditors periodically examine, on a surprise basis, the receiving department
copies of receiving reports. - Answers - a
To strengthen the system of internal control over the purchase of merchandise, a
company's receiving department should:
a. accept merchandise only if a purchase order or approval granted by the purchasing
department is on hand.
b. accept and count all merchandise received from the usual company vendors.
c. rely on shipping documents for the preparation of receiving reports.
d. be responsible for the physical handling of merchandise but not the preparation of
receiving reports. - Answers - a
During the inventory count an auditor selects items and determines that the proper
description and quantity were recorded by the client. This procedure is most closely
related to:
a. Valuation.
b. Completeness.
ANSWERS
From which of the following evidence gathering audit procedures would an auditor
obtain most assurance concerning the existence of inventories?
a. Observation of physical inventory counts.
b. Written inventory representations from management.
c. Confirmation of inventories in a public warehouse.
d. Auditor's recomputation of inventory extensions. - Answers - a
A client'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. sales.
b. sales returns.
c. purchases.
d. purchase discounts. - Answers - a
An inventory turnover analysis is useful to the auditor because it may detect:
a. inadequacies in inventory disclosures.
b. methods of avoiding cyclical holding costs.
c. the optimum automatic reorder points.
d. the existence of obsolete merchandise. - Answers - d
When an auditor tests a client's cost accounting system, the auditors' tests are primarily
designed to determine that:
a. quantities on hand have been computed based on acceptable cost accounting
techniques that reasonably approximate actual quantities on hand.
b. physical inventories are in substantial agreement with book inventories.
c. the system is in accordance with generally accepted accounting principles and is
functioning as planned.
d. costs have been properly assigned to finished goods, work-in-process, and cost of
goods sold. - Answers - d
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 physical inventory sheets. The
purpose of this procedure is to obtain assurance that:
a. the final inventory is valued at cost.
b. all inventory represented by an inventory tag is listed on the inventory sheets.
c. all inventory represented by an inventory tag is bona fide.
, d. inventory sheets do not include untagged inventory items. - Answers - b
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. - Answers - b
Purchase cutoff procedures should be designed to test whether purchases recorded
near year-end:
a. is owned by the company.
b. on the year-end balance sheet was carried at lower of cost or market.
c. on the year-end balance sheet was paid for by the company.
d. is in the possession of the company. - Answers - a
Which of the following is an effective control that encourages receiving department
personnel to count and inspect all merchandise received?
a. Quantities ordered are excluded from the receiving department copy of the purchase
order.
b. Vouchers are prepared by accounts payable department personnel only after they
match item counts on the receiving report with the purchase order.
c. Receiving department personnel are expected to match and reconcile the receiving
report with the purchase order.
d. Internal auditors periodically examine, on a surprise basis, the receiving department
copies of receiving reports. - Answers - a
To strengthen the system of internal control over the purchase of merchandise, a
company's receiving department should:
a. accept merchandise only if a purchase order or approval granted by the purchasing
department is on hand.
b. accept and count all merchandise received from the usual company vendors.
c. rely on shipping documents for the preparation of receiving reports.
d. be responsible for the physical handling of merchandise but not the preparation of
receiving reports. - Answers - a
During the inventory count an auditor selects items and determines that the proper
description and quantity were recorded by the client. This procedure is most closely
related to:
a. Valuation.
b. Completeness.
