Multiple Choice Questions
Select the best answer for each of the following and explain fully the reason for your selection.
a. Which of the following is least likely to be among the auditors’ objectives in the audit of inventories and cost of goods sold?
(1) Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods.
2) Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold.
(3) Establish that the client includes only inventory on hand at year-end in inventory totals.
(4) Establish the completeness of inventories.

b. The receiving department is least likely to be responsible for the:
(1) Determination of quantities of goods received.
(2) Detection of damaged or defective merchandise.
(3) Preparation of a shipping document.
(4) Transmittal of goods received to the store’s department.

c. The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the:
(1) Bill of lading.
(2) Job time shipping.
(3) Production order.
(4) Production schedule.

d. Which of the following should be included as a part of inventory costs of a manufacturing company?


.:.
e. The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the:
(1) Cost Accounting Standards Board.
(2) Financial Accounting Standards Board.
(3) Public Company Accounting Oversight Board.
(4) Securities and Exchange Commission.

f. When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is:
(1) Existence.
(2) Completeness.
(3) Clarity.
(4) Presentation.

g. Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and:
(1) Well-kept records of perpetual inventory are maintained.
(2) Inventory is slow-moving.
(3) Computer error reports are generated for missing prenumbered inventory tickets.
(4) Obsolete inventory items are segregated and excluded.

h. The auditor’s analytical procedures will be facilitated if the client:
(1) Uses a standard cost system that produces variance reports.
(2) Segregates obsolete inventory before the physical inventory count.
(3) Corrects material weaknesses in internal control before the beginning of the audit.
(4) Reduces inventory balances to the lower of cost or market.

i. When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably:
(1) Want the client to schedule the physical inventory count at the end of the year.
(2) Insist that the client perform physical counts of inventory items several times during the year.
(3) Increase the extent of tests for unrecorded liabilities at the end of the year.
(4) Have to disclaim an opinion on the income statement for that year.

j. Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending inventory?
(1) Compare the physical quantities of slow-moving items with corresponding quantities in the prior year.
(2) Observe merchandise and raw materials during the client’s physical inventory taking.
(3) Review the management’s inventory representations letter for accuracy.
(4) Test overall fairness of inventory values by comparing the company’s turnover ratio with the industry average.

k. McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client’s procedures. In reporting on the results of her examination, Mullins:
(1) Can issue an unqualified opinion without disclosing that she did not observe year-end inventories.
(2) Should comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion.
(3) Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole.
(4) Should, if the inventories are material, qualify her opinion.

l. The primary objective of a CPA’s observation of a client’s physical inventory count is to:
(1) Discover whether a client has counted a particular inventory item or group of items.
(2) Obtain direct knowledge that the inventory exists and has been properly counted.
(3) Provide an appraisal of the quality of the merchandise on hand on the day of the physical count.
(4) Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are reasonably accurate.