Question

2. An accounts receivable turnover analysis is useful to the auditor because it may detect

A) inadequacies in inventory pricing.

B) inadequacies in bad debt provision.

C) average credit period an audit client enjoys before paying its suppliers.

D) the existence of obsolete merchandise.

3. Which of the following control procedures most likely would be used to maintain accurate inventory records in terms of inventory quantity and description?

A) Perpetual inventory records are periodically compared with the market value for individual inventory items.

B) Requisition form, receiving reports, and purchase orders are matched independently before a payment is approved.

C) A just-in-time inventory system to keep inventory to the minimum.

D) Periodic inventory counts are used to adjust the perpetual inventory records.

4. Which of the following documents is usually issued by the purchasing department?

A) Invoice.

B) Purchase requisition form.

C) Purchase order.

D) Receiving report.

5. In auditing a manufacturing entity, which of the following procedures would an auditor most likely perform to determine whether slow-moving and obsolete items included in inventory are properly identified?

A) Tour the warehouse and production plant.

B) Test the mathematical accuracy of the inventory report.

C) Inquire of management about whether inventory has been pledged.

D) Test the computation of standard overhead rates.

Answer 1

2. Answer: Option B) inadequacies in bad debt provision.

The accounts receivable turnover is computed by dividing the net credit sales by the average accounts receivable and it denotes how well an organization is able to manage its debts. A low accounts receivable turnover ratio would indicate that the receivables (denominator) are high and the collection of receivables is thus low which may necessitate adequate provision for bad debts. Hence, option B is the correct option.

Options A, C, and D which refer to inventory pricing, credit period from suppliers, and obsolete merchandise, all relate to procurement and payables and not receivables and hence are incorrect.

3. Answer: Option D) Periodic inventory counts are used to adjust the perpetual inventory records.

Frequent inventory counts by which any discrepancies in inventory quantities and description can be identified and rectified in a timely manner would ensure accurate inventory records and hence option D is the correct answer.

Comparing perpetual inventory records with the market value will not ensure accuracy of quantities and description and hence option A is incorrect.

Matching of the requisition form, receiving reports, and purchase orders to the invoice would ensure accuracy of payment to vendors and not total inventory quantities and hence option B is incorrect.

A just-in-time inventory system keeps the inventory to the minimum however it does not ensure the accuracy of the same and hence option C is incorrect.

4. Answer: Option C) Purchase order

A purchase order is issued by the purchasing department and hence option C is the correct answer.

An invoice is issued by the sales department, purchase requisition is issued by the requesting department on the purchasing department, and receiving report is issued by the stores on receipt of materials. Hence, options A, B, and D are incorrect.

5. Answer: Option A) Tour the warehouse and production plant.

A tour of the warehouse where goods are stored and the production plant, would help an auditor in determining slow-moving and obsolete items based on the physical verification of the condition of the goods. Hence, option A is the correct answer.

The mathematical accuracy of the inventory report, pledging of inventory, and testing the computation of standard overhead rates will not be of any significance for determining slow-moving and obsolete inventory items and hence options B, C, and D are all incorrect.