Question

16. Which one of the following procedures would not be appropriate for the auditors when they observe client's physical inventory-taking?

A) Confirmation of goods in the hands of public warehouses.

B) Supervising the taking of the annual physical inventory.

C) Reviewing client’s inventory-taking plan.

D) Taking random samples to perform test counts.

17. A client's physical count of inventories was lower than the inventory quantities shown in its perpetual records (accounting records under the perpetual inventory system). This situation could be the result of the failure to record.

A) Sales.

B) Sales returns.

C) Purchases.

D) Purchase discounts.

18. In a manufacturing company, which one of the following audit procedures would give the least assurance of the cost of inventory at the audit date?

A) Testing the computation of allocated manufacturing overhead cost.

B) Examining paid vendors' invoices to determine direct material cost.

C) Reviewing direct labor rates and allocated direct labor costs.

D) Obtaining confirmation of inventories cost issued by client’s CEO and CFO.

19. An inventory turnover analysis (or days of inventory on hand analysis) is useful to the auditors of Dell and Compaq in late 1990s because it may detect:

A) Mistake in inventory quantity counting.

B) Superior inventory management techniques.

C) The optimum raw material automatic reorder points.

D) The existence of obsolete merchandise.

20. An auditor is most likely to make inquiries of production and sales personnel about possible obsolete or slow-moving inventory to support management's financial statement assertion of

A) Valuation or allocation.

B) Rights and obligations.

C) Existence or occurrence.

D) Cutoff.

Answer 1

Answer 16 ) Option D is correct i.e. Taking random samples to perform test counts would not be appropriate for the auditors when they observe client's physical inventory-taking.

Answer 17) Option A is correct i.e. Sales.

Physical quantity count was lower than the quatity recorded in books is because of failure to record sales as physical stock will be reduced by the quantity sold but not recorded and due to failure to record it quantity in books is not reduced.

Answer 18) Option D is correct i.e. Obtaining confirmation of inventories cost issued by client’s CEO and CFO would be the audit procedures that would give the least assurance of the cost of inventory at the audit date.

As in this scenario no action has been done except relying on CEO and CFO as audit procedure.

Answer 19) Option D) is correct i.e. The existence of obsolete merchandise.

Inventory turnover analysis helps auditor to detect obsolete merchandise or slow moving merchandise during his audit.

Answer 20) Option A) is correct i.e.Valuation or allocation.

Auditor is most likely to make inquiries of production and sales personnel about possible obsolete or slow-moving inventory to support management's financial statement assertion of Valuation or allocation.

Auditor will give assurance that figures in financial statements are valued properly and allocations adjustments are recorded appropriately.