Chapter 11 Preparatory Multiple Choice

Chapter 11 Preparatory Multiple Choice

11-1The existence and presentation/disclosure assertions are usually the most relevant for inventory. ( T / F ) F

11-2The most common concerns for inventory are that purchases are understated or ending inventory is overstated, both of which will result in lower cost of goods sold and higher net income. ( T / F ) T

11-3Which of the following activities is not an activity associated with the acquisition and payment cycle?

a.Receive a customer purchase order.

b.Purchase of goods and services.

c.Receipt of goods and services.

d.Approval of items for payment.

11-4Which of the following tasks will an automated purchasing system perform?

a.Apply preloaded specifications and materials lists to the system to start the process.

b.Automatically flag invoices that do not reconcile with purchase orders.

c.Create change orders and analyze variances from purchase orders.

d.All of the above.

11-5The audit of inventory can be complex because inventory is easily transportable, exists at multiple locations, may become obsolete, and may be difficult to value. ( T / F ) T

11-6Two important complexities in auditing inventory arise because inventory accounts experience a high volume of activity and are valued according to various inventory valuation methods. ( T / F ) T

11-7Which of the following is a common inherent risk relating to accounts payable and related expenses?

a.Management would generally prefer to record assets as expenses.

b.Because of debt covenants requiring that the client maintain a certain level of the current ratio, management may prefer to understate accounts payable.

c.Ending inventory balances may be valued according to various accounting valuation methods.

d.Because of the lower of cost or market requirements, it may be difficult to value accounts payable.

11-8Which of the following is not an inherent risk relating to inventory?

a.Sales contracts may contain unusual terms, and revenue recognition is often complex.

b.Inventory accounts typically experience a high volume of activity.

c.Inventory accounts may be valued according to various accounting valuation methods.

d.Identifying obsolete inventory and applying the lower of cost or market principle to determine valuation are difficult.

11-9One of the common ways that managers have committed fraud in the acquisition and payment cycle involves inappropriately classifying assets (e.g., inventory) as expenses. ( T / F ) F

11-10The following are possible manipulations that may occur when employees perpetrate fraud during the purchase of inventory: under-recording purchases, recording purchases in a later period, and not recording purchases. ( T / F ) T

11-11Which of the following is an example of fraud in the acquisition and payment cycle?

a.Theft of inventory by an employee.

b.Employee schemes involving fictitious vendors as means to transfer payments to themselves.

c.Executives recording fictitious inventory or inappropriately recording higher values for existing inventory.

d.All of the above.

11-12Refer to Exhibit 11.2 to identify the possible inventory or cost of goods sold manipulation that might occur when inventory is sold.

a. Overstate returns.

b.Overcount inventory.

c.Not record cost of goods sold nor reduce inventory.

d.Under-record purchases.

11-13A well-conceived inventory control system should provide reasonable assurance that all purchases are authorized and that inventory transactions are recorded accurately, completely, and in a timely manner. ( T / F ) T

11-14Because a purchase order is an external document, its level of reliability is higher than that of a requisition, which is an internal document. ( T / F ) T

11-15Refer to Exhibit 11.3 to identify which of the following is a typical control associated with the requisition process for inventory purchases in a just-in-time manufacturing process.

a.The store manager’s ability to issue a purchase order may be subject to overall corporate limits, usually specified in dollars.

b.An agreement is signed with the supplier whereby the supplier agrees to ship merchandise according to the production schedule set by the manufacturer.

c.Overall authorization to purchase product lines is delegated to individual buyers by the marketing manager.

d.The limits for individual goods can be exceeded only on specific approval by the marketing manager.

11-16Which of the following controls is related to the payment of inventory purchases?

a.Cycle counts.

b.A disclosure committee.

c.A three-way match.

d.Both a. and c.

11-17In terms of planning analytical procedures, assume that the client has introduced a new product with a low price point and significant customer demand. The auditor would expect inventory turnover to increase and days’ sales in inventory to also increase. ( T / F ) F

11-18A planning analytical procedure in the acquisition and payment cycle that might indicate fraud is that inventory is growing at a rate greater than sales. ( T / F ) T

11-20Which of the following planning analytical relationships is most typically suggestive of a heightened risk of fraud in the acquisition and payment cycle?

a.Unexpected increases in gross margin.

b.Unexpected decreases in gross margin.

c.Inventory that is growing at a rate slower than sales.

d.Expense accounts that have significant debit entries.

11-21When conducting the audit of the acquisition and payment cycle for a client with a high risk of material misstatement in its inventory accounts, the following mix of evidence would be appropriate: significant tests of internal control, significant reliance on substantive analytical procedures, and limited tests of details. ( T / F ) T

11-22When considering the appropriate mix of evidence, the sufficiency and appropriateness of selected procedures vary across inventory assertions to achieve the desired level of assurance for each relevant assertion. ( T / F ) T

11-23Which mix of evidence would be most appropriate for the following scenario?

Assume a client where the auditor has assessed the risk of material misstatement related to the existence of inventory as high. This client has incentives to overstate income to achieve profit targets that affect management bonuses. Oversight of the vice president of finance is relatively weak because of a lack of supervision by top management. Other controls are effectively designed.

a. 100% tests of details.

b. 50% tests of details, 30% analytics, 20% tests of controls.

c. 30% tests of details, 40% analytics, 30% tests of controls.

d. 20% tests of details, 40% analytics, 40% tests of controls.

11-24Which mix of evidence would be most appropriate for the following scenario?

Assume a client where the auditor has assessed the risk of material misstatement related to the existence of inventory as low. Top management appears to have a high level of integrity. Management has spent the resources necessary to ensure effective design, implementation, and operation of controls.

a.100% tests of details.

b.70% tests of details, 10% substantive analytics, 20% tests of controls.

c.50% tests of details, 10% substantive analytics, 40% tests of controls.

d.20% tests of details, 40% substantive analytics, 40% tests of controls.

11-25When selecting controls to test and performing tests of controls in the acquisition and payment cycle, the auditor might reasonably take a sample of receiving reports and trace them through the system to test controls related to the completeness assertion for inventory and accounts payable. ( T / F ) T

11-26When conducting the audit of acquisition and payment cycle accounts, the auditor will likely conduct less substantive tests for companies with effective internal controls than for companies with ineffective internal controls. ( T / F ) T

11-27Which of the following statements is false regarding obtaining evidence about internal control operating effectiveness in the acquisition and payment cycle?

a.For integrated audits, the auditor will test the operating effectiveness of important controls as of the client’s year-end.

b.The auditor will select controls to test that are important to the auditor’s conclusion about whether the client’s controls adequately address the assessed risk of material misstatement in the acquisition and payment cycle.

c.Evidence of proper payment is not necessary for each purchase and payment, but is only necessary for those that are material.

d.The auditor will take a sample of receiving reports and review whether independent counts were made of the goods received.

11-28Refer to the Why It Matters feature “Inventory Controls at Flow International Corporation.” Which of the following represents an implication of weaknesses in the company’s controls over inventory?

a.The company could not adequately process and account for the valuation of inventory.

b.The board of directors fired the CEO because of the internal control deficiencies.

c.The company developed a plan to remediate its material weaknesses related to inventory.

d.Both a. and c.

e.Both a. and b.

11-29A substantive procedure appropriate for testing the existence of inventory would be to perform year-end cutoff tests by noting the last shipping and receiving document numbers used before the physical inventory count is taken. ( T / F ) F

11-30A substantive procedure appropriate for testing rights and obligations associated with inventory would be to review vendor invoices when testing disbursements to determine that proper title is conveyed. ( T / F ) T