Chapter 9: Production Cycle and Auditing Inventory

Question 1

All additions and reductions of inventory are accounted for in the payroll, __, ____ and ___ cycles.

Answer 1

• production
• acquisition
• revenue

Question 2

If it is incorrect and either underestimates or overestimates product demand, the cost to the company can be in the millions, which is why the ___ ___ is one of the most important documents in any organization.

Answer 2

sales forecast

Question 3

The production planner uses the ______ to determine if there is sufficient stock to complete production.
- raw material inventory status report
- production order
- bill of materials
- materials requisition form

Answer 3

raw material inventory status report

Question 4

The materials requisition is also called a materials ___ ____.

Answer 4

transfer ticket

Question 5

Significant risk in the production cycle relates to the correct valuation of ______.
- cost of goods sold
- direct materials
- overhead

Answer 5

cost of goods sold

Question 6

The acquisition cycle is linked to the revenue cycle through the ____ cycle

Answer 6

production

Question 7

Auditors must ensure that cost of goods sold has been properly accounted for using an acceptable GAAP method. This addresses the ___ assertion.

Answer 7

accuracy

Question 8

Production activities start a marketing projection based on past performance and marketing initiatives called a(n) ____ ____.

Answer 8

sales forecast

Question 9

Because it governs the nature, timing, and extent of substantive procedures that will be performed in the audit of inventory, ____ _ assessment is important.

Answer 9

control risk

Question 10

One of the most critical jobs in any manufacturing operation is ______.
- production planner
- marketing manager
- sales forecaster

Answer 10

production planner

Question 11

The documents that authorize the inventory record keepers to update the raw material inventory files are the ______. (Select all that apply)
- materials requisition
- bill of materials
- production order
- raw material inventory status report

Answer 11

• materials requisition
• production order

Question 12

The most significant risks in the production cycle often relate to the ____ and ____ of inventory.

Answer 12

existence; valuation

Question 13

The most difficult inventory control issues relate to ______.
- finished goods
- raw materials
- work in process

Answer 13

work in process

Question 14

Auditors must verify that items included in inventory were in inventory on the balance sheet date to address the ______ assertion.
- existence
- rights
- accuracy
- completeness

Answer 14

existence (and cutoff)

Question 15

if the auditor decides to perform tests of controls over inventory they will often include ______. (Select all that apply)
- reperformance
- observation
- inspection

Answer 15

• observation
• inspection

Question 16

A specification of the type and quantity of components required for production is found on the ______.
- raw material inventory status report
- production order
- bill of materials
- materials requisition form

Answer 16

bill of materials

Question 17

Observation can be used to help determine ______. (Select all that apply)
- proper recording and allocation of labor and material costs
- separation of duties in the inventory area
- physical controls over inventory
- proper inventory authorizations

Answer 17

• separation of duties in the inventory area
• physical controls over inventory
• proper inventory authorizations

Proper recording and allocation of labor and material costs (this requires document inspection)

Question 18

When performing tests of controls, auditors are interested in determining that WIP and finished good inventory items were actually produced as part of the ______ direction.
- occurrence
- accuracy
- completeness

Answer 18

occurrence

Question 19

Differences between the inventory count and the perpetual records are adjusted by increasing or decreasing ______.
- cost of goods sold
- work in process
- finished goods
- raw materials

Answer 19

• cost of goods sold

Question 20

T/F: The tests of controls an auditor performs is highly dependent on the type of company and the type of inventory

Answer 20

True

Question 21

Sales forecasts ____. (Select all that apply)
- help auditors understand management’s strategy
- should not be used for audit decisions
- can be used in valuing inventory

Answer 21

• help auditors understand management’s strategy
• can be used in valuing inventory

Question 22

Observing the movement of inventory from raw materials to finished goods can help the auditor ensure proper _____.
- labor and material cost allocations
- valuation of inventory
- authorizations and documentation
- separation of duties

Answer 22

authorizations and documentation

Question 23

Tests of controls are designed to test production accounting in two directions: ____ and _____.

Answer 23

completeness; occurrence

Question 24

Auditors generally ____.
- make test counts of inventory
- observe but do not actually do any inventory counting
- count the entire inventory

Answer 24

make test counts of inventory

Question 25

Examining shipping and receiving documents issued before and after the manual physical inventory count is an important _ procedure.

Answer 25

cutoff

Question 26

GAAS requires auditors to be present to observe the client's physical inventory count ______. - when inventory is significant - regardless of the size of the inventory - only when requested by the client

Answer 26

when inventory is significant

Question 27

A record of all counts must be obtained and used for the existence-direction tests if a company does not maintain ____ inventory records. - perpetual - periodic - either periodic or perpetual

Answer 27

perpetual

Question 28

If auditors want to use a sales forecast for audit decisions ______. - substantive tests of details are required - overall tests for reasonableness should be performed - the risk of material misstatement must be assessed

Answer 28

overall tests for reasonableness should be performed

Question 29

The use of scanner and computers ______ the number of inventory counts required. - may increase - has no impact on - may decrease

Answer 29

has no impact on ## Footnote Reason: inventory is always counted twice

Question 30

Observation can be used to help determine____. (Select all that apply) - proper inventory authorizations - proper recording and allocation of labor and material costs - separation of duties in the inventory area - physical controls over inventory

Answer 30

- proper inventory authorizations - separation of duties in the inventory area - physical controls over inventory ## Footnote - proper recording and allocation of labor and material costs (This requires document inspection)

Question 31

True or false: Inventory roll-forward procedures are required if inventory is counted either before or after the balance sheet date.

Answer 31

False

Question 32

The overall physical inventory count is generally taken by_____. - company personnel - both company personnel and the external auditor - the external auditor

Answer 32

company personnel

Question 33

Cycle counts ____. (Select all that apply) - are the most appropriate when a high level of control risk is present - assist with maintaining accurate perpetual inventory records - require the auditors' presence at some of the counts only

Answer 33

- assist with maintaining accurate perpetual inventory records - require the auditors' presence at some of the counts only

Question 34

To prevent the client from adding inventory items by creating more at a later date, it is critically important to know which __ ___ or count sheets were or were not used.

Answer 34

tag numbers

Question 35

When the auditors were not present for the count of beginning inventory they must _ opinion on the income statement. - issue a modified - disclaim an - issue an adverse - issue an unmodified

Answer 35

disclaim an

Question 36

Selecting items from a perpetual inventory record and obtaining a test count can be done to produce evidence for the ____ balance assertion, while tracing items from the inventory floor to the inventory records produces evidence for the ____ balance assertion.

Answer 36

existence; completeness

Question 37

After observation is complete, auditors should have sufficient appropriate evidence that ____ the inventory compilation. - goods in the perpetual records but not owned were excluded from - goods on hand that have been sold were included in - goods in transit (purchased but not yet received) were included in - consigned-in goods were included in

Answer 37

- goods in the perpetial records but now owned were excluded from - goods in transit (purchased but not yet received) were included in

Question 38

The use of scanner and computers______. - improves efficiency - reduces the required number of counts from two to one - improves accuracy

Answer 38

- improves efficiency - improves accuracy

Question 39

If there is an intervening period between the count date and year-end, additional inventory ____ ____ auditing procedures must be performed on transactions during that period.

Answer 39

roll-forward

Question 40

Inventory disclosures must ensure that the presentation and disclosure assertions of occurrence______ and obligations,_____, classification and understandability, and accuracy and _____ are all met.

Answer 40

rights; completeness; valuation

Question 41

Physical counts of selected inventory throughout the year are called ___ ____.

Answer 41

cycle counts

Question 42

If auditors were not present for the count of beginning inventory, and cannot perform alternative procedures to provide evidence the number is not materially misstated they _____. - must issue an adverse opinion on the income statement - must withdraw from the audit - may have concerns about statement of cash flows - must issue a modified opinion on the financial statements

Answer 42

may have concerns about statements of cash flows

Question 43

The pricing and compilation tests audit for ______. - occurrence - valuation - existence - completeness

Answer 43

valuation

Question 44

When the auditor is satisfied that controls have been examined and transactions and balances are fairly presented according to GAAP, the audit ______. - work related to inventory is complete - focus must move to required disclosures

Answer 44

focus must move to required disclosures