Chap 009

Chapter 09

Production Cycle

True / False Questions

1. Most businesses try to estimate sales levels and seasonal timing and then try to plan production schedules to meet customer demand. True False

2. Production planning interacts with inventory planning to produce production orders. True False

3. Forecasts of the following year can be used in connection with valuing the inventory at lower of cost or market, which influences the amount of cost of goods sold that is shown in the financial statements. True False

4. Based on the production orders, management develops a plan for the amount and timing of production. True False

5. Standard costing of inventory is a generally accepted accounting principle. True False

6. If control risk is assessed very low, cost accumulations will require additional substantive procedures to lower the risk of failing to detect material misstatements in inventory. True False

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

7. The audit procedures for inventory and related cost of sales accounts frequently are typically extensive in an audit engagement. True False

8. In general, the auditors' best opportunity to detect inventory errors and frauds is during the physical observation of the inventory count. True False

9. When inventory quantities are determined solely by means of a physical count, it is necessary for the auditor to be present at the time of the count. True False

10.

When inventory is counted on a date other than the balance-sheet date, no additional procedures would normally be required to satisfy generally accepted auditing standards. True False

11.

The auditors must be present during some counting operations to evaluate cycle inventory counting plans and the execution. True False

12.

If an auditor was not present at a new client's inventory count, the auditor has no obligation to test the inventory. True False

13.

If inventory located off the client's premise, the auditor might confirm the amount with the custodian to satisfy evidence requirements. True False

Multiple Choice Questions


14.

A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record

A. Sales.

B. Sales discounts.

C. Purchases.

D. Purchase discounts.

15.

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to

A. Test and observe the client's physical count of inventory.

B. Verify independently the physical counts obtained by the client.

C. Assist the client in taking test counts of year-end inventory.

D. Determine whether inventory contains obsolete goods.


16.

Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made?

A. Debit Purchases/credit Cost of Goods Sold.

B. None.

C. Debit Inventory/credit Accounts Payable.

D. Debit Cost of Goods Sold/credit Accounts Payable.

17.

L. Martinez, CPA, was auditing a client, Marvelous Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which POCAOB assertion?

A. Rights and obligations.

B. Completeness.

C. Existence or occurrence.

D. Valuation or allocation.


18.

An auditor who wished to test for the existence or occurrence of inventory would most likely select a sample of inventory items from the perpetual records and

A. Trace additions to the general ledger.

B. Vouch additions to receiving reports.

C. Vouch additions to sales invoices.

D. Trace receipts to receiving reports.

19.

An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the PCAOB assertion of

A. Existence.

B. Valuation.

C. Completeness.

D. Rights and obligations.


20.

An auditor selected an invoice for a large inventory purchase and vouched the invoice to the receiving report. Which ASB transaction assertion is the auditor most likely testing?

A. Occurrence

B. Completeness

C. Rights and obligations

D. Valuation

21.

An auditor selected a product maintained in the finished goods warehouse. The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?

A. Existence

B. Completeness


D. Valuation


22.

An auditor selected a product recorded in the finished goods perpetual inventory subsidiary account. The auditor went to the warehouse and counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?

A. Existence

B. Completeness


D. Valuation

23.

Periodic or cycle counts of selected inventory items are made at various times during the year rather than during a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?

A. Complete recounts by independent teams are performed.

B. Perpetual inventory records are maintained.

C. Unit cost records are integrated with production accounting records.

D. Inventory balances are rarely at low levels.


24.

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record

A. Purchase discounts.

B. Purchase returns.

C. Sales.

D. Sales returns.

25.

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace

A. Inventory tags noted during the auditor's observation to items in the inventory listing schedule.

B. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices.

C. Items in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.

D. Items in receiving reports and vendors' invoices to the inventory listing schedule.


26.

Selecting a sample of cost accounting reports for labor and vouching it to time records is a procedure designed to test the ASB transaction assertion of

A. Occurrence.

B. Valuation.

C. Completeness.

D. Presentation and disclosure.

27.

Your client plans to count inventory at several locations on the same day. No location is material in amount, but the total of inventory is quite material. How is an auditor likely to plan to observe?

A. Observe all counts at all locations by using the required number of auditors.

B. Insist the inventory be counted on separate days so the auditor can be present at all locations.

C. Work with the client to determine which locations to observe.

D. Observe a sample of locations on a surprise basis.


28.

Generally accepted accounting principles (GAAP) require that inventory be recorded at

A. The lower of cost or fair market value.

B. The lower of cost or net realizable value.

C. The higher of cost or net realizable value less a normal profit (floor).

D. None of the above.

29.

If overhead is miscalculated so that it is underabsorbed, the result if the error is not corrected will be that

A. Inventory will be understated and net income will be overstated.

B. Inventory and net income will be overstated.

C. Inventory will be overstated and net income will be understated.

D. Inventory and net income will be understated.

30.

Which of the following steps would not normally be included in a program for a physical inventory observation?

A. Vouch unit prices to vendors' invoices or other cost records.

B. Obtain the client's inventory counting instructions and review them for completeness.

C. Inspect the tags used and unused and record the tag numbers used.

D. Obtain the numbers of the last five receiving reports and last five shipping documents.


31.

Counting different parts of inventory at different times of the year is called

A. LIFO inventory.

B. Inventory cutoff.

C. Cycle counting.

D. Just-in-time inventory.

32.

A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts. This reconciliation is most likely performed to provide assurance that

A. Recorded production transactions are valid and documented.

B. Valid production transactions are recorded and none omitted.

C. Production accounting and posting is complete.

D. Production transactions are recorded in the proper period.

33.

To test the control assertion of completeness in the area of work-in-process inventory, the auditor most likely would

A. Select a sample of open and closed production cost reports and recalculate all costs entered.

B. Select a sample of issue slips from the raw materials stores file and trace materials-used reports to production cost reports.

C. Select a sample of open and closed production cost reports and vouch overhead charges to overhead analysis schedules.

D. Select a sample of production orders and determine whether the production orders were authorized.


34.

An auditor's tests of controls over the issuance of raw materials to production would most likely include

A. Reconciling raw materials and work-in-process perpetual inventory records to general ledger balances.

B. Inquiring of the custodian about the procedures followed when defective materials are received from vendors.

C. Observing that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual.

D. Examining material requisitions and reperforming client controls designed to process and record issuances.

35.

Which of the following is not an acceptable method of determining inventory cost under GAAP?

A. FIFO.B. LIFO

.C. Average

cost.D. All of the above are

acceptable.

36.

Inventory count tags are controlled

A. To prevent counting errors.

B. To test cutoff.

C. To prevent subsequent addition of goods to the inventory.

D. For all of the above reasons.


37.

Counting inventory on the warehouse floor and tracing the count to the inventory compilation provides evidence to support which management (PCAOB) assertion?

A. Existence or occurrence.

B. Completeness.

C. Rights and obligations.


38.

Auditors record the last bill of lading used at the time of the inventory count to

A. Search for unrecorded sales.

B. Test cutoff.

C. Verify ownership.

D. All of the above.


39.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement (PCAOB) assertion of

A. Valuation or allocation.

B. Rights and obligations.



40.

Which of the following methods for determining inventory cost is not allowed by GAAP?

A. Average cost.

B. FIFO.C. LIFO

.D. Standard

cost.

41.

Which cycle is not directly linked to the production cycle?

A. Acquisition and expenditure cycle.

B. Payroll cycle.

C. Revenue and collection cycle.

D. Finance and investment cycle.


42.

To determine the client's planned amount and timing of production of a product, the auditor will review the

A. Sales forecast.

B. Inventory reports.

C. Production plan.

D. Purchases journal.

43.

An auditor reviews job cost sheets to test which transaction assertion?

A. Occurrence.

B. Completeness.

C. Accuracy.

D. Classification.

44.

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

A. Supplies of relatively little value are expensed when purchased.

B. The cycle basis is used for physical counts.

C. The warehouse manager is responsible for maintenance of perpetual inventory records.

D. Perpetual inventory records are maintained only for items of significant value.


45.

To make a year-to-year comparison of inventory turnover most meaningful, the auditor will perform the analysis

A. For the company as a whole.

B. By division.

C. By product.


46.

Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

A. Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record.

B. Have an independent accounting firm prepare an internal control report on the effectiveness of the controls over inventory.

C. Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records.

D. Require a manager's signature for the removal of any inventory item with a value above $50.


47.

An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

A. Owned by the client.

B. Not obsolete.

C. Physically present at the time of the preparation of the final inventory schedule.

D. Included in the final inventory schedule.

48.

A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?

A. Inventory items had been counted but the tags placed on the items had not been taken off and added to the inventory accumulation sheets.

B. Credit memos for several items returned by customers had not been recorded.

C. No journal entry had been made on the retailer's books for several items returned to its suppliers.

D. An item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records.


49.

From the auditors' point of view, inventory counts are more acceptable prior to the year end when

A. Internal control is weak.

B. Accurate perpetual inventory records are maintained.

C. Inventory is slow moving.

D. Significant amounts of inventory are held on a consignment basis.

50.

Which of the following internal control activities most likely addresses the completeness assertion for inventory?

A. The work-in-process account is periodically reconciled with subsidiary inventory records.

B. Employees responsible for custody of finished goods do not perform the receiving function.

C. Receiving reports are prenumbered and the numbering sequence is checked periodically.

D. There is a separation of duties between the payroll department and inventory accounting personnel.

51.

When auditing inventories, an auditor would least likely verify that

A. All inventory owned by the client is on hand at the time of the count.

B. The client has used proper inventory pricing.

C. The financial statement presentation of inventories is appropriate.

D. Damaged goods and obsolete items have been properly accounted for.


52.

A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably

A. Apply gross profit tests to ascertain the reasonableness of the physical counts.

B. Increase the extent of tests of controls relevant to the inventory cycle.

C. Request the client to schedule the physical inventory count at the end of the year.

D. Insist that the client perform physical counts of inventory items several times during the year.

53.

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of


B. Completeness.

C. Existence.

D. Accuracy and valuation.


54.

Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

A. Trace test counts noted during the entity's physical count to the entity's summarization of quantities.

B. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

C. Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales.

D. Inspect the open purchase order file for significant commitments that should be considered for disclosure.

55.

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about

A. Existence.


C. Completeness.



56.

An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about

A. Existence.


C. Completeness.

D. Valuation.

57.

When evaluating inventory controls, an auditor would be least likely to

A. Inspect documents.

B. Make inquiries.

C. Observe procedures.

D. Consider policy and procedure manuals.

58.

When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that

A. Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand.

B. Physical inventories agree substantially with book inventories.

C. The system is in accordance with generally accepted accounting principles and is functioning as planned.

D. Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.


59.

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to

A. Cost ledgers.

B. Perpetual inventory records.

C. Receiving reports.

D. Material requisitions.

60.

Your client counts inventory three months before the end of the fiscal year. Internal controls over inventory are excellent. Which procedure is not necessary for the inventory roll-forward?

A. Check that shipping documents for the last three months agree with perpetual records.

B. Tracing receiving reports for the last three months to perpetual records.

C. Compare gross margin percentages for the last three months.

D. Request the client to recount inventory at the end of the year.


61.

An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions should the auditor perform tests of controls?

A. Significant weaknesses were found in the company's internal control.

B. The auditor hopes to reduce the amount of work to be done in assessing inherent risk.

C. The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.

D. Tests of controls are always performed when the auditor begins to assess control risk.

62.

The typical functions of the production and conversion cycle do not include

A. Production planning and control.

B. Inventory planning and control.

C. Purchase order and control.

D. Reduction of inventory records for goods shipped.

63.

To execute job production, a foreperson would typically not need

A. Sales orders.

B. Production orders.

C. Bills of materials.

D. Manpower needs.


64.

When a job is completed, the foreperson typically prepares a completion report, a copy of which is sent to or kept in the following departments except

A. Finished goods stores accompanying the finished goods.

B. Sales department indicating goods available for sale.

C. Cost accounting to transfer the job from work-in-process to finished goods inventory.

D. Production department, which retains a copy for its own file.

65.

The information for inventory record keeping typically comes from all of the following sources except

A. Shipping department when goods have been shipped.

B. Accounting department when accounts payable are paid.

C. Receiving department when customers return goods.

D. Inventory stores when purchased goods are received.

66.

The functions typically related to inventory flow of transactions and control would not include

A. Inventory record keeping.

B. Physical count of inventory.

C. Sale of inventory.

D. Reconciliation of physical count to perpetual inventory records.


67.

Which of the following would not be an example of an inventory record error or fraud?

A. Unrecorded receipts or shipments.

B. Incorrect date of recording.

C. Fictitious sales or adjustments.

D. Incorrect sales price.

68.

Tracing a sample of inventory receiving reports to the perpetual inventory record entry achieves the specific ASB balance assertion of

A. Completeness.

B. Occurrence.

C. Presentation.

D. Valuation.

69.

Specific assertions typical of inventory and cost of sales accounts would not include that inventory

A. Shown in the accounts is on hand, in outside warehouses, or on consignment.

B. On hand is owned by the company.

C. Is valued at estimated sales value.

D. Is properly classified in the balance sheet.


70.

An increase in inventory turnover probably indicates

A. An increase in inventory obsolescence.

B. A decrease in collections from customers.

C. An improvement in inventory management.

D. A difference between standard and actual materials costs.

71.

A cutoff test reveals goods received and counted in inventory but not recorded in purchases. The effect on the financial statements is

A. Net income is overstated.

B. Net income is understated.

C. There is no effect because the inventory records were adjusted to the physical count.

D. Net income is not affected until the subsequent period.

Fill in the Blank Questions

72.

The overall production starts with production planning, which usually is based on a _______________________________________. ________________________________________

73.

Production planning interacts with the preparation of ____________________________________. ________________________________________


74.

A production order usually includes a ________________________________. ________________________________________

75.

________________________________ are used by the purchasing department to place orders for materials. ________________________________________

76.

The function of _________________________________ refers to comparing the physical count of inventory to the perpetual inventory records. ________________________________________

77.

_____________________________ can be used in connection with knowledge of the shape of management's plans for the year under audit. ________________________________________

78.

Production reports of finished units should be signed by the __________________________________ and finished goods inventory custodian and forwarded to _______________________________. ________________________________________

79.

Materials requisitions should be compared in the __________________________________ department with the ______________________________________ on the production order. ________________________________________

80.

Tracing production cost accumulation forward into the production cost reports in the cost accounting department is a test for ____________________________. ________________________________________


81.

With a sample of open and closed production cost reports, vouching labor cost to ________________________________ is a test for ____________________________. ________________________________________

82.

A material error or fraud in inventory typically has a _________________________________ on financial statements. ________________________________________

83.

Auditors ______________________________ the inventory taking and make ________________________________, but they seldom _____________________________ the entire inventory. ________________________________________

84.

Selecting inventory from locations on the warehouse floor, obtaining a test count, and tracing the count to the final inventory compilation produces evidence for the _____________________________ ASB balance assertion. ________________________________________

85.

The physical observation procedures for inventory are principally designed to audit for the balance assertions of ____________________________, ____________________________, and ____________________________. ________________________________________

86.

An inventory trial balance can be used to scan for __________________________________ and as a population for sample selection for the ______________________________________. ________________________________________


87.

A sample from the source documents meets the _____________________________ requirement to determine whether transactions were actually recorded in the inventory records. ________________________________________

88.

A sample from the perpetual inventory records meets the _____________________________ requirement to determine whether all recorded transactions are supported by reports and documents. ________________________________________

89.

Inventory observation may need to be scheduled on the year-end date, making a large number of test counts if the test of controls ________________________________. ________________________________________

Short Answer Questions


90.

The tests of controls for inventory records would include the following procedures.

A. Existence.B. Rights.C. Completeness.D. Valuation.E. Presentation and disclosure.

For each of the procedures, place the letter of the correct PCAOB assertion(s). Only one letter per procedure should be used.


91.

The tests of controls for inventory records would include the following procedures.

A. Existence.B. Rights and obligations.C. Completeness.D. Accuracy and valuations.E. Presentation and disclosure.

For each of the procedures, place the letter of the correct ASB balance assertion(s). Only one letter per procedure should be used.

Essay Questions


92.

The auditors of Mikel's Shops obtained the following information when performing cutoff testing procedures during their observation of Mikel's physical inventory count at December 31, 2009:

When comparing the cutoff information to the sales records, the auditors found that all these shipments were recorded as 2011 sales. The goods shipped on bills of lading 1235 and 1236 were not counted in the inventory, but the goods on bill of lading 1237 and 1238 were included.

Required:

Prepare the appropriate journal entry to correct the cutoff error.

93.

Explain briefly the two directions of inventory test counts.


94.

The cost accounting department at Blue Manufacturing Company receives various types of information at the end of each week. The production floor reports time and production work data directly to the cost accounting department. Also, the payroll department sends labor cost data to the cost accounting department. What is the cost accounting department likely to do with this information? Why?

95.

Prepare an audit plan for the observation of an inventory count.

96.

Prepare an audit plan for inventory pricing and compilation.


97.

Audit planning requires that the auditor consider possible inventory errors or frauds that might occur that could affect the financial statements. For each of the types of inventory errors listed in the following table, indicate what would be the possible effect in the inventory and cost of sales accounts: overstated, understated, or no effect.

Matching Questions


98.

Match the examples of specific control assertions in the production cycle with the correct letter of the ASB transaction assertions.

1. Cutoff Labor usage reports are

compared to job time tickets ____

2. Accuracy

All documents are prenumbered and the numerical

sequence is reviewed ____

3. Completeness

Job cost sheet entries are reviewed by a person independent of their

preparation ____

4. Classification

Payroll reviews the allocation of payroll for pay periods that begin in one reporting period and end in the next reporting

period ____

5. Occurrence

The production supervisor is required to account for all

material and labor used as direct or indirect ____


Chapter 09 Production Cycle Answer Key

True / False Questions

1. Most businesses try to estimate sales levels and seasonal timing and then try to plan production schedules to meet customer demand. TRUE

Reference: Question also found in study guide

AACSB: Analytic

AICPA BB: IndustryAICPA FN: Decision Making

Blooms: UnderstandDifficulty: 2 Medium

Learning Objective: 09-01 Describe the production cycle; including typical source documents and controls.Topic: Typical Activities in the Production Cycle

2. Production planning interacts with inventory planning to produce production orders. TRUE


AACSB: Analytic





3. Forecasts of the following year can be used in connection with valuing the inventory at lower of cost or market, which influences the amount of cost of goods sold that is shown in the financial statements. TRUE


AACSB: Analytic




4. Based on the production orders, management develops a plan for the amount and timing of production. TRUE


AACSB: Analytic




5. Standard costing of inventory is a generally accepted accounting principle. FALSE


AACSB: Analytic





6. If control risk is assessed very low, cost accumulations will require additional substantive procedures to lower the risk of failing to detect material misstatements in inventory. FALSE


AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: 2 Medium

Learning Objective: 09-02 Give examples of tests of controls over conversion of materials and labor in a production process.

Topic: Control Risk Assessment

7. The audit procedures for inventory and related cost of sales accounts frequently are typically extensive in an audit engagement. TRUE


AACSB: Analytic




8. In general, the auditors' best opportunity to detect inventory errors and frauds is during the physical observation of the inventory count. TRUE


AACSB: Analytic

AICPA BB: Industry


AICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 Medium

Learning Objective: 09-03 Identify and describe considerations involved in the observation of physical inventory and tests of inventory pricing and compilation.

Topic: Substantive Procedures in the Production Cycle

9. When inventory quantities are determined solely by means of a physical count, it is necessary for the auditor to be present at the time of the count. TRUE


AACSB: Analytic





10. When inventory is counted on a date other than the balance-sheet date, no additional procedures would normally be required to satisfy generally accepted auditing standards. FALSE


AACSB: Analytic






11. The auditors must be present during some counting operations to evaluate cycle inventory counting plans and the execution. TRUE


AACSB: Analytic





12. If an auditor was not present at a new client's inventory count, the auditor has no obligation to test the inventory. FALSE


AACSB: Analytic





13. If inventory located off the client's premise, the auditor might confirm the amount with the custodian to satisfy evidence requirements. TRUE


AACSB: Analytic



Learning Objective: 09-03 Identify and describe considerations involved in the observation of physical inventory


and tests of inventory pricing and compilation.Topic: Substantive Procedures in the Production Cycle

Multiple Choice Questions

14. A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record

A. Sales.

B. Sales discounts.

C. Purchases.

D. Purchase discounts.

AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Risk Analysis

Blooms: ApplyDifficulty: 2 Medium


Source: OriginalTopic: Inventory Testing


15. The audit procedures used in an observation of the client's physical inventory taking are designed primarily to

A.Test and observe the client's physical count of inventory.

B. Verify independently the physical counts obtained by the client.

C. Assist the client in taking test counts of year-end inventory.

D. Determine whether inventory contains obsolete goods.

AACSB: Analytic





16. Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made?

A. Debit Purchases/credit Cost of Goods Sold.

B. None.

C. Debit Inventory/credit Accounts Payable.

D. Debit Cost of Goods Sold/credit Accounts Payable.

AACSB: Analytic




Source: Original


Topic: Inventory Testing

17. L. Martinez, CPA, was auditing a client, Marvelous Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which POCAOB assertion?


B. Completeness.



AACSB: Analytic





18. An auditor who wished to test for the existence or occurrence of inventory would most likely select a sample of inventory items from the perpetual records and

A. Trace additions to the general ledger.

B.Vouch additions to receiving reports.

C. Vouch additions to sales invoices.

D. Trace receipts to receiving reports.

AACSB: Analytic


Blooms: Apply


Difficulty: 2 MediumLearning Objective: 09-03 Identify and describe considerations involved in the observation of physical inventory

and tests of inventory pricing and compilation.Source: Original


19. An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the PCAOB assertion of

A. Existence.

B. Valuation.

C. Completeness.

D. Rights and obligations.

AACSB: Analytic





20. An auditor selected an invoice for a large inventory purchase and vouched the invoice to the receiving report. Which ASB transaction assertion is the auditor most likely testing?

A.Occurrence

B. Completeness


D. Valuation

AACSB: Analytic






21. An auditor selected a product maintained in the finished goods warehouse. The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?

A. Existence

B.Completeness


D. Valuation

AACSB: Analytic






22. An auditor selected a product recorded in the finished goods perpetual inventory subsidiary account. The auditor went to the warehouse and counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?

A.Existence

B. Completeness


D. Valuation

AACSB: Analytic





23. Periodic or cycle counts of selected inventory items are made at various times during the year rather than during a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?

A. Complete recounts by independent teams are performed.

B.Perpetual inventory records are maintained.

C. Unit cost records are integrated with production accounting records.

D. Inventory balances are rarely at low levels.

AACSB: Analytic

AICPA BB: Critical Thinking


AICPA FN: Risk AnalysisBlooms: Apply


and tests of inventory pricing and compilation.Source: AICPA


24. While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record

A. Purchase discounts.

B. Purchase returns.

C. Sales.

D.Sales returns.

AACSB: Analytic


Blooms: ApplyDifficulty: 3 Hard


Source: AICPATopic: Inventory Testing


25. To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace

A. Inventory tags noted during the auditor's observation to items in the inventory listing schedule.

B. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices.

C. Items in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.

D. Items in receiving reports and vendors' invoices to the inventory listing schedule.

AACSB: Analytic





26. Selecting a sample of cost accounting reports for labor and vouching it to time records is a procedure designed to test the ASB transaction assertion of

A. Occurrence.

B.Valuation.

C. Completeness.


AACSB: Analytic






27. Your client plans to count inventory at several locations on the same day. No location is material in amount, but the total of inventory is quite material. How is an auditor likely to plan to observe?

A. Observe all counts at all locations by using the required number of auditors.

B. Insist the inventory be counted on separate days so the auditor can be present at all locations.

C. Work with the client to determine which locations to observe.

D.Observe a sample of locations on a surprise basis.

AACSB: Analytic





28. Generally accepted accounting principles (GAAP) require that inventory be recorded at

A. The lower of cost or fair market value.

B. The lower of cost or net realizable value.

C. The higher of cost or net realizable value less a normal profit (floor).

D.None of the above.

AACSB: AnalyticAICPA BB: Legal

AICPA FN: ResearchBlooms: RememberDifficulty: 2 Medium

Learning Objective: 09-01 Describe the production cycle; including typical source documents and controls.Source: Original

Topic: Production Cycle


29. If overhead is miscalculated so that it is underabsorbed, the result if the error is not corrected will be that

A. Inventory will be understated and net income will be overstated.

B. Inventory and net income will be overstated.

C. Inventory will be overstated and net income will be understated.

D.Inventory and net income will be understated.

AACSB: Analytic



Learning Objective: 09-04 Describe some common errors and frauds in the accounting for production costs and related cost of goods sold and design some audit and investigation procedures for detecting these errors and

frauds.Source: Original

Topic: Production Errors and Frauds

30. Which of the following steps would not normally be included in a program for a physical inventory observation?

A.Vouch unit prices to vendors' invoices or other cost records.

B. Obtain the client's inventory counting instructions and review them for completeness.

C. Inspect the tags used and unused and record the tag numbers used.

D. Obtain the numbers of the last five receiving reports and last five shipping documents.

AACSB: Analytic


Blooms: ApplyDifficulty: 1 Easy


Source: Original



31. Counting different parts of inventory at different times of the year is called

A. LIFO inventory.

B. Inventory cutoff.

C. Cycle counting.

D. Just-in-time inventory.





32. A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts. This reconciliation is most likely performed to provide assurance that

A. Recorded production transactions are valid and documented.

B. Valid production transactions are recorded and none omitted.

C. Production accounting and posting is complete.

D. Production transactions are recorded in the proper period.

AACSB: Analytic





Source: OriginalTopic: Production Controls

33. To test the control assertion of completeness in the area of work-in-process inventory, the auditor most likely would

A. Select a sample of open and closed production cost reports and recalculate all costs entered.

B.Select a sample of issue slips from the raw materials stores file and trace materials-used reports to production cost reports.

C. Select a sample of open and closed production cost reports and vouch overhead charges to overhead analysis schedules.

D. Select a sample of production orders and determine whether the production orders were authorized.

AACSB: Analytic





34. An auditor's tests of controls over the issuance of raw materials to production would most likely include

A. Reconciling raw materials and work-in-process perpetual inventory records to general ledger balances.

B. Inquiring of the custodian about the procedures followed when defective materials are received from vendors.

C. Observing that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual.

D.Examining material requisitions and reperforming client controls designed to process and record issuances.

AACSB: Analytic





Source: AICPATopic: Production Controls

35. Which of the following is not an acceptable method of determining inventory cost under GAAP?

A. FIFO.B. LIFO

.C. Average

cost.D.All of the above are

acceptable.





36. Inventory count tags are controlled

A. To prevent counting errors.

B. To test cutoff.

C. To prevent subsequent addition of goods to the inventory.

D. For all of the above reasons.

AACSB: Analytic






37. Counting inventory on the warehouse floor and tracing the count to the inventory compilation provides evidence to support which management (PCAOB) assertion?

A. Existence or occurrence.

B.Completeness.

C. Rights and obligations.


AACSB: Analytic





38. Auditors record the last bill of lading used at the time of the inventory count to

A. Search for unrecorded sales.

B.Test cutoff.

C. Verify ownership.


AACSB: Analytic






39. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement (PCAOB) assertion of

A.Valuation or allocation.




AACSB: Analytic





40. Which of the following methods for determining inventory cost is not allowed by GAAP?

A. Average cost.

B. FIFO.C. LIFO

.D.Standard

cost.


AICPA FN: ResearchBlooms: Remember

Difficulty: 1 EasyLearning Objective: 09-03 Identify and describe considerations involved in the observation of physical inventory




41. Which cycle is not directly linked to the production cycle?

A. Acquisition and expenditure cycle.

B. Payroll cycle.

C. Revenue and collection cycle.

D.Finance and investment cycle.


AICPA FN: ResearchBlooms: Remember

Difficulty: 1 EasyLearning Objective: 09-01 Describe the production cycle; including typical source documents and controls.

Source: OriginalTopic: Production Cycle

42. To determine the client's planned amount and timing of production of a product, the auditor will review the

A. Sales forecast.

B. Inventory reports.

C. Production plan.

D. Purchases journal.

AACSB: Analytic






43. An auditor reviews job cost sheets to test which transaction assertion?

A. Occurrence.

B. Completeness.

C. Accuracy.

D. Classification.

AACSB: Analytic





44. Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

A. Supplies of relatively little value are expensed when purchased.

B. The cycle basis is used for physical counts.

C. The warehouse manager is responsible for maintenance of perpetual inventory records.

D. Perpetual inventory records are maintained only for items of significant value.

AACSB: Analytic






45. To make a year-to-year comparison of inventory turnover most meaningful, the auditor will perform the analysis

A. For the company as a whole.

B. By division.

C. By product.


AACSB: Analytic





46. Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

A. Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record.

B. Have an independent accounting firm prepare an internal control report on the effectiveness of the controls over inventory.

C. Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records.

D. Require a manager's signature for the removal of any inventory item with a value above $50.

AACSB: Analytic






47. An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

A. Owned by the client.

B. Not obsolete.

C. Physically present at the time of the preparation of the final inventory schedule.

D.Included in the final inventory schedule.

AACSB: Analytic






48. A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?

A. Inventory items had been counted but the tags placed on the items had not been taken off and added to the inventory accumulation sheets.

B.Credit memos for several items returned by customers had not been recorded.

C. No journal entry had been made on the retailer's books for several items returned to its suppliers.

D. An item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records.

AACSB: Analytic





49. From the auditors' point of view, inventory counts are more acceptable prior to the year end when

A. Internal control is weak.

B.Accurate perpetual inventory records are maintained.

C. Inventory is slow moving.

D. Significant amounts of inventory are held on a consignment basis.

AACSB: Analytic



Learning Objective: 09-03 Identify and describe considerations involved in the observation of physical inventory




50. Which of the following internal control activities most likely addresses the completeness assertion for inventory?

A. The work-in-process account is periodically reconciled with subsidiary inventory records.

B. Employees responsible for custody of finished goods do not perform the receiving function.

C. Receiving reports are prenumbered and the numbering sequence is checked periodically.

D. There is a separation of duties between the payroll department and inventory accounting personnel.

AACSB: Analytic




Source: AICPATopic: Production Controls

51. When auditing inventories, an auditor would least likely verify that

A.All inventory owned by the client is on hand at the time of the count.

B. The client has used proper inventory pricing.

C. The financial statement presentation of inventories is appropriate.

D. Damaged goods and obsolete items have been properly accounted for.

AACSB: Analytic




Source: AICPA



52. A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably

A. Apply gross profit tests to ascertain the reasonableness of the physical counts.

B. Increase the extent of tests of controls relevant to the inventory cycle.

C. Request the client to schedule the physical inventory count at the end of the year.

D. Insist that the client perform physical counts of inventory items several times during the year.

AACSB: Analytic





53. An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of


B.Completeness.

C. Existence.


AACSB: Analytic






54. Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

A. Trace test counts noted during the entity's physical count to the entity's summarization of quantities.

B. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

C. Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales.

D. Inspect the open purchase order file for significant commitments that should be considered for disclosure.

AACSB: Analytic





55. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about

A. Existence.


C. Completeness.

D.Accuracy and valuation.

AACSB: Analytic







56. An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about

A. Existence.


C. Completeness.

D.Valuation.

AACSB: Analytic





57. When evaluating inventory controls, an auditor would be least likely to

A. Inspect documents.

B. Make inquiries.

C. Observe procedures.

D.Consider policy and procedure manuals.

AACSB: Analytic






58. When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that

A. Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand.

B. Physical inventories agree substantially with book inventories.

C. The system is in accordance with generally accepted accounting principles and is functioning as planned.

D.Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

AACSB: Analytic





59. The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to

A. Cost ledgers.

B. Perpetual inventory records.

C. Receiving reports.

D.Material requisitions.

AACSB: Analytic




Difficulty: 2 MediumLearning Objective: 09-02 Give examples of tests of controls over conversion of materials and labor in a

production process.Source: Original

Topic: Production Controls

60. Your client counts inventory three months before the end of the fiscal year. Internal controls over inventory are excellent. Which procedure is not necessary for the inventory roll-forward?

A. Check that shipping documents for the last three months agree with perpetual records.

B. Tracing receiving reports for the last three months to perpetual records.

C. Compare gross margin percentages for the last three months.

D.Request the client to recount inventory at the end of the year.

AACSB: Analytic






61. An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions should the auditor perform tests of controls?

A. Significant weaknesses were found in the company's internal control.

B. The auditor hopes to reduce the amount of work to be done in assessing inherent risk.

C. The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.

D. Tests of controls are always performed when the auditor begins to assess control risk.

AACSB: Analytic





62. The typical functions of the production and conversion cycle do not include

A. Production planning and control.

B. Inventory planning and control.

C. Purchase order and control.

D. Reduction of inventory records for goods shipped.



AICPA FN: Research


Blooms: RememberDifficulty: 1 Easy



63. To execute job production, a foreperson would typically not need

A.Sales orders.

B. Production orders.

C. Bills of materials.

D. Manpower needs.



AICPA FN: ResearchBlooms: UnderstandDifficulty: 2 Medium


Topic: Production Controls


64. When a job is completed, the foreperson typically prepares a completion report, a copy of which is sent to or kept in the following departments except

A. Finished goods stores accompanying the finished goods.

B.Sales department indicating goods available for sale.

C. Cost accounting to transfer the job from work-in-process to finished goods inventory.

D. Production department, which retains a copy for its own file.






65. The information for inventory record keeping typically comes from all of the following sources except

A. Shipping department when goods have been shipped.

B.Accounting department when accounts payable are paid.

C. Receiving department when customers return goods.

D. Inventory stores when purchased goods are received.


AACSB: Analytic


AICPA BB: LegalAICPA FN: ResearchBlooms: Understand

Difficulty: 1 EasyLearning Objective: 09-01 Describe the production cycle; including typical source documents and controls.

Source: OriginalTopic: Production Cycle

66. The functions typically related to inventory flow of transactions and control would not include

A. Inventory record keeping.

B. Physical count of inventory.

C. Sale of inventory.

D. Reconciliation of physical count to perpetual inventory records.







67. Which of the following would not be an example of an inventory record error or fraud?

A. Unrecorded receipts or shipments.

B. Incorrect date of recording.

C. Fictitious sales or adjustments.

D. Incorrect sales price.


AACSB: Analytic




Source: OriginalTopic: Production Errors and Frauds


68. Tracing a sample of inventory receiving reports to the perpetual inventory record entry achieves the specific ASB balance assertion of

A.Completeness.

B. Occurrence.

C. Presentation.

D. Valuation.


AACSB: Analytic






69. Specific assertions typical of inventory and cost of sales accounts would not include that inventory

A. Shown in the accounts is on hand, in outside warehouses, or on consignment.

B. On hand is owned by the company.

C. Is valued at estimated sales value.

D. Is properly classified in the balance sheet.


AACSB: Analytic





70. An increase in inventory turnover probably indicates

A. An increase in inventory obsolescence.

B. A decrease in collections from customers.

C. An improvement in inventory management.

D. A difference between standard and actual materials costs.


AACSB: Analytic






71. A cutoff test reveals goods received and counted in inventory but not recorded in purchases. The effect on the financial statements is

A.Net income is overstated.

B. Net income is understated.

C. There is no effect because the inventory records were adjusted to the physical count.

D. Net income is not affected until the subsequent period.


AACSB: Analytic






Fill in the Blank Questions


72. The overall production starts with production planning, which usually is based on a _______________________________________. sales forecast


73. Production planning interacts with the preparation of ____________________________________. production orders


74. A production order usually includes a ________________________________. bill of materials


75. ________________________________ are used by the purchasing department to place orders for materials. Material requisitions


76. The function of _________________________________ refers to comparing the physical count of inventory to the perpetual inventory records. periodic reconciliation



77. _____________________________ can be used in connection with knowledge of the shape of management's plans for the year under audit. Forecasts


78. Production reports of finished units should be signed by the __________________________________ and finished goods inventory custodian and forwarded to _______________________________. production supervisor; cost accounting


79. Materials requisitions should be compared in the __________________________________ department with the ______________________________________ on the production order. cost accounting; list (bill) of materials


80. Tracing production cost accumulation forward into the production cost reports in the cost accounting department is a test for ____________________________. completeness



81. With a sample of open and closed production cost reports, vouching labor cost to ________________________________ is a test for ____________________________. labor reports; occurrence


82. A material error or fraud in inventory typically has a _________________________________ on financial statements. pervasive effect


83. Auditors ______________________________ the inventory taking and make ________________________________, but they seldom _____________________________ the entire inventory. observe; test counts; count


84. Selecting inventory from locations on the warehouse floor, obtaining a test count, and tracing the count to the final inventory compilation produces evidence for the _____________________________ ASB balance assertion. completeness



85. The physical observation procedures for inventory are principally designed to audit for the balance assertions of ____________________________, ____________________________, and ____________________________. existence; completeness; valuation


86. An inventory trial balance can be used to scan for __________________________________ and as a population for sample selection for the ______________________________________. unusual conditions, physical inventory observation


87. A sample from the source documents meets the _____________________________ requirement to determine whether transactions were actually recorded in the inventory records. completeness


88. A sample from the perpetual inventory records meets the _____________________________ requirement to determine whether all recorded transactions are supported by reports and documents. occurrence



89. Inventory observation may need to be scheduled on the year-end date, making a large number of test counts if the test of controls ________________________________. reveals weaknesses (assessed high)


Short Answer Questions


90. The tests of controls for inventory records would include the following procedures.

A. Existence.B. Rights.C. Completeness.D. Valuation.E. Presentation and disclosure.

For each of the procedures, place the letter of the correct PCAOB assertion(s). Only one letter per procedure should be used.

1.C; 2.A; 3.D; 4.C; 5.D

AACSB: Analytic




Source: OriginalTopic: Inventory Controls


91. The tests of controls for inventory records would include the following procedures.

A. Existence.B. Rights and obligations.C. Completeness.D. Accuracy and valuations.E. Presentation and disclosure.

For each of the procedures, place the letter of the correct ASB balance assertion(s). Only one letter per procedure should be used.

1.C; 2.A; 3.D; 4.E; 5.D

AACSB: Analytic





Essay Questions


92. The auditors of Mikel's Shops obtained the following information when performing cutoff testing procedures during their observation of Mikel's physical inventory count at December 31, 2009:

When comparing the cutoff information to the sales records, the auditors found that all these shipments were recorded as 2011 sales. The goods shipped on bills of lading 1235 and 1236 were not counted in the inventory, but the goods on bill of lading 1237 and 1238 were included.

Required:

Prepare the appropriate journal entry to correct the cutoff error.

AACSB: Analytic





Topic: Inventory Errors and Frauds


93. Explain briefly the two directions of inventory test counts.

The inventory test counts can run from the

A. Basic transaction files to perpetual inventory records (completeness assertion).B. Perpetual inventory records to the detail source documents (existence or occurrence assertion).

AACSB: Analytic





94. The cost accounting department at Blue Manufacturing Company receives various types of information at the end of each week. The production floor reports time and production work data directly to the cost accounting department. Also, the payroll department sends labor cost data to the cost accounting department. What is the cost accounting department likely to do with this information? Why?

In this situation, the cost accounting department is receiving data independently for the same labor information. They should reconcile the information from the two sources for quantity (time) and amount (dollars). This reconciliation is performed to make sure that cost accounting is using actual payroll data and that the payroll department is paying only for work performed.

AACSB: Analytic






95. Prepare an audit plan for the observation of an inventory count.

Note that other answers are possible.

1. Obtain client's inventory counting instructions and review for completeness.2. Tour facility before count looking for out-of-the-way items, obsolete items, and movement of inventory.3. Observe client personnel counting inventory for compliance with instructions.4. Test count a selection of items throughout the facility and record a sample of your test counts. Note description, stage of completion, counting unit, and condition.5. Inspect tags used and unused and record tag numbers used.6. Select a sample of used tags and trace each to the items on the floor.7. Obtain the number of the last five receiving reports and last five shipping documents. Record numbers of the next unused items in sequence.8. Tour facilities to ensure all items have been counted.

AACSB: Analytic






96. Prepare an audit plan for inventory pricing and compilation.

Note that other answers are possible.

1. Obtain the client's inventory listing and foot and agree it to the general ledger.2. Trace test counts from inventory observation to the final inventory compilation.3. Select a sample of inventory items. Vouch unit prices to vendors' invoices or other cost records. Recalculate the multiplication of units and price.4. Scan the inventory compilation for items added from sources other than the physical count and items that appear to be large round numbers or systematic fictitious additions.5. Recalculate the extensions and footings of the final inventory compilation for clerical accuracy. Reconcile the total to the adjusted trial balance.6. For selected inventory items and categories, determine the replacement cost and the applicability of lower-of-cost-or-market valuation.7. Determine whether obsolete or damaged goods should be written down.8. Inquire about obsolete, damaged, slow-moving, and overstocked inventory.9. Scan the perpetual records for slow-moving items.10. During the physical observation, be alert to notice damaged or scrap inventory.11. Compare the listing of obsolete, slow-moving, damaged, or unsalable inventory from last year's audit to the current inventory compilation.12. At year-end, obtain the numbers of the last shipping and receiving documents for the year. Compare these to the sales, inventory/cost of sales, and accounts payable entries for proper cutoff.13. Read bank confirmations, debt agreements, and minutes of the board, and make inquiries about pledge or assignment of inventory to secure debt.14. Inquire about inventory out on consignment and about inventory


on hand that is consigned in from vendors.15. Confirm or inspect inventories held in public warehouses.16. Recalculate the amount of intercompany profit to be eliminated in consolidation.17. Obtain management representations concerning pledging of inventory as collateral, intercompany sales, and other related-party transactions.

AACSB: Analytic






97. Audit planning requires that the auditor consider possible inventory errors or frauds that might occur that could affect the financial statements. For each of the types of inventory errors listed in the following table, indicate what would be the possible effect in the inventory and cost of sales accounts: overstated, understated, or no effect.

a. If book inventory is adjusted to agree with the physical inventory, the effect in inventory would be "no effect" and the cost of goods sold would be "understated."


b. The assumption is that the book inventory is adjusted to agree with the physical inventory.c. If book inventory is adjusted to agree with the physical inventory with the adjustment debit going to cost of sales, the result is "no effect" on both accounts.d. Both are "no effect." The cost is transferred from inventory to cost of sales, but the sales and receivables are both understated.

AACSB: Analytic






Matching Questions


98. Match the examples of specific control assertions in the production cycle with the correct letter of the ASB transaction assertions.

1. Cutoff Labor usage reports are

compared to job time tickets 5

2. Accuracy

All documents are prenumbered and the numerical

sequence is reviewed 3

3. Completeness

Job cost sheet entries are reviewed by a person

independent of their preparation 2

4. Classification

Payroll reviews the allocation of payroll for pay periods that

begin in one reporting period and end in the next reporting period 1

5. Occurrence

The production supervisor is required to account for all

material and labor used as direct or indirect 4

AACSB: Analytic






Chap 009

Documents

Transcript of Chap 009