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Auditing and Assurance Services, 14e (Arens)
Chapter 21 Audit of the Inventory and Warehousing Cycle
Learning Objective 21-1
1)Receipt of ordered materials by the receiving department will generate the completion
of a form called the:
A) bill of lading.
B) receiving
report.
C) materials requisition.
D) inventory acquisition
summary. Answer: B
Terms: Receipt of ordered materials generate completion of form
Diff: Easy
Objective: LO 21-1
AACSB: Reflective thinking skills
2)Which of the following would you normally characterize as a difficult and complex
account to audit? A) property, plant and equipment
B) cash
C) inventory
D) prepaid
insurance
Answer: C
Terms: Complex and difficult account to audit
Diff: Easy
Objective: LO 21-1
AACSB: Reflective thinking skills
3)Inventory is a complex area to audit for all but which of the following reasons?
A) Inventory is often in different locations.
B)There are several acceptable valuation methods and some entities use different
methods for different types of inventory.
C) Inventory is often the largest account in working capital.
D) Inventory valuation includes few estimates.
Answer: D
Terms: Reasons inventory is complex to audit
Diff: Easy
Objective: LO 21-1
AACSB: Reflective thinking skills
1
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4)In most manufacturing companies, the inventory and warehousing cycle
begins with the: A) receipt of a customer's order.
B) completion of production of a customer's
order. C) initiation of production of a
customer's order.
D) acquisition of raw materials for production of
an order. Answer: D
Terms: Inventory and warehousing cycle begins with
Diff: Easy
Objective: LO 21-1
AACSB: Reflective thinking skills
5)________ accumulate costs by individual jobs as material is issued into production and
labor costs are
incurred.
A) Just-in-time production
systems B) Job order cost
systems
C) Process cost
systems D)
Manufacturing
systems Answer: B
Terms: Accumulate costs by individual jobs
Diff: Easy
Objective: LO 21-1
AACSB: Reflective thinking skills
6)In performing audit tests of the client's cost accounting system, the auditor is primarily
concerned with which of the following?
A) System is functioning properly in providing costing and pricing information for
management. B) Costs have been properly assigned to finished goods, work-in-
process, and cost of goods sold. C) Inventory counts agree with the client's
accounting records.
D) The client's cost accounting system is designed on the basis on acceptable cost
accounting systems. Answer: B
Terms: Audit tests of cost accounting system
Diff: Easy
Objective: LO 21-1
AACSB: Reflective thinking skills
7)Master files, worksheets, and reports that accumulate material, labor, and overhead
as the costs are incurred are:
A) accounting systems.
B) storeroom
documents. C) cost
accounting records.
D) finished goods inventory
records. Answer: C
Terms: Master files, worksheets, and reports that accumulate material, labor and overhead as costs
Diff: Moderate
Objective: LO 21-1
AACSB: Reflective thinking skills
2
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8) The main difference between job order and process costing systems
is that: A) one accumulates costs by materials issued and the other by
labor incurred.
B) one accumulates costs by individual jobs and the other by particular processes.
C) one emphasizes costs accumulated in completed products and the other emphasizes
costs associated with work-in-process.
D) one emphasizes costs adding value to the product and the other emphasizes costs
incurred because of waste, scrap, and obsolescence.
Answer: B
Terms: Main difference between job order and process costing systems
Diff: Moderate
Objective: LO 21-1
AACSB: Reflective thinking skills
9)The auditor's main concerns in verifying transfers of inventory do not include whether:
A) recorded transfers exist.
B)transfers represent appropriate uses of company resources.
C) all actual transfers are recorded.
D) the details of the transfer are accurately
recorded. Answer: B
Terms: Main concern in verifying transfers of inventory
Diff: Moderate
Objective: LO 21-1
AACSB: Reflective thinking skills
10) What are two factors affecting the complexity of the audit
of inventory? Answer:
• Inventory is often the largest account in the working capital.
• Inventory is often in different locations.
• Diverse items in inventory are often difficult to value.
• Inventory valuation is difficult due to the estimates involved.
• There are several acceptable methods of valuing inventory and some entities use
different methods for different types of inventory.
Terms: Factors affecting complexity of audit of inventory
Diff: Easy
Objective: LO 21-1
AACSB: Reflective thinking skills
3
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11) State the six functions that make up the inventory and warehousing cycle and,
for each function, identify the related documents and/or records that would be used
by a manufacturing company. Answer: The six functions are:
• Process purchase orders. Related documents are the purchase requisition and the
purchase order.
• Receive raw materials. Related documents are the receiving report and the vendor's
invoice.
• Store raw materials. Related record is the raw materials perpetual inventory master file.
• Process the goods. Related documents and records are the raw materials
requisition and the cost accounting records.
• Store finished goods. Related records are the finished goods perpetual inventory
master file and the cost accounting records.
• Ship finished goods. Related documents and records are the shipping document, the
finished goods perpetual inventory master file, and the cost accounting records.
Terms: Functions that make up the inventory and warehousing cycle and related documents/records
Diff: Challenging
Objective: LO 21-1
AACSB: Reflective thinking skills
12) In process cost systems, costs are accumulated by individual jobs.
A) True
B)False
Answer:
B
Terms: Process cost system
Diff: Easy
Objective: LO 21-1
AACSB: Reflective thinking skills
13) In job cost systems, costs are accumulated by
individual jobs. A) True
B) False
Answer:
A
Terms: Job cost systems
Diff: Easy
Objective: LO 21-1
AACSB: Reflective thinking skills
14) While separate perpetual inventory records are normally kept for raw materials
and finished goods, most companies do not use perpetual for work-in-process.
A) True
B) False
Answer:
A
Terms: Perpetual inventory records for inventories
Diff: Challenging
Objective: LO 21-1
AACSB: Reflective thinking skills
4
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