SOLVED

6) Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending inventory? A) Compare the physical quantities of slow-moving items with corresponding quantities of the prior year. B) Observe merchandise and raw materials during the client’s physical inventory count. C) Review the management’s inventory representation letter for accuracy. D) Test overall fairness of inventory values by comparing the company’s turnover ratio with the industry average. 7) It is frequently possible to test the physical inventory prior to the balance sheet date when: A) there are accurate perpetual inventory master files. B) year-end sales are small. C) the internal control system is no better at year-end than at an earlier point in time. D) the client counts inventory at interim dates. 8) Tests of the perpetual inventory master files for the purpose of reducing the tests of physical inventory or changing their timing are done through the use of: A) inquiry. B) observation. C) confirmation. D) documentation. 9) Which one of the following analytical procedures would be most useful in alerting the auditor to the possibility of obsolete inventory? A) Compare gross margin percentage with previous years’. B) Compare unit costs of inventory with previous years’. C) Compare inventory turnover ratio with previous years’. D) Compare current year manufacturing costs with previous years’. 10) Which of the following statements is correct regarding the auditor’s responsibility with respect to the year-end inventory procedures of an audit client? A) The auditor is responsible for reconciling the physical count with the perpetual inventory matter files. The auditor is responsible for taking and compiling the inventory. The auditor is responsible for observing the physical counting of inventory. Yes No No B) The auditor is responsible for reconciling the physical count with the perpetual inventory matter files. The auditor is responsible for taking and compiling the inventory. The auditor is responsible for observing the physical counting of inventory. No No Yes C) The auditor is responsible for reconciling the physical count with the perpetual inventory matter files. The auditor is responsible for taking and compiling the inventory. The auditor is responsible for observing the physical counting of inventory. Yes No Yes D) The auditor is responsible for reconciling the physical count with the perpetual inventory matter files. The auditor is responsible for taking and compiling the inventory. The auditor is responsible for observing the physical counting of inventory. No Yes No 11) McKesson & Robbins Company is a well-known audit case involving auditor responsibility. What occurred at the McKesson & Robbins Company to change the way in which auditors audit inventory? A) The company recorded nonexistent inventory. B) The auditor did not perform any audit tests of the inventory. C) The auditor and company colluded to overstate inventory balances. D) The company counted inventory three months prior to year-end. 12) When a physical count of inventory is performed at an interim date, the auditor observes it at that time and tests the perpetual records for transactions: A) throughout the year. B) which are a representative sample of the period under audit. C) from the date of the count to year-end. D) from the date of the count to the end of the audit field work. 13) When there are no perpetual inventory files and inventory is material: A) an audit cannot be performed, so the auditor must issue a disclaimer. B) a physical inventory should be taken by the client near year-end. C) the auditor will have to perform the inventory count and determine valuation. D) the auditor need not observe inventory counts but must do test counts. 14) The most important part of the observation of inventory is to determine whether: A) all counts are accurate. B) the inventory-takers are qualified. C) obsolete inventory has been identified. D) the physical count is being taken in accordance with the client’s instructions. 15) A useful starting point for becoming familiar with the client’s inventory is for the auditor to: A) read the AICPA’s Industry Audit Guide. B) review accounting theory covering special problems, such as gas and oil accounting, or lease-purchase agreements. C) read the client’s Accounting Manual. D) tour the client’s facility.