Gleim AUD Chp 12

Terms in this set (16)

Inventory Turnover ratio
Cost of Sales (GOGS) / average ending inventory
When performing procedures to test assertions about purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which relevant assertion would this procedure most likely support?
Occurrence
Determining that received items have been properly entered in the inventory records supports the ____ assertion.
Completeness
The auditor obtained management representations about the nature and purpose of recorded payables. Which assertion?
Rights and Obligations
When applied to accounts payable and purchases
*When testing inventory Management Representation Letter applies to Classification and Understandability.
When testing Valuation and Allocation, GAAP requires inventory to be recorded at:
the lower of cost or market
An auditor would be most likely to learn of slow-moving inventory through
1 Physical observation of inventory.
2 Inquiry of sales personnel.
3 Review of perpetual inventory records.
4 Inquiry of stores personnel.
3 Review of perpetual inventory records.

This answer is correct.
To identify slow-moving inventory, the auditor should review perpetual inventory records. In a perpetual system, receipts and issuances of goods are recorded as the transactions occur, both as to quantities and prices. By comparing the dates of receipt and issuance, the auditor is able to readily identify slow-moving and possibly obsolete inventory.
An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning relevant assertions about
1 Classification and understandability.
2 Valuation and allocation.
3 Completeness.
4 Existence.
Classification and understandability.

This answer is correct.
Events such as the renewal of the note payable do not require adjustment of the financial statements but may require disclosure (AU 560). Accordingly, the auditor should determine that the renewal had essentially the same terms and conditions as the recorded debt at year end. A significant change may affect the classification of notes payable (e.g., as current or noncurrent), the understandability of the statements, and the required disclosures.
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
1.Reconcile receiving reports with related cash payments made just prior to year end.
2.Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
3.Contrast the ratio of accounts payable to purchases with the prior year's ratio.
4.Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
4.Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

This answer is correct.
Observance of cutoff procedures helps ensure that liabilities were recorded in the appropriate period. Tracing cash disbursements made subsequent to year end to amounts recorded at year end may disclose liabilities that were unrecorded as a result of a failure to observe such procedures. Recomputation of interest, bank confirmations, and reading the minutes of directors' meetings may also detect unrecorded liabilities.
When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing unrecorded liabilities?
1.Review of outstanding receipts.
2.Confirmation of negotiable receipts with holders.
3.Inspection of receiving and issuing procedures.
4.Observation of inventory.
3.Inspection of receiving and issuing procedures.

This answer is correct.
When auditing a public warehouse, the inspection of receiving and issuing procedures is the most important procedure for disclosing unrecorded liabilities. Shipping orders and receiving reports that are not reflected in the records suggest that transactions are not being properly recorded.
If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded
1.Sales.
2.Purchases.
3.Sales discounts.
4.Purchase discounts.
2.Purchases.

This answer is correct.
In a perpetual system, purchases are debited directly to inventory at the time of the transaction rather than to a purchases account. A sale requires an immediate credit to inventory. Hence, failure to record a purchase would understate inventory.
When outside firms of nonaccountants specializing in the taking of physical inventories are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily
1.Not reduce the extent of work on the physical count of inventory.
2.Consider the report of the outside inventory-taking firm to be an acceptable alternative procedure to the observation of physical inventories.
3.Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions.
4.Consider the reduced audit effort with respect to the physical count of inventory as a scope limitation.
3.Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions.

This answer is correct.
The taking of inventory by an outside firm of nonaccountants does not substitute for the auditor's own observation or taking of some physical counts. The independent auditor may, as a result, be able to reduce the extent of his/her procedures but only after a proper evaluation of the outside firm's work, including examining its program, observing its procedures and controls, making or observing some physical counts, recomputing calculations, and applying tests to subsequent transactions.
**To obtain assurance that items reflected in a client's perpetual inventory records actually exist, an auditor would most likely trace
1.Items listed in receiving reports and vendors' invoices to the perpetual inventory records.
2.Inventory tags noted during the auditor's test counts to items listed in receiving reports and vendors' invoices.
3.Items in the inventory perpetual records to inventory tags and the auditor's test counts.
4.Inventory tags noted during the auditor's test counts to items in the perpetual inventory records.
3.Items in the inventory perpetual 'records' to inventory tags and the auditor's test counts.
records -> invent tags -> test counts

This answer is correct.
To test whether records reflect actual inventory, the auditor most likely will select a sample of items from the records and trace them to evidence supporting existence. The inventory tags created during the client's count and confirmed by the auditor's test counts provide evidence of existence.
An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all
1.Receiving reports.
2.Merchandise received.
3.Canceled checks.
4.Vendors' invoices.
4.Vendors' invoices.

This answer is correct.
Vendors' invoices are the billing documents received by the client. They describe the items purchased, the amounts due, and the payment terms. The auditor should trace these invoices to the related receiving reports.
An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of
1.Accuracy.
2.Existence.
3.Valuation and allocation.
4.Classification and understandability.
4.Classification and understandability.
In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the purchase
1.Journal.
2.Invoices.
3.Orders.
4.Requisitions.
2.Invoices.

This answer is correct.
Vendor invoices, which state the items purchased, the amount due, and the payment terms, document inventory cost when compared with purchase orders and receiving reports.
Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation assertions about recorded accounts payable?
1. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
2. Confirming accounts payable balances with known suppliers who have zero balances.
3. Receiving the client's mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor's invoices.
4. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.
1. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

This answer is correct.
Vouching a sample of recorded accounts payable to purchase orders and receiving reports provides evidence that the obligations exist at a given date. The purchase orders evidence the initiation of the transactions, and the receiving reports indicate that goods were received and that liabilities were thereby incurred. Thus, these documents provide evidence that amounts are owed to others, that the transactions occurred, and that the liabilities have been included at appropriate amounts.
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