As part of the process of observing a clients physical inventories, an auditor should be alert to:

Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count?

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Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count?
Verification of existence of inventory. Observation tests the assertion of existence. The auditor should observe and make test counts but is not responsible for taking inventory.
An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?
Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.Payment vouchers bearing the required approvals should be supported by a properly authorized purchase requisition, a purchase order executing the transaction, a receiving report indicating all goods ordered have been received in good condition, and a vendor invoice confirming the amount owed. To determine that check requests are valid, the appropriate audit procedure is therefore to compare checks and the related vouchers. The direction of testing should be from a sample of checks to the approved vouchers. If the date of a voucher is later than the date of the related check, the inference is that a check was issued without proper support.
The auditor may conclude that depreciation charges are insufficient by noting
Excessive recurring losses on assets retired.Excessive recurring losses on assets retired indicate excess carrying amounts at the dates of disposition. The implication is that the method of cost allocation has not been sufficient. The effect of understating depreciation in prior periods would have been to overstate income in those periods and understate income in the period of retirement.
A portion of a client’s inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?
Confirmation.The auditor should confirm or investigate inventories held in public warehouses. Confirmation is efficient because of its low cost. The auditor ordinarily obtains confirmation of the existence of inventories by direct communication with the custodian. When a significant portion of current or total assets is held in a public warehouse, the auditor should consider testing the client’s procedures by (1) evaluating the warehouser, (2) obtaining an independent accountant’s report on the warehouser’s internal control, (3) visiting the warehouse and observing physical counts, and (4) investigating the use of warehouse receipts (e.g., whether they are being used for collateral). The auditor should confirm with lenders the details of any pledged receipts.
An audit of owners’ equity normally would not include
Detail checking from the dividend payment list to the capital stock records.An auditor normally does not perform detail checking from the dividend payment list to the capital stock records. (S)he may test certain large dividend payments but, because the amount of each dividend is usually small, detail checking is minimal. The need for extensive checking is reduced when the entity uses an independent financial institution as its agent for dividend payments. The stock transfer agent often performs this function because it maintains detailed records of shareholders. The arrangement substantially decreases the risks of material misstatement.
When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the
Quality.The purpose of the cutoff is to ensure that the asset and related liability are recognized in the correct period. Accordingly, merchandise included in ending inventory but not yet arrived may not be available for inspection. The quality of such merchandise cannot be assured until the inspection has been conducted after the goods are received.
To test the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would
Examine the audited financial statements of the investee company.The equity method recognizes undistributed income arising from an investment in an investee. Under the equity method, investor income is recorded as the investee reports income. Consequently, the audited financial statements of the investee provide the auditor with the undistributed income from the investee.
The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?
Credit memos for several items returned by customers had not been recorded.If credit memos for items returned by customers have not been prepared and recorded, the returned items will be reflected in the physical inventory but not in the perpetual records.
The auditor observes the count of marketable securities on December 31. (S)he records the serial number of each security and checks the serial number and number of shares (or principal amount) against company records. Which error or bad practice has the best chance of being detected by this procedure?
The CFO misappropriated and sold securities on April 4. (S)he speculated successfully with the proceeds and replaced the misappropriated securities on December 29.The auditor is most likely to detect a misappropriation and replacement of securities by comparing information for the securities counted with the entity’s records. The records would indicate that the recorded serial numbers differ from those of securities counted by the auditor.
An auditor should vouch corporate stock issuances and treasury stock transactions to the
Minutes of the board of directors.A primary concern of the auditor is that all capital stock transactions are properly authorized. Accordingly, all entries in the capital stock account should be vouched to the minutes of the board of directors’ meetings. The articles of incorporation, by-laws, and minutes of shareholders’ meetings should also be reviewed.
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?
Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.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.
An auditor inspects a client’s investment records to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence concerning relevant financial statement assertions about
Classification and understandability, and valuation and allocation.Assertions about classification and understandability address whether the information is appropriately presented and described and disclosures are clear. For example, U.S. GAAP require that a debt security be reclassified as available for sale if the entity (1) does not have the positive intent and ability to hold it to maturity but (2) does not intend to sell it in the near term. Inspecting the client’s records just prior to and just after year end could help the auditor determine whether investment classifications are appropriate. Assertions about valuation address whether reported amounts conform with U.S. GAAP. Classification affects valuation. For example, held-to-maturity securities are measured at amortized cost, and available-for-sale and trading debt securities are subsequently measured at fair value. Thus, inspecting transfers between categories also helps determine whether the investments are recorded at proper amounts.
During the year under audit, a client issued a substantial amount of bonds to an insurance company (a private placement). Which of the following is the most important step in the auditor’s plan for the audit of bonds payable?
Tracing the cash received from the issue to the accounting records.In a private placement of bonds, one not involving the use of an independent trustee, the auditor is most concerned that the cash received from the issue is accurately recorded. The auditor also is concerned that the cash is adequately safeguarded by the CFO’s department. Failure to employ a trustee substantially increases the risks of material misstatement for all aspects of bond issues.
Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and expenses?
The current year’s payroll expense with the prior year’s payroll expense.Comparing the current year’s expense with that of the prior year’s is an analytical procedure. The objective of analytical procedures is to identify such things as the existence of unusual transactions and events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit planning ramifications (AU-C 520).
An auditor most likely increases substantive tests of payroll when
Overpayments are discovered in performing tests of details.During the application of substantive tests, the auditor may decide to extend the tests when unexpected findings (e.g., overpayments) are made. The purpose is to determine the extent of any fraud.
In connection with the audit of a current issue of bonds payable, the auditor should
Ascertain that the client has obtained the opinion of counsel on the legality of the issue.An audit of noncurrent debt (1) determines that all noncurrent debt has been recorded and constitutes bona fide liabilities; (2) verifies that federal and state laws relevant to financial reporting have been complied with; (3) determines that premium, discount, interest payable, and interest expense are accurately recorded; (4) monitors compliance with debt contracts; and (5) reviews proper presentation and disclosure in the financial statements. The auditor therefore should determine that the client has obtained the opinion of a lawyer on the legality of the bond issue.
The auditor who interviews the plant manager is most likely to rely upon this interview as primary support for an audit conclusion on
The necessity to record a provision for deferred maintenance costs.The auditor typically does not use the responses to inquiries as primary support for an audit conclusion. However, the determination by management that a liability exists should convince the auditor that an entry should be made.
An auditor’s inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should
Evaluate management’s conclusion about the recognition of an impairment loss.The auditor (1) evaluates management’s conclusion about recognition of an impairment loss for a decline in fair value below cost or carrying amount and (2) obtains support for the amount of the recorded adjustment, including compliance with the reporting framework.
In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the purchase
Invoices.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.
As part of the process of observing a client’s physical inventories, an auditor should be alert to
The inclusion of any obsolete or damaged goods.When observing a client’s physical inventories, the auditor always should be alert to the inclusion of any obsolete or damaged goods. The auditor should be alert for empty boxes, empty squares, and inventory defects.
Which of the following is true about the auditors observation of the client's physical inventory?
What should be done by the auditor in inventory audit?
What are the purposes of the auditors observation of the taking of the physical inventory?
How do you audit physical inventory?

Verification of existence of inventory. Observation tests the assertion of existence. The auditor should observe and make test counts but is not responsible for taking inventory.

An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

The auditor may conclude that depreciation charges are insufficient by noting

Excessive recurring losses on assets retired.Excessive recurring losses on assets retired indicate excess carrying amounts at the dates of disposition. The implication is that the method of cost allocation has not been sufficient. The effect of understating depreciation in prior periods would have been to overstate income in those periods and understate income in the period of retirement.

A portion of a client’s inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?

Confirmation.The auditor should confirm or investigate inventories held in public warehouses. Confirmation is efficient because of its low cost. The auditor ordinarily obtains confirmation of the existence of inventories by direct communication with the custodian. When a significant portion of current or total assets is held in a public warehouse, the auditor should consider testing the client’s procedures by (1) evaluating the warehouser, (2) obtaining an independent accountant’s report on the warehouser’s internal control, (3) visiting the warehouse and observing physical counts, and (4) investigating the use of warehouse receipts (e.g., whether they are being used for collateral). The auditor should confirm with lenders the details of any pledged receipts.

An audit of owners’ equity normally would not include

Detail checking from the dividend payment list to the capital stock records.An auditor normally does not perform detail checking from the dividend payment list to the capital stock records. (S)he may test certain large dividend payments but, because the amount of each dividend is usually small, detail checking is minimal. The need for extensive checking is reduced when the entity uses an independent financial institution as its agent for dividend payments. The stock transfer agent often performs this function because it maintains detailed records of shareholders. The arrangement substantially decreases the risks of material misstatement.

When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the

To test the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would

Examine the audited financial statements of the investee company.The equity method recognizes undistributed income arising from an investment in an investee. Under the equity method, investor income is recorded as the investee reports income. Consequently, the audited financial statements of the investee provide the auditor with the undistributed income from the investee.

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?

Credit memos for several items returned by customers had not been recorded.If credit memos for items returned by customers have not been prepared and recorded, the returned items will be reflected in the physical inventory but not in the perpetual records.

The auditor observes the count of marketable securities on December 31. (S)he records the serial number of each security and checks the serial number and number of shares (or principal amount) against company records. Which error or bad practice has the best chance of being detected by this procedure?

The CFO misappropriated and sold securities on April 4. (S)he speculated successfully with the proceeds and replaced the misappropriated securities on December 29.The auditor is most likely to detect a misappropriation and replacement of securities by comparing information for the securities counted with the entity’s records. The records would indicate that the recorded serial numbers differ from those of securities counted by the auditor.

An auditor should vouch corporate stock issuances and treasury stock transactions to the

Minutes of the board of directors.A primary concern of the auditor is that all capital stock transactions are properly authorized. Accordingly, all entries in the capital stock account should be vouched to the minutes of the board of directors’ meetings. The articles of incorporation, by-laws, and minutes of shareholders’ meetings should also be reviewed.

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?

Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.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.

An auditor inspects a client’s investment records to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence concerning relevant financial statement assertions about

Classification and understandability, and valuation and allocation.Assertions about classification and understandability address whether the information is appropriately presented and described and disclosures are clear. For example, U.S. GAAP require that a debt security be reclassified as available for sale if the entity (1) does not have the positive intent and ability to hold it to maturity but (2) does not intend to sell it in the near term. Inspecting the client’s records just prior to and just after year end could help the auditor determine whether investment classifications are appropriate. Assertions about valuation address whether reported amounts conform with U.S. GAAP. Classification affects valuation. For example, held-to-maturity securities are measured at amortized cost, and available-for-sale and trading debt securities are subsequently measured at fair value. Thus, inspecting transfers between categories also helps determine whether the investments are recorded at proper amounts.

During the year under audit, a client issued a substantial amount of bonds to an insurance company (a private placement). Which of the following is the most important step in the auditor’s plan for the audit of bonds payable?

Tracing the cash received from the issue to the accounting records.In a private placement of bonds, one not involving the use of an independent trustee, the auditor is most concerned that the cash received from the issue is accurately recorded. The auditor also is concerned that the cash is adequately safeguarded by the CFO’s department. Failure to employ a trustee substantially increases the risks of material misstatement for all aspects of bond issues.

Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and expenses?

The current year’s payroll expense with the prior year’s payroll expense.Comparing the current year’s expense with that of the prior year’s is an analytical procedure. The objective of analytical procedures is to identify such things as the existence of unusual transactions and events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit planning ramifications (AU-C 520).

An auditor most likely increases substantive tests of payroll when

Overpayments are discovered in performing tests of details.During the application of substantive tests, the auditor may decide to extend the tests when unexpected findings (e.g., overpayments) are made. The purpose is to determine the extent of any fraud.

In connection with the audit of a current issue of bonds payable, the auditor should

Ascertain that the client has obtained the opinion of counsel on the legality of the issue.An audit of noncurrent debt (1) determines that all noncurrent debt has been recorded and constitutes bona fide liabilities; (2) verifies that federal and state laws relevant to financial reporting have been complied with; (3) determines that premium, discount, interest payable, and interest expense are accurately recorded; (4) monitors compliance with debt contracts; and (5) reviews proper presentation and disclosure in the financial statements. The auditor therefore should determine that the client has obtained the opinion of a lawyer on the legality of the bond issue.

The auditor who interviews the plant manager is most likely to rely upon this interview as primary support for an audit conclusion on

The necessity to record a provision for deferred maintenance costs.The auditor typically does not use the responses to inquiries as primary support for an audit conclusion. However, the determination by management that a liability exists should convince the auditor that an entry should be made.

An auditor’s inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should

Evaluate management’s conclusion about the recognition of an impairment loss.The auditor (1) evaluates management’s conclusion about recognition of an impairment loss for a decline in fair value below cost or carrying amount and (2) obtains support for the amount of the recorded adjustment, including compliance with the reporting framework.

In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the purchase

Invoices.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.

As part of the process of observing a client’s physical inventories, an auditor should be alert to

The inclusion of any obsolete or damaged goods.When observing a client’s physical inventories, the auditor always should be alert to the inclusion of any obsolete or damaged goods. The auditor should be alert for empty boxes, empty squares, and inventory defects.

Which of the following is true about the auditors observation of the client's physical inventory?

Which of the following is true about the auditors' observation of the client's physical inventory? The auditors should evaluate the adequacy of the client's counting procedures.

What should be done by the auditor in inventory audit?

9 common inventory audit procedures.

Cutoff analysis. ... .

Physical inventory count. ... .

Analytical procedures. ... .

ABC analysis. ... .

Freight cost analysis. ... .

Finished goods cost analysis. ... .

Overhead analysis. ... .

Reconciling items..

What are the purposes of the auditors observation of the taking of the physical inventory?

What are the purposes of the auditors observation of the taking of the physical inventory? Observing physical inventory is a key step in meeting the required standard of field work. It also gives information and proof that it was done correctly and numbers are accurate.

How do you audit physical inventory?

Physical inventory count. This is the most common way to perform an inventory audit. It involves physically counting every item in your inventory and comparing the numbers against the numbers in your system.