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Problem

1. To ascertain whether inventories included in the statement of financial position physically exist, a CPA
will ordinarily:
a. Obtain confirmation of pledged inventories.
b. Observe physical inventory counts.
c. Test client’s shipping cutoff procedures.
d. Perform an analytic review of the relationship of the inventory balance to recent sales.
2. When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical
inventory counting unless impracticable. Where attendance is impracticable, due to factors such
as the nature and location of the inventory, the auditor should
a. Take or observe some physical counts on an alternative date and, when necessary, perform
tests of intervening transactions.
b. Consider whether alternative procedures provide sufficient appropriate audit evidence of
existence and condition to conclude that the auditor need not make reference to a scope
limitation.
c. Issue qualified or disclaimer of opinion.
d. Issue qualified or adverse opinion.
3. Which of the following is not one of the independent auditor's objectives regarding the audit of
inventories?
a. Verifying that the client has used proper inventory pricing.
b. Verifying that inventory counted is owned by the client.
c. Verifying that all inventory owned by the client is on hand at the time of the count.
d. Ascertaining the physical quantities of inventory on hand.
4. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of
control risk is high an auditor will probably
a. Increase the extent of tests of controls relevant to the inventory cycle.
b. Request the client to schedule the physical inventory count at the end of the year.
c. Insist that the client perform physical counts of inventory items several times during the year.
d. Apply gross profit tests to ascertain the reasonableness of the physical counts.
5. An auditor most likely to inspect loan agreements under which an entity’s inventories are pledged to
support management’s financial statement assertion of
a. Existence or occurrence
b. Presentation and disclosure
c. Valuation or allocation.
d. Completeness
6. When auditing inventories of raw materials, purchased parts, and/or merchandise inventory, the
auditor's most effective means for evaluating the valuation assertion is to
a. Compare purchases with prior year and with industry averages and account for significant
fluctuations.
b. Trace quantities from tags or count sheets to final inventory listings.
c. Examine recent invoices from vendors, along with freight bills and compare with client's unit
costs, as adjusted for freight and discount.
d. Scan inventory listings for large extended amounts, and trace related quantities to auditor's copy
of the inventory tag or listing.
 7. 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 procedures most likely obtained evidence
concerning management’s assertion of
a. Completeness
b. Valuation
c. Rights and obligations
d. Existence or occurrence
8. The accuracy of perpetual inventory records may be established in part by comparing perpetual inventory
records with
a. Purchase requisitions
b. Receiving reports
c. Purchase orders
d. Vendor payments.
9. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain
evidence that
a. No goods held on consignment for customers are included in the inventory balance.
b. No goods observed during the physical count are pledged or sold.
c. All goods owned at year end are included in the inventory balance
d. All goods purchased before year end are received before the physical inventory count.
10. Which of the following items should not be included in a physical inventory?
a. Materials in transit from vendors.
b. Goods in a private warehouse.
c. Goods received for repairs under warranty.
d. Consignment to an agent.
AT - INVTY
Answer Section

PROBLEM

1. B
2. B
3. C
4. B
5. B
6. C
7. A
8. B
9. C
10. C