CPA Auditing and Attestation (AUD) : Inventory Cycle

Study concepts, example questions & explanations for CPA Auditing and Attestation (AUD)

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Example Questions

Example Question #1 : Performing Further Procedures

A physical inventory is taken on a “cut-off date”. This procedure is necessary to ensure.

Possible Answers:

completeness

authorization

reasonableness

ownership

Correct answer:

completeness

Explanation:

Taking a physical inventory at a cut-off date ensures that all of the inventory that is appropriate to be reported will be included in the financial statements.  The auditor sets the cut-off date and traces the amount to the accounting records to ensure that the records include all the inventory.

Example Question #2 : Performing Further Procedures

A ___________ inventory system is best used for high dollar items

Possible Answers:

concurrent

perpetual

periodic

recurring

Correct answer:

perpetual

Explanation:

A perpetual inventory provides a real time record of inventory values.  Items purchased are recorded to the inventory account at the time of purchase.  High dollar inventory items are particularly important to properly value the inventory account.

Example Question #3 : Performing Further Procedures

Inquiries of warehouse personnel concerning possible obselete or slow moving inventory items provide assurance about management's assertion of:

Possible Answers:

Presentation

Valuation

Completeness

Existence

Correct answer:

Valuation

Explanation:

Inquiries of warehouse personnel concerning possible obselete or slow moving inventory items provide assurance about management's assertion of valuation (has the inventory been properly valued and recorded.)

Example Question #4 : Performing Further Procedures

The warehouse manager is responsible for ensuring that high-end merchandise is in the locked section of the building. This is an example of

Possible Answers:

An authorization procedure

A reconciliation procedure

A review procedure

A physical control

Correct answer:

A physical control

Explanation:

Physical control provides a physical barrier to the asset.  They consist of policies such as insurance, or kinetic barriers such as locks, secure areas, etc.

Example Question #2 : Inventory Cycle

An auditor generally tests the segregation of duties related to inventory by:

Possible Answers:

Analytical procedures and invoice recomputation

Personal inquiry and observation

Test counts and cutoff procedures

Document inspection and reconciliation

Correct answer:

Personal inquiry and observation

Explanation:

The independent auditor's direct personal knowledge, based on personal inquiry and observation, are auditing procedures commonly used to test the segregation of duties.

Example Question #6 : Performing Further Procedures

Of the following duties included in the inventory cycle, which should be segregated to maintain proper internal controls?

Possible Answers:

Warehousing

All of the answer choices are correct

Purchasing

Receiving

Correct answer:

All of the answer choices are correct

Explanation:

All of these duties, in addition to shipping, would need to be segregated in order to maintain proper internal controls.

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