Here are the answers to todays quiz: Question 1: The correct answer is A. A. Correct! Gaining assurance about the valuation of inventory requires, among other things, determining that inventories have been properly priced at the lower of cost or market. The determination of cost is obtained by reviewing current production costs, which might include testing the entitys computation of standard overhead rates. B. Incorrect… Obtaining confirmation of inventories pledged under loan agreements provides evidence supporting the presentation and disclosure assertion, not the valuation assertion. C. Incorrect… Reviewing shipping and receiving cut-off procedures for inventories would provide evidence supporting the completeness assertion, not the valuation assertion. D. Incorrect… Tracing test counts to the entitys inventory listing provides evidence for the completeness assertion, not the valuation assertion. Question 2: The correct answer is B. A. Incorrect… Although observation of inventory would be possible, in this case, it would be more efficient to obtain direct confirmation from the custodian of the public warehouse. B. Correct! When inventory is held in a public warehouse, the auditor would ordinarily obtain direct confirmation from the custodian. C. Incorrect… Calculation would not be an effective audit procedure to establish the existence of the inventory. D. Incorrect… Inspection of underlying documents would not be as effective as direct confirmation from the custodian of the public warehouse. Question 3: The correct answer is B. A. Incorrect… It is not necessary to have complete recounts by independent teams. A physical inventory observation performed at interim must simply be rolled forward (by adding purchases and subtracting sales) to year end, as the year-end balance is the balance that is reported on. B. Correct! If inventory is to be observed at an interim date, perpetual inventory records must be maintained. Such records will provide the book balances against which the physical count can be compared. C. Incorrect… The integration of unit cost records with production accounting records does not impact the auditors decision as to whether or not to observe the physical inventory-taking at an interim date. D. Incorrect… The auditors decision as to whether or not to observe the physical inventory-taking at an interim date does not depend on low levels of inventory. Question 4: The correct answer is C. A. Incorrect… Tracing inventory counts (via inventory tags noted during the auditors observation) to the records (inventory listing schedule) is a test for completeness of the listing, rather than a test of the validity of the items listed. B. Incorrect… Tracing inventory tags noted during the auditors observation to items listed in receiving reports and vendors invoices is a test for completeness of the inventory listing, rather than a test of the validity of the items listed. C. Correct! Tracing items listed in the records (inventory listing schedule) to inventory tags and the auditors recorded count sheets is correctly a test of the validity of the listing. By tracing from the records to the tags and count sheets, the auditor is verifying that the items on the listing existed. D. Incorrect… Tracing items listed in receiving reports and vendors invoices to the inventory listing schedule is a cut-off test for completeness of the listing. Question 5: The correct answer is D. A. Incorrect… Tracing from the detail to the records verifies that the records are complete. B. Incorrect… Rights and obligations would be verified by inquiring about consignment inventory or reviewing loan collateral requirements. C. Incorrect… Valuation or allocation would be verified by testing the accuracy of inventory extensions or completing price tests of inventory. D. Correct! Presentation and disclosure involves assertions about occurrence and rights and obligations, completeness, classification and understandability, and accuracy and valuation related to the financial statements and notes to the financial statements. Tracing from the detail into the records verifies that the records are complete and thus addresses completeness, not presentation and disclosure.
Posted on: Fri, 17 Jan 2014 15:57:41 +0000
Trending Topics
© 2015