The Conversion Cycle 17.

A company’s value stream includes all steps in a

process, both essential and non-essential, for which the
1. The philosophy of customer satisfaction permeates customer is willing to pay.
the world-class firm.
18. Lean manufacturing evolved from the Toyota
2. Reports generated by the cost accounting system Production System (TPS), which is based on the justin-
include performance reports and budget reports. time (JIT) production model.
3. The cost accounting system authorizes the release of 19. The two subsystems of a traditional conversion cycle
raw materials into production. are the production system and the delivery system.
4. Batch processing creates a homogeneous product 20. Manufacturing resources planning (MRP II) has
through a continuous series of standard procedures. evolved into enterprise resource planning (ERP).
5. The bill of materials specifies the types and quantities MULTIPLE CHOICE
of the raw materials and subassemblies used in
producing a single unit of finished product. 1. Which statement is true?
6. A purchase requisition authorizes the storekeeper to a. World-class companies must maintain strategic agility
release materials to individuals or work centers in the and be able to turn on a dime.
production process. b. World-class companies motivate and treat employees
like appreciating assets.
7. Cement and petrochemicals are produced by the c. Manufacturing firms that achieve world-class status
batch manufacturing method. do so by following a philosophy of lean manufacturing
T 8. The objective of the Economic Order Quantity d. All the above are true
model is to reduce total inventory costs by 2. Which function is not a part of the batch production
minimizing carrying costs and ordering costs. process?

9. The work-in-process file is the subsidiary ledger for a. Plan and control production
the work-in-process control account. b. Prepare purchase orders
c. Maintain inventory control
10. Move tickets authorize the storekeeper to release d. Perform cost accounting
materials to work centers.
3. The purpose of the cost accounting system is to
11. Typically the only allocated cost in the value stream
is a charge per square foot for the value stream a. produce information for inventory valuation
production facility. b. authorize release of raw materials
c. direct the movement of work-in-process
12. Computer Integrated Manufacturing focuses on d. determine material requirements
reducing the complexity of the physical manufacturing
layout of the shop floor. 4. Which process creates a homogeneous product
through a continuous series of standard procedures?
13. The only objective of the Just-In-Time philosophy is
to reduce inventory levels. a. batch process
b. make-to-order process
14. Accounting in a world-class manufacturing c. continuous process
environment emphasizes standard cost and variance d. none of the above
analysis.
5. An example of a continuous process is the production
15. ABC assigns cost to based on their use of acti cost of
objects vities.
a. wedding invitations
16. The complexities of ABC have caused many firms to b. milk products
abandon this method in favor of a simpler accounting c. jet aircraft
model called value stream accounting. d. all of the above
6. All of the following are characteristics of batch c. prepares a materials requisition for each production
processing except batch
d. records the completed production as an increase to
a. each item in the batch is similar finished goods inventory
b. batches are produced in accordance with detailed
customer specifications 12. The storekeeper releases raw materials based on
c. batches are produced to replenish depleted inventory the
levels
a. production schedule
d. setting up and retooling is required for different
batches b. materials requisition
c. work order
7. When one of the following statements is true? d. bill of materials
a. ERP evolved directly from MRP. 13. Which of the following is not an assumption of the
b. ERP evolved into MRP and MRP evolved into MRP II Economic Order Quantity model?
c. MRP II evolved from MRP and MRP II evolved into
a. demand for the product is known with certainty
ERP
d. None of the above is true. b. total cost per year of placing orders is fixed
c. lead time is known and is constant
8. The production schedule is d. there are no quantity discounts
a. the expected demand for the firm’s finished goods for 14. Firms hold safety stock to compensate for
a given year
b. the formal plan and authority to begin production a. mathematical weaknesses of the Economic Order
Quantity model
c. a description of the type and quantity of raw
materials and subassemblies used to produce a single b. variations in lead time or daily demand
c. fluctuations in carrying costs
unit of finished product
d. the sequence of operations during manufacturing d. uncertainty in the estimation of ordering costs
15. What is the economic order quantity if the annual
9. A move ticket
demand is 10,000 units, set up cost of placing each
a. is the formal plan and authority to begin production order is $3 and the holding cost per unit per year is $2?
b. specifies the materials and production required for
each batch a. 174
b. 123
c. records the work done in each work center
d. authorizes the storekeeper to release materials to c. 245
d. none of the above
work centers
10. The internal control significance of the excess 16. If the daily demand is 40 units and the lead time is
12 days, the reorder point is
materials requisition is that it
a. indicates the amount of material released to work a. 52 units
b. 48 units
centers
b. identifies materials used in production that exceed c. 480 units
d. none of the above
the standard amount allowed
c. indicates the standard quantities required for 17. Which statement is not correct?
production
d. documents the return to raw materials inventory of a. general ledger creates a new cost record upon receipt
unused production materials of a work order from production planning and control
b. cost accounting updates the cost record with data
11. Inventory control performs all of the following tasks gathered from the materials requisition
except it c. general ledger posts summary information about the
a. provides production planning and control with the manufacturing process based on a journal voucher
prepared by cost accounting
inventory status report of finished goods
b. updates the raw material inventory records d. cost accounting computes variances and applies
overhead to individual cost records
 23. Process simplification focuses on
a. using Computer Numerical Controlled machines
which stand alone within a traditional setting
18. Which of the following is not a problem associated b. completely automating the manufacturing
with standard cost accounting? environment
a. Standard costing motivates management to produce c. reducing the complexity of the physical
large batches of products and build inventory. manufacturing layout of the shop floor
b. Applying standard costing leads to product cost d. organizing the process into functional departments
distortions in a lean environment.
c. Standard cost data are associated with excessive time 24. A manufacturing process that is organized into
lags that reduce its usefulness. group technology cells utilizing no human labor is called
d. The financial orientation of standard costing may
promote bad decisions. a. islands of technology
e. All of the above are problems with standard costing. b. process simplification
c. Computer Integrated Manufacturing
19. Computer integrated manufacturing groups all of d. traditional manufacturing
the following technologies except
a. robotics 25. An example of automation of manufacturing design
b. materials requirements planning is
c. automated storage and retrieval systems a. Computer Aided Engineering
d. computer aided design b. Automated Storage and Retrieval Systems
20. Which of the following would not be included as a c. Computer Numerical Control
value stream cost? d. robotics

a. Labor costs of employees who simply transport the 26. An example of automation of manufacturing
product from cell to cell. planning is
b. Labor costs of employees who design the product.
c. A charge per square foot for the value stream a. Computer Aided Engineering
production facility including cost of rent and building b. Automated Storage and Retrieval Systems
maintenance. c. Materials Requirements Planning
d. All of the above are value stream costs d. Computer Numerical Control

21. Which situation violates the segregation of functions

control procedure? 27. Which of the following is not true?

a. production planning and control is located apart from a. The complexities of ABC have caused many firms to
the work centers pursue value stream accounting.
b. inventory control maintains custody of inventory b. Value stream accounting captures costs related to
items value added activities within a
c. cost accounting has custody of and makes entries on specified department or activity.
cost records c. An essential aspect in implementing value stream
d. work centers record direct labor on job tickets accounting is defining the product family
d. Value stream accounting makes no distinction
22. All of the following are internal control procedures between direct costs and indirect costs
that should be in place in the conversion cycle except
a. calculation and analysis of direct material and direct
labor variances
b. retention of excess materials by work centers
28. Characteristics
c. physical count of inventory items on hand
d. limited access to raw material and finished goods
inventories
of lean
manufacturing d. proceeds from
include all of the the sale of scrap
following except 30. A flexible
a. push manufacturing
manufacturing system
b. zero defects a. creates
c. reduced setup bottlenecks in the
time and small lot process
sizes b. leads to an “us”
d. reliable vendors versus “them”
29. The cost of attitude among
poor quality workers
includes all of the c. shortens the
following except physical distance
a. cost of rework between activities
b. warranty claims d. is organized
c. scheduling along functional
delays lines
28. Characteristics of lean manufacturing include all of
the following except
 b. leads to an “us” versus “them” attitude among

a. push
workers
c. shortens the physical distance between activities
d. is organized along functional lines

manufacturing 1. Computer integrated manufacturing includes all of

the following technologies except

b. zero defects a. materials requirements planning

b. computer-aided design
c. robotics

c. reduced setup d. automated storage and retrieval systems

2. The cost of poor quality includes all of the

time and small lot following except

a. warranty claims
b. cost of rework
sizes c. proceeds from the sale of scrap
d. scheduling delays

d. reliable vendors 3. The production schedule

a. the sequence of operations during manufacturing
is

a. push manufacturing b. the expected demand for the firm's finished goods for

b. zero defects
a given year
c. the formal plan and authority to begin production
d. a description of the type and quantity of raw

c. reduced setup materials and subassemblies used to produce a single

unit of finished product
d. batches are produced in accordance with detailed

time and small lot customer specifications

4. All of the following are characteristics of batch

sizes processing except

a. batches are produced to replenish depleted inventory
b. zero defects levels
c. reduced setup time and small lot sizes b. setting up and retooling is required for different
d. reliable vendors batches
c. each item in the batch is similar
d. batches are produced in accordance with detailed
customer specifications

29. The cost of poor quality includes all of the following 5. Inventory control performs all of the following
except tasks except it
a. updates the raw material inventory records
a. cost of rework b. prepares a materials requisition for each production
b. warranty claims batch
c. scheduling delays c. provides production planning and control with the
d. proceeds from the sale of scrap inventory status report of finished goods
d. records the completed production as an increase to
finished goods inventory
30. A flexible manufacturing system
6. Which of the following is not a principle of lean
a. creates bottlenecks in the process manufacturing?
a. All activities that do not add value and maximize the 12. Which of the following is not a principle of lean
use of scarce resources must be eliminated. manufacturing?
b. A goal is the achievement of a high inventory a. A lean manufacturing firm must achieve high
turnover rate. inventory turnover rates.
c. A lean manufacturing firm must have established and b. A lean manufacturing firm must have established and
cooperative relationships with vendors. cooperative relationships with vendors.
d. Products are pushed from the production end to the c. All activities that do not add value and maximize the
customer. use of scarce resources must be eliminated.
d. All of the above are principles of lean manufacturing.
7. Which of the following is not an assumption of the e. None of the above are principles of lean
economic order quantity model? manufacturing.
a. total cost per year of placing orders is fixed
b. there are no quantity discounts 13. Which document triggers the cost accounting
c. demand for the product is known with certainty process for a given production run?
d. lead time is known and is constant a. route sheet
b. move ticket
8. Lead time times daily demand is c. production schedule
a. the reorder point d. materials requisition
b. the economic order quantity e. work order
c. total inventory
d. safety stock 14. Which of the following is not a process in the batch
processing system?
9. All of the following are internal control procedures a. maintain inventory control
that should be in place in the conversion cycle except b. purchase of raw materials
a. physical count of inventory items on hand c. perform production operations
b. limited access to raw material and finished goods d. perform cost accounting
inventories e. plan and control production
c. calculation and analysis of direct material and direct
labor variances 15. Which statement describes the evolution of
d. retention of excess materials by work centers enterprise systems?
a. ERP evolved into MRP and MRP evolved into MRP II
10. Which situation violates the segregation of functions b. ERP evolved directly into MRP
control procedure? c. MRP evolved directly into ERP
a. production planning and control is located apart from d. MRP II evolved from MRP and MRP II evolved into
the work centers ERP
b. work centers record direct labor on job tickets
c. inventory control maintains custody of inventory 16. Which of the following is not a feature of a world-
items class company?
d. cost accounting has custody of and makes entries on a. ability to profitably meet customers' needs
cost records b. ability to maintain strategic agility
c. high employee turnover
11. The fundamental EOQ model d. all of the above are features that characterize a
a. is stochastic in nature world-class company
b. is best used in conjunction with a periodic inventory
system

d.
c. focuses on the trade-off between production costs
and carrying costs
d. provides for fluctuating lead times during reorder
cycles
e. is relatively insensitive to errors in demand,
procurement costs, and carrying costs
Value stream push
accounting manufacturing
makes no b.
distinction zero defects
between direct c.
costs and indirect reduced setup
costs. time and small
lot sizes
ANS: B PTS: 1 d.
28. reliable vendors
Characteristics
1. The objective of the Economic Order Quantity model
is to reduce total inventory costs by minimizing carry
costs and ordering costs.

of lean
2. Move tickets authorize the storekeeper to release
materials to work centers.
3. Computer Integrated Manufacturing focuses on

manufacturing reducing the complexity of the physical

manufacturing layout of the shop floor.
4. The two subsystems of a traditional conversion cycle

include all of the are the production system and the delivery system.
5. All of the following are characteristics of batch
processing except:

following except a. each item in the batch is similar

b. batches are produced in accordance with detailed

a. customer specifications
c. batches are produced to replenish depleted
inventory levels
d. setting up and retooling is required for different
batches
6. The productions schedule is: 12. An example of automation of manufacturing design
a. the expected demand for the firm's finished goods is:
for a given year a. Computer Aided Engineering
b. the formal plan and authority to begin production b. Automated Storage and Retrieval Systems
c. a description of the type and quantity of raw c. Computer Numerical Control
materials and subassemblies used to produce a d. robotics
single unit of finished product.
d. the sequence of operations during manufacturing 13. An example of automation of manufacturing
planning is:
7. A move ticket a. Computer Aided Engineering
a. is the formal plan and authority to begin b. Automated Storage and Retrieval Systems
production c. Materials Requirements Planning
b. specifies the materials and production required for d. Computer Numerical control
each batch
c. records the work done in each work center 14. Characteristics of Just-In-Time manufacturing include
d. authorizes the storekeeper to release materials to all of the following except:
work centers a. push manufacturing
b. zero defects
8. Inventory control performs all of the following tasks c. reduced setup time and small lot sizes
except it: d. reliable vendors
a. provides production planning and control with the
inventory status report of finished goods 15. The cost of poor quality includes all of the following
b. updates the raw material inventory records except:
c. prepares a materials requisition for each a. cost of rework
production batch b. warranty claims
d. records the completed production as an increase c. scheduling delays
to finished goods inventory d. proceeds from the sale of scrap

9. Which of the following is not an assumption of the 16. Computer integrated manufacturing groups all of the
Economic Order Quantity Model? following technologies except:
a. demand for the product is known with certainty a. robotics
b. total cost per year of placing orders is fixed b. materials requirements planning
c. lead time is known and is constant c. automated storage and retrieval systems
d. there are no quantity discounts d. computer aided design

10. If the daily demand is 40 units and the lead time is 12 17. Which situation violates the segregation of functions
days, the reorder point is: control procedures?
a. 52 units a. production planning and control is located apart
b. 48 units from the work centers
c. 480 units b. inventory control maintains custody of inventory
d. none of the above items
c. cost accounting has custody of and makes entries
11. A manufacturing process that is organized into group on cost records
technology cells utilizing no human labor is called: d. work centers record direct labor on job tickets
a. islands of technology
b. process simplification 18. Firms implement a Just-In-Time inventory approach
c. Computer Integrated Manufacturing to:
d. traditional manufacturing a. reduce investment in inventories
b. determine the optimum inventory level using the
 EOQ model c. whether recorded inventory was properly counted by
c. camouflage production problems the client.
d. ensure overproduction of inventory d. whether client inventory instruction had properly
been followed.
ARENS
7.In most manufacturing companies, the inventory and
1. Receipt of ordered materials by the receiving
warehousing cycle begins with the:
department will generate the completion of a form
a. receipt of a customer’s order.
called the: b. completion of production of a customer’s order.
a. bill of lading. c. initiation of production of a customer’s order.
b. receiving report. d. acquisition of raw materials for production of an
c. materials requisition. order.
d. inventory acquisition summary.
8.The audit tests to verify that the client is using an
2.The audit of ______ is often the most difficult and inventory method which is generally accepted and to
complex part of an audit. verify that physical counts were correctly summarized
a. property, plant and equipment are performed during the audit of the:
b. cash a. acquisition and payments cycle.
c. inventory b. payroll and personnel cycle.
d. prepaid insurance c. inventory and warehousing cycle.
d. sales and collection cycle.
3.Inventory is a complex area to audit for all but which
of the following reasons? 9. Which of the following would be an appropriate
a. Inventory is often in different locations. initiation of a purchase requisition?
b. There are several acceptable valuation methods and One initiated based on a periodic count
some entities use different methods of raw materials.
for different types of inventory. One initiated by stockroom personnel as
c. Inventory is often the largest account in working raw materials are needed.
capital. a. Yes Yes
d. Inventory valuation includes few estimates. b. No No
c. Yes No
4.When labor is a significant part of inventory, verifying d. No Yes
the proper accounting of these costs
should be tested in the: 10. Almost all companies need physical controls over
a. inventory and warehousing cycle. their assets to prevent loss. Which of the following is
b. payroll and personnel cycle. not an example of such a control?
c. acquisitions and payments cycle. a. Perpetual inventory master files.
d. cash cycle. b. Segregated, limited-access storage areas.
c. Custody of assets assigned to specific responsible
5.For retail and wholesale businesses, the most individuals.
important inventory is: d. Approved prenumbered documents for authorizing
a. merchandise available for sale. movement of inventory.
b. work-in-process.
c. raw materials. 11. Which department within a manufacturing company
d. inventory held on consignment. is often responsible for the review of production and
scrap reports?
6.The audit procedure “observe the client taking a a. Purchasing.
physical inventory count and test the count” is sufficient b. Accounts Payable.
to determine all of the following except: c. Accounting.
a. whether recorded inventory actually exists. d. Production.
b. whether recorded inventory was properly valued by
the client. 12. Handling the receipt of ordered goods is a part of
the ________ cycle.
a. purchasing c. purchases.
b. acquisition and payment d. purchase discounts.
c. inventory
d. inventory and warehousing 19. Which of the following is not a function within the
inventory and warehousing cycle?
13. _________ accumulate costs by individual jobs as a. Process the goods.
material is issued into production and labor costs are b. Store raw materials.
incurred. c. Ship finished goods.
a. Just-in-time production systems d. Process invoices for shipped goods.
b. Job order cost systems
c. Process cost systems 20. If an auditor were concerned with obtaining
d. Manufacturing systems evidence about the appropriateness of the value of
inventory, which of the following tests would be most
14. There must be a periodic physical count by the client appropriate?
of the inventory items on hand: a. Compilation tests.
a. only if the client uses the LIFO method. b. Price tests.
b. only if the client uses a lower-of-cost-or-market c. Confirmation of inventory held by outside parties.
method. d. Physical examination of the inventory.
c. regardless of the client’s inventory valuation method.
d. only if the client uses either the LIFO or FIFO method. 21. Which of the following is the best audit procedure
for the discovery of damaged merchandise in a client’s
15. With regard to the physical count of inventory, ending inventory?
necessary control procedures include: a. Compare the physical quantities of slow-moving
a. proper instructions for the physical count. items with corresponding quantities of
b. independent third-party verification of the counts. the prior year.
c. third-party reconciliations of the physical counts with b. Observe merchandise and raw materials during the
perpetual inventory master files. client's physical inventory count.
d. counting the inventory only on the year-end date. c. Review the management’s inventory representation
letter for accuracy.
16. If the auditor concludes that physical controls over d. Test overall fairness of inventory values by comparing
inventory are so inadequate that the inventory will be the company’s turnover ratio with
difficult to count, the auditor should ordinarily: the industry average.
a. withdraw from the engagement.
b. issue a qualified audit report. 22. Which of the following controls would be
c. conduct expanded observation tests of physical appropriate regarding the release of materials from a
inventory. stockroom?
d. hire a specialist to assist the auditor. a. Production employees request materials be delivered
to their work areas as they need them.
17. From which of the following evidence-gathering b. Stockroom employees deliver materials to work areas
audit procedures would an auditor obtain most throughout the day to maintain acceptable levels of
assurance concerning the existence of inventories? safety stock – no written records are maintained.
a. Observation of physical inventory counts. c. Production employees submit approved requisition
b. Written inventory representations from forms to the stockroom for materials needed.
management. d. Production employer in need of materials should
c. Confirmation of inventories in a public warehouse. personally pick up needed materials from the
d. Auditor’s recomputation of inventory extensions. stockroom.

18. Johnson Co.’s physical count of inventories was 23. Who should maintain the perpetual inventory
lower than the inventory quantities shown in its master files?
perpetual records. This situation could be the result of a. Production personnel.
the failure to record: b. Inventory storeroom personnel.
a. sales. c. Inventory receiving personnel.
b. sales returns. d. Accounting department personnel.
 a. Recorded transfers occurred.
24. The inventory and warehousing cycle can be b. Transfers were properly transported.
thought of as having two separate but closely related c. Transfers were properly planned.
systems, one involving the actual physical flow of goods, d. Transfers represent efficient movement of assets.
and the other the:
a. related costs. 30. When may auditors observe the physical inventory
b. storage of the goods. count?
c. internal control over those goods. At an interim date At year-end
d. prevention of waste, obsolescence, and theft. a. Yes Yes
b. No No
25. In any company involved in manufacturing, an c. Yes No
adequate cost accounting internal control system is d. No Yes
necessary to indicate the relative profitability of the
various products for management planning and control 31. Which of the following is not an aspect of concern
and to: when auditing the cost accounting system?
a. determine variances from standards. a. Unit cost records.
b. determine variances from budgets. b. Physical controls over inventory.
c. value inventories for financial statement purposes. c. Documents and records for transferring inventory.
d. value inventories for audit verification. d. Safeguarding the raw materials from point of receipt
to the storeroom.
26. Master files, worksheets, and reports that
accumulate material, labor, and overhead as the costs 32. The auditor’s tests of the adequacy of the physical
are incurred are: controls over raw materials, work-in-process,
a. accounting systems. and finished goods must be restricted to:
b. storeroom documents. a. observation and inquiry.
c. cost accounting records. b. documentation and observation.
d. finished goods inventory records. c. documentation and confirmation.
d. documentation and inquiry.
27. The main difference between job order and process
costing systems is that: 33. It is frequently possible to test the physical
a. one accumulates costs by materials issued and the inventory prior to the balance sheet date when:
other by labor incurred. a. there are accurate perpetual inventory master files.
b. one accumulates costs by individual jobs and the b. year-end sales are small.
other by particular processes. c. the internal control system is no better at year-end
c. one emphasizes costs accumulated in completed than at an earlier point in time.
products and the other emphasizes costs associated d. the client counts inventory at interim dates.
with work-in-process.
d. one emphasizes costs adding value to the product 34. Tests of the perpetual inventory master files for the
and the other emphasizes costs incurred because of purpose of reducing the tests of physical inventory or
waste, scrap, and obsolescence. changing their timing are done through the use of:
a. inquiry.
28. A well-designed computerized system of perpetual b. observation.
inventory master files includes information about the: c. confirmation.
a. units of inventory purchased, sold, and on hand. d. documentation.
b. unit costs of inventory purchased, sold, and on hand.
c. units of raw materials, work-in-process, and finished 35. A major difficulty in the verification of inventory cost
goods. records is determining reasonableness of:
d. units and unit costs of inventory purchased, sold, and a. direct labor’s hourly rate.
on hand. b. raw materials per unit cost.
c. cost allocations.
29. Which of the following is a significant audit concern d. number of direct labor hours applied.
related to the transfer of inventory from one location to
another?
36. When auditing the inventory and warehousing cycle, d. from the date of the count to the end of the audit
the use of analytical procedures is: field work.
a. not important for this cycle.
b. less important than for any other cycle. 41. When there are no perpetual inventory files and
c. more important than for any other cycle. inventory is material:
d. as important as their use in any other cycle. a. an audit cannot be performed, so the auditor must
issue a disclaimer.
37. Which one of the following analytical procedures b. a physical inventory should be taken by the client
would be most helpful in alerting the auditor to the near year-end.
possibility of obsolete inventory? c. the auditor will have to perform the inventory count
a. Compare gross margin percentage with previous and determine valuation.
years’. d. the auditor need not observe inventory counts but
b. Compare unit costs of inventory with previous years’. must do test counts.
c. Compare inventory turnover ratio with previous
years’. 42. Auditor tests of physical controls over raw materials,
d. Compare current year manufacturing costs with work-in-process, and finished goods are performed by:
previous years’. Examination Observation Inquiry
a. Yes No Yes
38. Which of the following statements is correct b. No Yes No
regarding the auditor’s responsibility with respect to the c. Yes Yes No
year-end inventory procedures of an audit client? d. No No Yes
 The auditor is responsible for reconciling the
physical count with the perpetual inventory 43. The most important part of the observation of
matter files. inventory is to determine whether:
 The auditor is responsible for taking and a. all counts are accurate.
compiling the inventory. b. the inventory-takers are qualified.
 The auditor is responsible for observing the c. obsolete inventory has been identified.
physical counting of inventory. d. the physical count is being taken in accordance with
a. Yes No No the client’s instructions.
b. No No Yes
c. Yes No Yes 44. A useful starting point for becoming familiar with
d. No Yes No the client’s inventory is for the auditor to:
a. read the AICPA’s Industry Audit Guide.
b. review accounting theory covering special problems,
39. McKesson & Robbins Company is a well-known audit such as gas and oil accounting, or
case involving auditor responsibility. What occurred at lease-purchase agreements.
the McKesson & Robbins Company to change the way in c. read the client’s Accounting Manual.
which auditors audit inventory? d. tour the client’s facility.
a. The company recorded nonexistent inventory.
b. The auditor did not perform any audit tests of the 45. A common inventory observation procedure is to
inventory. select a random sample of tag numbers and identify the
c. The auditor and company colluded to overstate tag with that number attached to the actual inventory
inventory balances. item. The audit objective being achieved by this
d. The company counted inventory three months prior procedure is:
to year-end. a. inventory as recorded on tags actually exists
(existence).
40. When a physical count of inventory is performed at b. existing inventory is counted and tagged
an interim date, the auditor observes it at that time and (completeness).
tests the perpetual records for transactions: c. inventory is counted accurately (accuracy).
a. throughout the year. d. inventory is classified correctly (classification).
b. which are a representative sample of the period
under audit.
c. from the date of the count to year-end.
46. If a client intends to count inventory at an interim 52. After accounting for a sequence of inventory tags,
date, the auditor should expect there to be all of the an auditor traces a sample of tags to the physical
following except: inventory listing to obtain evidence that all items:
a. controls over the preparation and maintenance of a. included in the listing have been counted.
perpetual inventory records. b. represented by inventory tags actually exist.
b. competent personnel assigned to count the c. represented by inventory tags are included in the
inventory. listing.
c. third-party inventory counting specialists. d. included in the listing are represented by inventory
d. an adequately designed plan to count the inventory. tags.

47. A common inventory observation procedure is to be 53. Auditors test the quantity of materials charged to
alert for items that are damaged, rust- or dust-covered, work-in-process by tracing these quantities to:
or located in inappropriate places. The balance-related a. cost ledgers.
audit objective being achieved by this procedure is: b. perpetual inventory records.
a. classification. c. receiving reports.
b. cutoff. d. material requisitions.
c. realizable value.
d. rights. 54. Which of the following situations would most likely
require special audit planning?
48. The test of details of balance procedure which a. Inventory consists of precious stones.
requires the auditor to account for unused inventory b. Some items of factory and office equipment do not
tag numbers to make sure none have been deleted is bear identification numbers.
associated with the audit objective of: c. Depreciation methods used on the client’s tax return
a. accuracy. differ from those used on the books.
b. existence. d. Assets costing less than $500 are expensed even
c. detail tie-in. though their expected life exceeds one year.
d. completeness.
55. For several years, a client’s physical inventory count
49. The test of details of balance procedure which has been lower than what was shown on the books at
requires the auditor to perform tests of lower-ofcost-or- the time of the count so that downward adjustments to
market, selling price, and obsolescence is an attempt to the inventory account were required. Contributing to
satisfy the objective of: the inventory problem could be weaknesses in internal
a. existence. control that led to the failure to adjust the accounting
b. completeness. records for some:
c. accuracy. a. purchases returned to vendors.
d. realizable value. b. sales returns received.
50. Most of the audit testing of the storage of finished c. sales discounts allowed.
goods as well as the shipment of merchandise takes d. cash purchases.
place during the testing of the:
a. sales and collection cycle. 56. The physical counting of inventory may be
b. payroll and personnel cycle. performed at which of the following times?
c. acquisitions and payments cycle. Interim dates On a cycle basis during the year
d. inventory and warehousing cycle. a. Yes Yes
b. No No
51. The auditor’s main concerns in verifying transfers of c. Yes No
inventory do not include whether: d. No Yes
a. recorded transfers exist.
b. transfers represent appropriate uses of company 57. When an auditor observes that personnel who are
resources. responsible for physically counting inventory are not
c. all actual transfers are recorded. following the inventory instructions, the auditor should:
d. the details of the transfer are accurately recorded. a. contact a client’s supervisor in an attempt to correct
the problem.
b. modify the client’s physical inventory instructions.
c. not discuss the problem with client’s supervisor in a. sales.
order to maintain independence. b. sales discounts.
d. assign audit staff to the inventory count. c. purchases.
d. purchase discounts.
58. The auditor’s objective during an observation of a
client’s physical inventory count is to: 63. Which of the following is not a generally recognized
a. discover whether a client has counted a particular inventory method?
inventory item or group of items. a. FIFO
b. obtain direct knowledge that the inventory exists and b. LOFO
has been properly counted. c. LIFO
c. provide an appraisal of the quality of the merchandise d. Specific identification
on hand on the day of the physical
count. 64. Which of the following control procedures would
d. allow the auditor to supervise the conduct of the most likely be used to maintain accurate perpetual
count so as to obtain assurance that inventory records?
inventory quantities are reasonably accurate. a. Independent storeroom count of goods received.
b. Periodic independent comparison of records with
59. The audit of year-end physical inventories should goods on hand.
include steps to verify that the client’s purchases and c. Periodic independent reconciliation of control and
sales cutoffs were adequate. The audit steps should be subsidiary records.
designed to detect whether merchandise included in d. Independent matching of purchase orders, receiving
the physical count at year-end was not recorded as a: reports, and vendors’ invoices.
a. sale in the current period.
b. sale in the subsequent period. 65. Cost accounting controls are those related to the
c. purchase in the current period. physical inventory and the consequent costs from the
d. purchase return in the subsequent period. point at which:
a. materials are ordered for purchase until the finished
60. Which one of the following procedures would not product is sold.
be appropriate for an auditor in discharging his b. the customer’s order is received until the finished
responsibilities concerning the client’s physical product is shipped.
inventories? c. raw materials are requisitioned until the finished
a. Confirmation of goods in the hands of public product is sent to storage.
warehouses. d. raw materials are requisitioned until the finished
b. Supervising the taking of the annual physical product is completely manufactured.
inventory.
c. Carrying out physical inventory procedures at an
interim date.
d. Obtaining written representation from the client as to 66. In valuing inventory, the auditor must consider all
the existence, quality, and dollar amount of the but which of the following factors?
inventory. a. The valuation method must be in accordance with
GAAP.
61. Pricing manufactured inventory is difficult. Auditors b. The valuation method must be applied on a
must evaluate the method of allocating manufacturing consistent basis.
overhead for all but which of the following? c. The inventory must be valued at the lower of cost or
a. reasonableness. market.
b. computational correctness. d. All inventory must be valued using the same
c. adherence to FASB pronouncement valuation method under GAAP.
d. consistency.
67. Controls which provide a means of ensuring that the
62. If the perpetual inventory master files show lower physical counts are properly summarized, priced at the
quantities of inventory than the physical same amount as the unit records, correctly extended
count, an explanation of the difference might be and totaled, and included in the general ledger at the
unrecorded: proper amount are known as:
a. standard cost controls. strengthening internal controls over the accounting for
b. pricing internal controls. materials used in production would be most likely to
c. compilation internal controls. implement a(n):
d. count quantity internal controls. a. perpetual inventory system.
b. job order cost accounting system.
68. Assume that the client’s valuation of an inventory c. economic order quantity system.
item is $10 per unit for 1,000 units, using first-in, first- d. separation of duties among production personnel.
out (FIFO). If the most recent acquisition of inventory
was for 600 units at $10 per unit and the immediately 73. Which of the following is an internal control
preceding acquisition was for 700 units at $9 per unit, weakness for a company whose inventory of
the inventory item is in error and it is: supplies consists of a large number of individual items?
a. understated $400. a. The cycle basis is used for physical counts.
b. understated $300. b. Supplies of relatively little value are expensed when
c. overstated $400. purchased.
d. overstated $700. c. Perpetual inventory records are maintained only for
items of significant value.
69. Assume that the client’s valuation of an inventory d. The storekeeper is responsible for maintenance of
item is $10 per unit for 1,000 units, using LIFO. If the perpetual inventory records.
most recent acquisition of a layer of inventory was for
600 units at $10 per unit and the immediately preceding 74. When auditing a public warehouse, which of the
layer was for 700 units at $9 per unit, the inventory following is the most important audit
item is in error and it is: procedure with respect to disclosing unrecorded
a. understated $700. liabilities?
b. understated $300. a. Observation of inventory.
c. overstated $400. b. Review of outstanding receipts.
d. overstated $700. c. Inspection of receiving and issuing procedures.
d. Confirmation of negotiable receipts with holders.
70. When an outside specialist has assumed full
responsibility for taking the client’s physical inventory, TRUE/FALSE
reliance on the specialist’s report is acceptable if:
a. the auditor’s report contains a reference to the 1. Auditors have been required to perform physical
assumption of full responsibility. observation tests of inventory since the early
b. the auditor is satisfied through application of 2. Perpetual inventory records should be maintained
appropriate procedures as to the reputation by persons have access to inventory.
and competence of the specialist. 3. Internal controls over the ship finished goods
c. the auditor conducted the same audit tests and function in the inventory and warehousing cycle are
procedures as would have been applicable if not normally tested by the auditor as a part of
the client’s employees took the physical inventory. performing tests of controls and substantive tests of
d. circumstances made it impracticable or impossible for transactions in the sales and collection cycle.
the auditor either to do the work personally or observe 4. In the audit of inventory, the auditor and client are
the work done by the inventory firm. jointly responsible for making and recording the
count of physical inventory; while the auditor is
71. To best ascertain that a company has properly responsible for drawing conclusions about the
included merchandise that it owns in its ending adequacy of the physical inventory.
inventory, the auditor should review and test the: 5. The audit procedure “Perform tests of lower-of-
a. terms of the open purchase orders. cost-or-market, selling price, and obsolescence”
b. purchase cutoff procedures. provides assurance mainly for the realizable value
c. contractual commitments made by the purchasing objective for inventory pricing and compilation.
department. 6. In process costing systems, costs are accumulated
d. purchase invoices received on or around year-end. by individual jobs.
7. In job cost systems, costs are accumulated by
72. Hardy Company mass-produces eight different individual jobs.
products. The controller who is interested in
8. An approved purchase requisition form authorizes finished goods” provides assurance mainly for the
shipment of goods to customers. accuracy objective for inventory pricing and
9. The receipt of raw materials is a part of the compilation.
acquisition and payment cycle. 22. The audit procedure “Account for unused tag
10. When finished goods are completed, they are numbers shown in the auditor’s working papers to
usually stored in the packing area. make sure no tags have been added” provides
11. When performing price tests for purchased assurance mainly for the existence objective for
inventory, the auditor would not be concerned with inventory pricing and compilation.
the most recent vendors’ invoices if the client uses 23. When performing audit tests of pricing and
the FIFO valuation method. compilation for inventory, the client’s perpetual
12. A comparison of the current year’s inventory inventory master file may be used in place of
turnover ratio with previous years’ may indicate the vendors’ invoices if controls over the perpetual
presence of obsolete inventory. inventory master file are adequate.
13. To test for proper sales cutoff, an auditor would 24. Production personnel should ordinarily be
obtain the number of the last bill of lading issued responsible for maintaining perpetual inventory
during the period under audit and verify that the records.
item shipped had been excluded from the inventory 25. The extent and timing of an auditor’s physical
listing. examination of inventory is significantly influenced
14. If the perpetual inventory master files show lower by the adequacy of the client’s perpetual inventory
quantities of inventory than the physical count, one records.
explanation of the difference might be unrecorded 26. While separate perpetual inventory records are
sales. normally kept for raw materials and finished goods,
15. It is acceptable under generally accepted accounting most companies do not use perpetuals for work-in-
principles for a company to use different valuation process.
methods for different parts of its inventory. 27. Inherent risk is typically assessed at a moderate
16. Internal controls over the processing of purchase level for inventory due to the nature of the asset.
order’s function, the receipt of raw materials
function, and the storage of raw materials function
in the inventory and warehousing cycle are normally
tested by the auditor as a part of performing tests
of controls and substantive tests of transactions in
the acquisition and payment cycle and the payroll
and personnel cycle.
17. The major considerations in evaluating the
reasonableness of cost allocations are compliance
with GAAP and consistency with prior years.
18. When verifying the transfer of inventory from one
location to another, the audit objectives with which
the auditor is primarily concerned are occurrence of
recorded transfers, completeness of recorded
transfers, and accuracy of recorded transfers.
19. When the client’s perpetual inventory master files
are inadequate, the auditor will probably choose to
test the physical inventory prior to the balance
sheet date.
20. When part of the client’s inventory is in a public
warehouse or in the possession of other outside
custodians, the auditor does not need to observe a
physical count of the inventory if a written
confirmation is obtained directly from the inventory
custodians.
21. The audit procedure “Foot the inventory listing
schedules for raw materials, work-in-process, and