Multiple Choice
1. The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that
a. Independent internal verification of activity reports is established.
b. Transfers to the finished goods department are documented by a completed production report and a quality control report.
c. Production orders are prenumbered and signed by a supervisor.
d. Custody of work in process and finished goods is properly maintained.

2. Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions?
a. Inventory manager does not have ability to record inventory transactions.
b. Summary of the receiving reports is independently compared to the inventory status report.
c. Inventory is periodically reviewed for slow- moving or obsolete items, which may require a write- down.
d. Subsidiary ledgers are periodically reconciled with inventory control accounts. LO 13-

3. Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory?
a. Periodic reconciliation of work in process with job cost sheets.
b. Segregation of functions between general accounting and cost accounting.
c. Independent comparisons of finished goods records with counts of goods on hand.
d. Approval of inventory journal entries by the storekeeper.

4. Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who
a. Issue raw materials obtain materials requisitions for each issue and pre-pare daily totals of materials issued.
b. Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.
c. Obtain receipts for the transfer of completed work to finished goods prepare a completed production report.
d. Are independent of issuing production orders update records from completed job cost sheets and production cost reports on a timely basis.

5. An auditor’s tests of controls over the issuance of raw materials to production would most likely include
a. Reconciliation of raw materials and work- in- process perpetual inventory records to general ledger balances.
b. Inquiry of the custodian about the procedures followed when defective materials are received from vendors.
c. Observation that raw materials are stored in secure areas and that store-room security is supervised by a responsible individual.
d. Examination of materials requisitions and reperformance of entity controls designed to process and record issuances.

6 Which of the following internal control activities is most likely to address the completeness assertion for inventory?
a. The work- in- process account is periodically reconciled with subsidiary records.
b. Employees responsible for custody of finished goods do not perform the receiving function.
c. Receiving reports are prenumbered and periodically reconciled.
d. There is a separation of duties between payroll department and inventory accounting personnel.

7. An entity maintains perpetual inventory records in both quantities and 13-12 dollars. If the level of control risk were set at high, an auditor would probably
a. Insist that the entity perform physical counts of inventory items several times during the year.
b. Apply gross profit tests to ascertain the reasonableness of the physical counts.
c. Increase the extent of tests of controls of the inventory system.
d. Request that the entity schedule the physical inventory count at the end of the year.

8. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items
a. Included in the listing have been counted.
b. Represented by inventory tags are included in the listing.
c. Included in the listing are represented by inventory tags.
d. Represented by inventory tags are bona fide.

9. When auditing merchandise inventory at year- end, the auditor performs a purchase cutoff test to obtain evidence that
a. All goods purchased before year- end are received before the physical inventory count.
b. No goods held on consignment for customers are included in the inventory balance.
c. Goods observed during the physical count are pledged or sold.
d. All goods owned at year- end are included in the inventory balance.

10. Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management’s assertion of\
a. Completeness.
b. Existence.
c. Presentation.
d. Valuation.

11. Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year- end. Which of the following is necessary if the auditor plans to observe inventory at interim dates?
a. Complete recounts are performed by independent teams.
b. Perpetual inventory records are maintained.
c. Unit cost records are integrated with production- accounting records.
d. Inventory balances are rarely at low levels.

12. An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file?
a. Economic reorder quantity.
b. Warehouse location.
c. Date of last purchase.
d. Quantity sold.

13. Which of the following audit procedures would probably provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventory?
a. Tracing of test counts noted during the entity’s physical count to the entity’s summarization of quantities.
b. Inquiry of management to determine whether there are significant purchase commitments that should be considered for disclosure.
c. Selection of the last few shipping advices used before the physical count and determination of whether the shipments were recorded as sales.
d. During physical observation of inventory verify that “bill-and-hold” inventory is segregated and not included in the ending inventory count.