Purchase cut-off procedures should be designed to test whether all inventory

AUDITING THEORY - 074: Process part 2 CMP Test of Control and Substantive Test in the Conversion 1. To strengthen contro

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AUDITING THEORY - 074: Process part 2 CMP Test of Control and Substantive Test in the Conversion 1. To strengthen control procedures over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic a. Increase in insurance coverage. b. Inspection of equipment and reconciliation with accounting records. c. Verification of liens, pledges, and collateralizations. d. Accounting for work orders. 2. To improve accountability for fixed asset retirements, management most likely would implement an internal control structure that includes a. Continuous analysis of the repairs and maintenance account. b. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. c. Continuous utilization of serially numbered retirement work orders. d. Periodic inspection of insurance policies by internal auditors. 3. From the auditor's point of view, inventory counts are more acceptable prior to the year-end, when a. Internal control is deficient. b. Accurate perpetual inventory records are maintained. c. Inventory is slow moving. d. Significant amounts of inventory are held on consignment. 4. Apex Manufacturing Corporation mass produces eight different products. The controller who is interested in strengthening control procedures over the accounting for materials used in production would be most likely to implement a. An economic order quantity (EOQ) system. b. A job order cost accounting system. c. A perpetual inventory system. d. A separation of duties among production personnel. 5. For several years, a client's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be deficiencies in internal control that led to the failure to record some a. Purchases returned to vendors. b. Sales returns received. c. Sales discounts allowed. d. Cash purchases. 6. When perpetual inventory records are maintained in quantities and in dollars, and internal control procedures over inventory are deficient, the auditor would probably a. Want the client to schedule the physical inventory count at the end of the year. b. Insist that the client perform physical counts of inventory items several times during the year. c. Increase the extent of tests for unrecorded liabilities at the end of the year. d. Have to disclaim an opinion on the income statement that year. 7. Purchase cutoff procedures should be designed to test whether or not all inventory a. Purchased and received before the year-end was recorded. b. Was carried at the lower of cost or market on the year-end balance sheet. c. Was paid for by the company on the year-end balance sheet. d. Owned by the company is in the possession of the company. 8. In tests of property, plant, and equipment, the auditor tries to determine all of the following except the a. Adequacy of the internal control. b. Extent of property abandoned during the year. c. Adequacy of replacement funds. d. Reasonableness of depreciation. 9. An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that a. The final inventory is valued at cost. b. All inventory represented by an inventory tag is listed on the inventory sheets. c. All inventory represented by an inventory tag is bona fide. d. Inventory sheets do not include untagged inventory items. 10. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference? a. Inventory items had been counted, but the tags placed on the items had not been taken off the items

AUDITING THEORY - 074: PROCESS 2 CMP c. Stock dividends are capitalized at par or stated value on the dividend declaration date. d. Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings. E N D

Detailed below are some individual tests that can be applied in order to help satisfy the objectives noted in Audit objectives. It may not be appropriate to undertake all of the tests; in each case, the auditor should review this bank of tests and determine which are most appropriate for the circumstances of the particular client being dealt with. The auditor should, however, ensure that each objective is satisfied. Where the balance includes accounting estimates, refer to the guidance in Auditing accounting estimates.

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