Audit of Inventory and Warehouse Cycle

Worksheet
I. Answer the following Questions
1. The audit of the inventory and warehousing cycle will be affected by the results from other business
processes. Identify the "other" business cycles and how they impact the audit of inventory.
2. Discuss the four aspects of the audit of cost accounting with which the auditor is most concerned. Answer:
3. What are the auditor's primary concerns in verifying the transfer of inventory from one location to another?
II. Choose the correct answer
1) Receipt of ordered materials by the receiving department will generate the completion of a form called the:
A) bill of lading. C) materials requisition.
B) receiving report. D) inventory acquisition summary.
2) ________ is normally characterized as a difficult and complex account to audit.
A) Property, plant and equipment C) Inventory
B) Cash D) Prepaid insurance
3) Inventory is a complex area to audit for all but which of the following reasons?
A) Inventory is often in different locations.
B) There are several acceptable valuation methods and some entities use different methods for different types
of inventory.
C) Inventory is often the largest account on the balance sheet.
D) Inventory valuation includes few estimates.
4) In most manufacturing companies, the inventory and warehousing cycle begins with the:
E) receipt of a customer's order.
F) completion of production of a customer's order.
G) initiation of production of a customer's order.
H) acquisition of raw materials for production of an order.
A 5) The inventory and warehousing cycle can be thought of as having two separate but closely related systems,
one involving the actual physical flow of goods, and the other the:
A) related costs.
B) storage of the goods.
C) internal control over those goods.
D) prevention of waste, obsolescence, and theft.
6) Auditors test the quantity of materials charged to work-in-process by tracing these quantities to:
E) cost ledgers. G) receiving reports.
F) perpetual inventory records. H) material requisitions.
7) The audit tests to verify that the client is using an inventory method which is generally accepted and to
verify that physical counts were correctly summarized are performed during the audit of the:
A) acquisition and payments cycle. C) inventory and warehousing cycle.
B) payroll and personnel cycle. D) sales and collection cycle.
8) Handling the receipt of ordered goods is a part of the ________ cycle.
A) purchasing C) inventory
B) acquisition and payment D) inventory and warehousing
9) Auditor tests of the physical controls over raw materials, work in process, and finished goods are
generally limited to:
A) observation and confirmation. C) inquiry and reconciliation.
B) observation and inquiry. D) observation and reconciliation.
10) Almost all companies need physical controls over their assets to prevent loss. Which of the following is not an
example of such a control?
A) Perpetual inventory master files
B) Segregated, limited-access storage areas
C) Custody of assets assigned to specific responsible individuals
D) Approved prenumbered documents for authorizing movement of inventory
11) When auditing inventory cost accounting, the auditor is concerned with all of the following except for:
E) net realizable value. H) documents and records for transferring
F) unit cost records. inventory
G) physical controls over inventory.

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 12) To assure proper segregation of duties, who should maintain the perpetual inventory master files?
A) Production personnel C) Inventory receiving personnel
B) Inventory storeroom personnel D) Accounting department personnel
13) Which of the following statements is correct regarding the audit of inventory cost accounting?
A) Cost accounting systems and controls are the same for all manufacturing companies.
B) All companies that have work-in-process must use a perpetual inventory system.
C) Auditors test perpetual inventory master files by examining documentation that supports additions and
reductions of inventory amounts in the master files.
D) Manufacturing companies keep their cost accounting records separate from the production and other
accounting records.
14) From which of the following evidence-gathering audit procedures would an auditor obtain most
assurance concerning the existence of inventories?
E) Observation of physical inventory counts
F) Written inventory representations from management
G) Confirmation of inventories in a public warehouse
H) Auditor's recomputation of inventory extensions
15) The most important part of the observation of inventory is to determine whether:
A) all counts are accurate.
B) the inventory-takers are qualified.
C) obsolete inventory has been identified.
D) the physical count is being taken in accordance with the client's instructions.
16) A common inventory observation procedure is to be alert for items that are damaged, rust- or dust-covered, or
located in inappropriate places. The balance-related audit objective being achieved by this procedure is:
E) classification. G) realizable value.
F) cutoff. H) rights.
17) An auditor must inquire about consigned or customer inventory included on the client's premises to satisfy
the balance-related audit objective of:
I) cutoff. K) rights.
J) classification. L) completeness.
18) To best ascertain that a company has properly included merchandise that it owns in its ending
inventory, the auditor should review and test the:
A) terms of the open purchase orders.
B) purchase cutoff procedures.
C) contractual commitments made by the purchasing department.
D) purchase invoices received on or around year-end.
19) Boxes or other containers holding inventory should also be opened during test counts to determine the
________ of the inventory.
A) classification C) existence
B) detail tie-in D) realizable value
20. The test of details of balance procedure which requires the auditor to perform tests of lower of cost or market,
selling price, and obsolescence is an attempt to satisfy the objective of:
A. existence. C. accuracy.
B. completeness. D. realizable value.
21. When labor is a significant part of inventory, verifying the proper accounting of these costs should be tested in
the:
A) inventory and warehousing cycle. C) Acquisitions and payments cycle.
B) payroll and personnel cycle. D) cash cycle
22. An auditor selected items for test counts while observing a client's physical inventory count. The auditor then traced
the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning
management's balance assertion of
A. rights and obligations C. existence
B. completeness D. valuation and allocation
23. In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test
for
A. occurrence C. classification
B. completeness D. cutoff

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True/False
1. An approved purchase requisition form authorizes shipment of goods to customers. F
2. The receipt of raw materials is a part of the acquisition and payment cycle. T
3. The physical observation of the inventory and the acquisition of raw materials are part of the inventory and
warehousing cycle. F
4. 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. T

Answer Key for short answer questions

1. Acquisition and Payment: Acquire and record raw materials, labor, overhead Sale and collection: Ship
goods and record revenue and the appropriate costs
2. The audit of the inventory and warehousing cycle consists of five parts. State the five parts and, for each
part, identify the cycle in which that part is tested by the auditor.
The five parts are:
• Acquire and record raw materials, labor, and overhead. This is tested during the audits of the
acquisition and payment cycle, and the payroll and personnel cycle.
• Internally transfer assets and costs. This is tested in the inventory and warehousing cycle.
• Ship goods, and record revenue and costs. This is tested during the audit of the sales and collection
cycle.
• Physically observe inventory. This is tested in the inventory and warehousing cycle.
• Price and compile inventory. This is tested in the inventory and warehousing cycle.
3. The auditor is most concerned with:
• Physical controls over inventory. Generally limited to observation and inquiry to determine if inventory
is protected from theft and misuse.
• Documents and records for transferring inventory. The auditor's primary concerns in verifying the transfer of
inventory from one location to another are that the recorded transfers exist, the transfers that have actually
taken place are recorded, and the quantity, description, and date of all recorded transfers are accurate.
• Perpetual inventory master files. The adequacy of perpetual inventory master files has a major effect on
the timing and extent of the auditor's physical examination of inventory.
• Unit cost records. To maintain accurate cost data, clients must integrate their cost accounting records with
production and other accounting records. The auditor is concerned that there is accurate cost data for raw
materials, direct labor, and manufacturing overhead to ensure that raw materials, work-in-process, and
finished goods inventories are fairly stated.
4. recorded transfers exist
all transfers are recorded
the quantity, description, and date of all recorded transfer are accurate

Choices
1. B 7. C 13. C 19. C
2. C 8. B 14. C 20. D
3. D 9. B 15. D 21. B
4. D 10. A 16. D 22. B
5. A 11. A 17. D 23. B
6. A 12. D 18. B

True/False
1. False
2. True
3. False
4. True