Auditing the Production and Personnel Services Cycle - Multiple Choice

REQUIRED:  Indicate the best answer choice for each of the following.

  1.Which of the following functions is not part of the production cycle?
a. acquisition of raw materials
b. processing goods in production
c. determining and recording manufacturing costs
d. maintaining the correctness of inventory balances
e. protecting inventories

  2.The use of the computer to compare production hours to direct labor hours on daily production reports relates to the:
a. valuation or allocation assertion.
b. completeness assertion.
c. rights and obligations assertion.
d. existence or occurrence assertion.
e. presentation or disclosure assertion.

  3.With a manufacturer, wholesaler, or retailer, however, inherent risk for inventory may be assessed at or near the maximum level for all of the following reasons except:
a.inventories are often stored at multiple sites, adding to the difficulties associated with maintaining physical controls over theft and damages, and properly accounting for goods in transit between sites.
b.the wide diversity of inventory items may present special problems in determining their quality and market value.
c.inventories are vulnerable to spoilage, obsolescence, and other factors such as general economic conditions that may affect demand and salability, and thus the proper valuation of the inventories.
d.inventory may be sold subject to right of return and repurchase agreements.
e.the volume of purchases, manufacturing, and sales transactions that affects these accounts is generally high, decreasing the opportunities for misstatements to occur.

  4.Which one of the following analytical procedures may indicate possible inventory obsolescence problems when ratios are large?
a. inventory turnover
b. finished goods produced to raw material used
c. inventory growth to cost of sales growth
d. finished goods produced to direct labor
e. product defects per million

  5.Observation of inventories is a required audit procedure whenever:
a. inventories are material.
b. inventories are material and it is practicable and reasonable.
c. it is practicable and reasonable.
d. the auditor considers it to be necessary.
e. inventories are material and the auditor considers it to be necessary.

  6.During the observation of the inventory, the auditor has no responsibility to:
a. observe the taking of the inventory by client personnel.
b. make some test counts of inventory quantities.
c. supervise the taking of the inventory.
d. make inquiries of the client concerning the inventories.
e. watch for damaged and obsolete inventory items.

  7.The production cycle relates to:
a. the conversion of inventory into receivables or cash.
b. activities involving  the acquisition of and payment for goods  and  services.
c. exchanges of goods and services with customers.
d. events and activities that pertain to executive and employee compensation.
e. the conversion of raw materials into finished goods.

  8.In companies where inventories are at multiple locations, the auditor¿s observations ordinarily should include:
a. all inventory locations.
b. a random sample of locations.
c. several inventory locations picked by the auditor.
d. a representative sample of locations.
e. all significant inventory locations.

  9.The auditor¿s strategy in performing test counts during the inventory observation is to:
a. concentrate tests on high dollar items and take a representative sample of other items.
b. test all high dollar items.
c. randomly select all test items.
d. concentrate tests in areas where employees seem to be disregarding the inventory instructions.
e. sequentially select all test items.

10.When inventories are material and the auditor does not observe the inventory at or near the year-end, professional standards require the auditor to:
a. thoroughly test the accounting records.
b. observe some physical counts of the inventory.
c. disclaim an opinion on the financial statements.
d. resign from the engagement.
e. reperform the entire inventory count.