Inventory Cycle
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CPA Auditing and Attestation (AUD) › Inventory Cycle
A ___________ inventory system is best used for high dollar items
concurrent
recurring
periodic
perpetual
Explanation
A perpetual inventory provides a real time record of inventory values. Items purchased are recorded to the inventory account at the time of purchase. High dollar inventory items are particularly important to properly value the inventory account.
Of the following duties included in the inventory cycle, which should be segregated to maintain proper internal controls?
Purchasing
Receiving
Warehousing
All of the answer choices are correct
Explanation
All of these duties, in addition to shipping, would need to be segregated in order to maintain proper internal controls.
Inquiries of warehouse personnel concerning possible obselete or slow moving inventory items provide assurance about management's assertion of:
Presentation
Existence
Valuation
Completeness
Explanation
Inquiries of warehouse personnel concerning possible obselete or slow moving inventory items provide assurance about management's assertion of valuation (has the inventory been properly valued and recorded.)
A physical inventory is taken on a “cut-off date”. This procedure is necessary to ensure.
completeness
reasonableness
ownership
authorization
Explanation
Taking a physical inventory at a cut-off date ensures that all of the inventory that is appropriate to be reported will be included in the financial statements. The auditor sets the cut-off date and traces the amount to the accounting records to ensure that the records include all the inventory.
The warehouse manager is responsible for ensuring that high-end merchandise is in the locked section of the building. This is an example of
A review procedure
A physical control
A reconciliation procedure
An authorization procedure
Explanation
Physical control provides a physical barrier to the asset. They consist of policies such as insurance, or kinetic barriers such as locks, secure areas, etc.
An auditor generally tests the segregation of duties related to inventory by:
Document inspection and reconciliation
Test counts and cutoff procedures
Analytical procedures and invoice recomputation
Personal inquiry and observation
Explanation
The independent auditor's direct personal knowledge, based on personal inquiry and observation, are auditing procedures commonly used to test the segregation of duties.