As part of the current audit, the auditor begins performing substantive tests on a client’s inventory. To test the valuation, allocation, and accuracy assertion, the audi- tor should perform all of the following procedures except for:reviewing direct labor rates and testing the computation of the standard over- head rates used.

The following questions deal with internal controls in the inventory and warehousing cycle and tests of details of balances for inventory. Choose the best response.
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Chapter 21 / AUDIT OF THE INVENTORY AND WAREHOUSING CYCLE 721
a. Alpha Company uses its sales invoices for posting perpetual inventory records.
Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an
(1) understatement of revenues and receivables and an overstatement of inventory.
(2) understatement of revenues, receivables, and inventory.
(3) overstatement of revenues and receivables and an understatement of inventory.
(4) overstatement of revenues, receivables, and inventory.
b. As part of the current audit, the auditor begins performing substantive tests on a
client’s inventory. To test the valuation, allocation, and accuracy assertion, the audi-
tor should perform all of the following procedures except for
(1) reviewing direct labor rates and testing the computation of the standard over-
head rates used.
(2) performing inventory price tests on a sample of inventory items to ensure the
inventory is properly valued.
(3) testing the mathematical computations of the inventory report and reconciling
to the inventory general ledger accounts.
(4) vouching a sample of items from the client’s inventory report sheet to the cor-
responding prenumbered inventory tags.
c. In auditing a manufacturing entity, which of the following procedures would an auditor most likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?
(1) Test the mathematical accuracy of the inventory report
(2) Inquire of management about whether inventory has been pledged or assigned
(3) Tour the manufacturing plant or production facility
(4) Test the computation of standard overhead rates

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