ACC 406 EXAM 3 QUESTIONS WITH CORRECT ANSWERS
2025/2026
Understanding Auditing (Inventory) - CORRECT ANSWER -1. Identify the cycle being audited and
its purpose
2. Identify the relevant accounts in the cycle and the risks in the accounts for misstatement
3. Identify the most important account assertions (which have the highest risk?)
4. Identify what could go wrong (WCGW) - what would impact the assertion?
5. Identify controls that will prevent or detect and correct the WCGW (if the client's controls are
weak or ineffective, risk increases)
6. Identify substantive audit tests to look for misstatements affecting the assertions
1. Identify the cycle being audited and its purpose - CORRECT ANSWER -1. Inventory is part of
the revenue and expenditure (and production and HR) cycles.
2. Purpose:
-> Ensure that inventory is available when needed
-> Safeguard inventory (protect against obsolescence, spoilage, and theft)
2. Identify the relevant accounts in the cycle and the risks in the accounts for misstatement -
CORRECT ANSWER -1. Departments and activities
-> Inventory management, purchasing department, raw materials stores, manufacturing,
finished goods stores, cost accounting, general ledger
2. Accounts/Accounting Principles
-> Inventory and COGS
-> Inventory costing (FIFO, LIFO, WAC, Specific identification), excess and obsolescence issues,
LCM
3. Identify the most important account assertions (which have the highest risk?) - CORRECT
ANSWER -1. Inventory balance:
, -> EXISTENCE, VALUATION, rights, completeness
2. COGS (transactions):
-> authorization, occurrence, completeness, cut-off, accuracy
4. Identify what could go wrong (WCGW) - what would impact the assertion? - CORRECT
ANSWER -1. Improper accounting
-> Existence, completeness, valuation
2. Recording COGS in wrong period
-> Cutoff
3. Obsolete/slow moving inventory
-> Valuation
4. Fraud and theft
-> Existence
5. Poor inventory count procedures
-> Existence, completeness, accuracy
5. Identify controls that will prevent or detect and correct the WCGW (if the client's controls are
weak or ineffective, risk increases) - CORRECT ANSWER -1. SOD
2. Accounting for numerical sequence of materials requisitions
3. Physical safeguards over inventory
4. Review of cost accumulation and variance reports
5. IT application and general controls over the inventory master file
6. Review of slow-moving inventory for excess or obsolete inventory
6. Identify substantive audit tests to look for misstatements affecting the assertions - CORRECT
ANSWER -1. Primary test for existence and completeness
-> Inventory observation (perform test counts)
2025/2026
Understanding Auditing (Inventory) - CORRECT ANSWER -1. Identify the cycle being audited and
its purpose
2. Identify the relevant accounts in the cycle and the risks in the accounts for misstatement
3. Identify the most important account assertions (which have the highest risk?)
4. Identify what could go wrong (WCGW) - what would impact the assertion?
5. Identify controls that will prevent or detect and correct the WCGW (if the client's controls are
weak or ineffective, risk increases)
6. Identify substantive audit tests to look for misstatements affecting the assertions
1. Identify the cycle being audited and its purpose - CORRECT ANSWER -1. Inventory is part of
the revenue and expenditure (and production and HR) cycles.
2. Purpose:
-> Ensure that inventory is available when needed
-> Safeguard inventory (protect against obsolescence, spoilage, and theft)
2. Identify the relevant accounts in the cycle and the risks in the accounts for misstatement -
CORRECT ANSWER -1. Departments and activities
-> Inventory management, purchasing department, raw materials stores, manufacturing,
finished goods stores, cost accounting, general ledger
2. Accounts/Accounting Principles
-> Inventory and COGS
-> Inventory costing (FIFO, LIFO, WAC, Specific identification), excess and obsolescence issues,
LCM
3. Identify the most important account assertions (which have the highest risk?) - CORRECT
ANSWER -1. Inventory balance:
, -> EXISTENCE, VALUATION, rights, completeness
2. COGS (transactions):
-> authorization, occurrence, completeness, cut-off, accuracy
4. Identify what could go wrong (WCGW) - what would impact the assertion? - CORRECT
ANSWER -1. Improper accounting
-> Existence, completeness, valuation
2. Recording COGS in wrong period
-> Cutoff
3. Obsolete/slow moving inventory
-> Valuation
4. Fraud and theft
-> Existence
5. Poor inventory count procedures
-> Existence, completeness, accuracy
5. Identify controls that will prevent or detect and correct the WCGW (if the client's controls are
weak or ineffective, risk increases) - CORRECT ANSWER -1. SOD
2. Accounting for numerical sequence of materials requisitions
3. Physical safeguards over inventory
4. Review of cost accumulation and variance reports
5. IT application and general controls over the inventory master file
6. Review of slow-moving inventory for excess or obsolete inventory
6. Identify substantive audit tests to look for misstatements affecting the assertions - CORRECT
ANSWER -1. Primary test for existence and completeness
-> Inventory observation (perform test counts)
