A Risk to the Auditor Due to the Complexity of Physical

question 28

Multiple Choice

A risk to the auditor due to the complexity of physical inventory includes the possibility of which of the following?

• A)Overstatement of individual items across multiple locations for cutoff testing.
• B)Utility of the items exceeding their cost for existence testing.
• C)Movement of goods during existence testing.
• D)Stocking of only one type of inventory in the warehouse for presentation and disclosure testing.

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Definitions:

Rent-seeking Behavior

Activities undertaken by individuals or firms to increase their own wealth without creating new wealth, often through manipulating the social or political environment in which economic activities occur.

X-inefficiency

X-inefficiency occurs when a firm lacks the incentive to control costs, leading to inefficiency and higher expenditure than is necessary for the level of output produced.

Economies of Scale

Economies of scale refer to the cost advantage achieved by an increase in production, which typically leads to a reduction in average cost per unit as scale increases.

Average Total Costs

Average total costs represent the total costs of production (fixed and variable costs combined) divided by the quantity of output produced.