An Entity Maintains Perpetual Inventory Records in Both Quantities and Dollars

question 7

Multiple Choice

An entity maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably

• A) Increase the extent of tests of controls for the inventory cycle.
• B) Request that the entity schedule the physical inventory count at the end of the year.
• C) Insist that the entity perform physical counts of inventory items several times during the year.
• D) Apply gross profit tests to ascertain the reasonableness of the physical counts.

---

Definitions:

Opportunity Cost

The cost of forgoing the next best alternative when a decision is made to choose one option over another.

Production Possibilities Curve

A graphical representation showing the maximum quantity of goods and services that a society can produce with existing resources and technology, underlining the concept of opportunity cost.

Consumer Goods

Goods produced for direct consumption by the end customer, as opposed to goods used in the production of other goods.

Capital Goods

Physical assets that are used in the production of other goods and services and have a life expectancy of more than one year.