Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 3

Which of the following describes the result if an organization records merchandise as a purchase, but fails to include it in the closing inventory count?

Answer options

• A. The cost of goods sold for the period will be understated.
• B. The cost of goods sold for the period will be overstated.
• C. The net income for the period will be understated.
• D. There will be no effect on the cost of goods sold or the net income for the period.

Correct answer: B

Explanation

If merchandise is recorded as a purchase but omitted from the closing inventory, it leads to an increase in the cost of goods sold, causing it to be overstated. This occurs because the inventory count reflects fewer goods available, thus inflating the expenses. The other options do not accurately describe the financial impact of this error.