9. Audit of the Inventory

  Audit of the Inventory

  

Describe the business functions

and the related documents and

records in the inventory

Flow of Inventory and Costs

  Raw Materials Work in Process

  Beginning inventory Raw materials used Purchases

  Ending inventory

Flow of Inventory and Costs

  

Work in Process Finished Goods

  Beginning inventory Ending inventory

  Cost of goods manufactured Beginning inventory Ending inventory

  Cost of goods sold Functions in the Inventory and Warehousing Cycle Process

  Process

  Receive raw purchase

  Receive raw purchase

  orders materials

  orders materials Functions in the Inventory and Warehousing Cycle Store finished goods

  Store finished goods

  Ship finished goods

  Ship finished goods

  

Describe how e-commerce

affects inventory management.

How E-Commerce Affects Inventory Management

  The Internet enables clients to provide expanded descriptions of their inventory on a real-time basis.

  The use of the Internet and other e-commerce applications may lead to financial reporting risks if access to inventory databases and

  

Explain the five parts of

the audit of the inventory

and warehouse cycle.

  

Audit of Inventory

  Acquire and record raw materials, labor, and overhead.

  Part of audit Cycle in which tested

  Acquisition and payment plus payroll and personnel Audit of Inventory

  Ship goods and record revenue and costs.

  Physically observe inventory.

  Cycle in which tested Part of audit

  Sales and collection Inventory and warehousing

  Design and perform audit tests of cost accounting.

Cost Accounting Controls

  1. Physical Controls Raw materials WIP Finished goods

Methodology for Designing Controls and Substantive Tests

  Understand internal control – cost accounting system.

  Assess planned control risk – cost accounting system.

Methodology for Designing Controls and Substantive Tests

  Audit procedures Design tests of controls and substantive tests of

  Sample size transactions for the cost accounting system to meet

  Items to select

Tests of Cost Accounting

  Physical Controls Documents and records for transferring inventory

  Perpetual inventory master files

  Apply analytical procedures to the accounts in the inventory and warehousing cycle.

Analytical Procedures for Manufacturing Equipment

  Analytical Procedure Possible Misstatement Compare gross margin Overstatement or percentage with that of understatement of previous years. inventory and cost of goods sold

Analytical Procedures for Manufacturing Equipment

  Analytical Procedure Possible Misstatement Compare unit costs of Overstatement or inventory with those of understatement of previous years. unit costs

  Compare extended Misstatements in

Analytical Procedures for Manufacturing Equipment

  Analytical Procedure Possible Misstatement Compare current year Misstatement of unit manufacturing costs with costs of inventory, those of previous years especially direct (variable costs should be labor and

  Methodology for Designing Tests of Balances – INVENTORY

  Identify client business risks affecting the inventory and warehousing cycles.

  Set tolerable misstatement and assess inherent risk for the inventory and warehousing cycles. Methodology for Designing Tests of Balances – Inventory

  Design and perform tests of controls and substantive tests of transactions for the several cycles. Methodology for Designing Tests of Balances – Other Accounts

  Audit procedures Design tests of details

  Sample size of inventory to satisfy balance-related

  Items to select audit objectives.

  

Design and perform

physical observation

audit tests for inventory.

Audit Responsibilities for Client Physical Counts

  • Be present at the time the client counts

    inventory
  • Observe the client’s counting procedures

  • Make inquiries of client personnel about

    their counting procedures

Controls Over Physical Count

  • Proper instructions for the physical count
  • Supervision by responsible personnel
  • Independent internal verification of the counts

  • Independent reconciliations of the physical

Controls Over Physical Count

  Proper instructions for the physical count Supervision by responsible personnel

  Independent interval verification of the counts Independent reconciliations of the physical

  Sample size Timing

  Audit Decisions

Physical Observation Tests

  The most important part of the observation of inventory is determining whether the physical count is being taken in accordance with the client’s instructions.

Balance-Related Objectives: Physical Inventory Observation

  Existence Completeness

  Inventory as recorded on tags exist.

  Existing inventory is counted and tagged.

Balance-Related Objectives: Physical Inventory Observation

  Inventory is classified Classification correctly on the tags.

  Transactions are recorded Cutoff in the proper period.

Balance-Related Objectives: Physical Inventory Observation

  The client has rights Realizable

  Value Obsolete and unusable inventory items are excluded or noted.

  

Design and perform audit

tests of pricing and

compilation for inventory.

  

Audit of Pricing and

Compilation

Inventory price tests

  Pricing and Pricing and Valuation compilation compilation of inventory procedures controls

  Purchased Manufactured

Audit of Pricing and Compilation

  Inventory compilation tests Inventory price tests

  Pricing and compilation procedures

  Pricing and compilation controls

  

Audit of Pricing and

Compilation

  

Balance-Related Objectives:

Inventory Pricing and Compilation

  Detail tie-in Existence

  

Balance-Related Objectives:

Inventory Pricing and Compilation

  Classification Realizable value

  Presentation

Valuation (Pricing) of Inventory

  Pricing Purchased Inventory Pricing Manufactured Inventory

  Integrate the various parts of the audit of the inventory and warehousing cycle.

  Interrelationship of Various Audit Tests Tests of acquisition and payment cycle Acquisitions of raw materials

  Raw materials Other manufacturing costs

  Work in process

  

Interrelationship of Various

Audit Tests

Tests of payroll and

personnel cycle

  

Work in process Work in process

Direct labor Indirect labor

  

Interrelationship of Various

Audit Tests

Inventory tests Cost accounting records
  • Physical inventory observation Pricing and compilation Ending inventory

  Raw materials Ending inventory

  Work in process Interrelationship of Various Audit Tests Work in process Finished goods

  Cost of goods Cost of goods manufactured manufactured Finished goods

  Tests of

  

Interrelationship of

Various Audit Tests

Tests of sales and

collection cycle Integration of the Tests

  • Acquisition and Payment Cycle
  • Payroll and Personnel Cycle
  • >Sales and Collection C

  The End