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
inventoryObserve 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