Copyright © 2014 Pearson Education Chapter 20 Audit of the Inventory and Warehousing Cycle.

Copyright © 2014 Pearson Education

Chapter 20

Audit of the Inventory and Warehousing

Cycle

Chapter 20

Audit of the Inventory and Warehousing

Cycle

Copyright © 2014 Pearson Education20-2

Describe the business functions and the related documents and records in the inventory and warehousing cycle.

Explain the five parts of the audit of the inventory and warehousing cycle.

Design and perform audit tests of cost accounting.

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


Design and perform physical observation audit tests for inventory.

Design and perform audit tests of pricing and compilation for inventory.

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


Describe the business functions and the related documents and records in the

inventory and warehousing cycle.

20-4

11


Raw Materials Work-in-ProcessBeginninginventory

Rawmaterialsused

Purchases

Endinginventory

Beginninginventory

Cost ofgoodsmanufactured

Endinginventory

Cost ofgoods soldFinished Goods

Beginninginventory

Cost ofgoods sold

Endinginventory

Direct LaborActual Applied

Manufacturing OverheadActual Applied


Processpurchase

orders

Receiveraw

materials

Storeraw

materials

Processthe

goods

Storefinishedgoods

Shipfinishedgoods

Flowof

Inventory

Receiveraw

materials

Putmaterials

instorage

Putmaterials

inproduction

Putcompletedgoods instorage

Shipfinishedgoods


Explain the five parts of the audit of the inventory and warehousing cycle.

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22


Part of audit

Acquire and recordraw materials, labor,and overhead

Internally transferassets and costs

Acquisition and paymentPayroll and personnel

Cycle(s) Where tested

Inventory and Warehousing


Part of auditShip goodsand recordrevenue and costs

Physically observeinventory

Price and compile

inventory

Cycle where tested

Sales and collection Inventory andwarehousing

Inventory andwarehousing


Design and perform audit tests of cost accounting.

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33


Physical controls over raw materials, work in process, and finished goods inventory

Controls over the related costs


Understand internal control –cost accounting system

Assess planned control risk –cost accounting system

Determine extent of testing controls

Design tests of controls andsubstantive tests of transactionsfor the cost accounting system

to meet transaction-relatedaudit objectives

Audit procedures

Sample size

Items to select

Timing


Physical controls over inventory

Documents and records for transferring inventory

Perpetual inventory master files

Unit cost records


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

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44


Analytical procedure Possible misstatement

Compare gross marginpercentage with that ofprevious years

Compare inventory turnover(cost of goods sold divided byaverage inventory) with thatof previous year

Overstatement orunderstatement ofinventory and costof goods sold

Obsolete inventoryoverstatement orunderstatementof inventory



Compare unit costs ofinventory with thoseof previous years

Compare extended inventoryvalue with that of previousyears

Overstatement orunderstatement of unitcosts, which affectinventory and cost ofgoods sold

Misstatements incompilation, unit costs, orextensions, which affectinventory and cost ofgoods sold



Compare current yearmanufacturing costs withthose of previous years(variable costs should beadjusted for changesin volume)

Misstatements of unit costs of inventory, especially direct labor andmanufacturing overhead,which affect inventory andcost of goods sold


Design and perform physical observation audit tests for inventory.

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55


Be present at the time the client counts inventory

Observe the client’s counting procedures

Make inquiries of client personnel about their counting procedures

Make their own independent tests of the physical count


Proper instructions for the physical count

Supervision by responsible personnel

Independent internal verification of the counts

Independent reconciliations of the physicalcounts with perpetual inventory master files

Adequate control over count sheets or tags


Timing

Sample size

Selection of items


The most important part of the observation ofinventory is determining whether the physicalcount is being taken in accordance with theclient’s instructions.


Existence:Inventory as recorded on tags exist.

Completeness:Existing inventory is counted and tagged.

Accuracy:Inventory is counted accurately.

Classification:Inventory is classified correctly on the tags.


Cutoff:Transactions are recorded in the proper period.

Realizable value:Obsolete and unusable inventory items areexcluded or noted.

Rights:The client has rights to inventory recordedon tags.


Design and perform audit tests of pricing and compilation for inventory.

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Inventory price tests

Pricing and compilation procedures

Pricing and compilation

controls

Valuation of inventory

Purchased inventory

Manufactured inventory


77


Tests of acquisitionand payment cycle

Other manufacturingcosts

Raw material used

Work in processRaw materials

Acquisitions ofraw materials

Raw material used


Tests of payroll andpersonnel cycle

Work in processWork in process

Indirect laborDirect labor


Inventory tests Cost accounting records Physical inventory observation Pricing and compilation

Work in process

Ending inventory

Raw materials

Ending inventory

Finished goods

Ending inventory


Work in process Finished goods

Cost of goodsmanufactured

Cost of goodsmanufactured

Tests ofsales and

collection cycleCost of goods sold

Finished goods



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