Audit of The Inventory and Warehousing Cycle

CHAPTER 18 Audit of the Inventory and Warehousing Cycle
Copyright 2003 Pearson Education Canada Inc.
18 - 1
What is the sequence of functions in the inventory and warehousing cycle?
18 - 2
1. An employee recognizes a need for a purchase; completes a requisition and sends it to purchasing.
Ace Company PURCHASE REQUISITION
The production dept. needs 200 kgs. of dry #4 solvent.
authorized employee
PURCHASING DEPARTMENT
18 - 3
2. Purchasing shops for the appropriate quality at the best price, then prepares a purchase order.
PURCHASING DEPARTMENT
Ace Company PURCHASE ORDER To: Big Chemical Co. Please ship 200 kgs. of dry #4 solvent by 6/2/04 Price $38.40/kg.
purchasing agent
BIG
Chemical Co.
18 - 4
3. When goods arrive from the vendor, the receiving dept. inspects, counts, and prepares a receiving report.
BIG
Chemical Co. RECEIVING DEPARTMENT
Ace Company RECEIVING REPORT

Received 200 kgs. of dry #4 solvent on 6/1/04. Condition: OK
receiving employee
BIG Chemical Co.
18 - 5
4. Goods are moved from receiving to a warehouse; perpetual inventory is updated.

RECEIVING DEPARTMENT
WAREHOUSE
perpetual inventory description $$ 6/1/04-dry #4 solvent-200 kgs.7680
18 - 6
5. When needed, goods are moved from the warehouse to production; perpetual inventory and cost accounting records are updated.
WAREHOUSE
PRODUCTION DEPARTMENT
cost acctg. system description _ $$ _ June 8, 2004 Raw matl added - dry #4 solvent (200 kgs.) 7680
perpetual inventory description $$ 6/1/01-dry #4 solvent-200 kgs.7680 6/8/04-trans.200 kgs.to prod. -7680
18 - 7
6. When finished, goods are moved from production to the warehouse; perpetual inventory and cost accounting records are updated.
WAREHOUSE
PRODUCTION DEPARTMENT
perpetual inventory description $$ 6/9/04-fin.goods 50 litres x7g 9680
cost acctg. system description _ $$ _ 6/9/04-trans. 50 litres of finished x7g to warehouse 9680
18 - 8
7. When sold, goods are shipped and perpetual inventory records are updated.
A C E
Ace Co.
perpetual inventory description $$ 6/9/04-fin.goods 50 litres-x7g 9680 8/5/03- sold 30 litres-x7g -5808
18 - 9
What are the primary audit
objectives with regard to inventory?
18 - 10
What are the primary audit objectives with regard to inventory?
- existence
18 - 11
- existence - rights
ABC Electronics Co.
Sales Invoice
18 - 12
- existence - rights - accuracy

18 - 13
- existence - rights - accuracy - realizable value

18 - 14
What is the primary audit procedure with regard to inventory?
18 - 15
Observe the clients inventory-taking procedures.

18 - 16
Observe the clients inventory-taking procedures.
18 - 17
When do client inventorytaking procedures occur?
18 - 18

If the client has a periodic inventory system, the physical inventory count determines the balance in inventory accounts and will probably occur on the balance sheet date.
December
18 - 19

If the client has a perpetual inventory system, the physical inventory count may occur any time during the accounting period. Whenever the count occurs, the auditor is required to observe.
June
18 - 20
Some clients use statistical sampling in their inventory methods.
why?
18 - 21

reduces the need to count every inventory item (sample results can be statistically extended to the population)
18 - 22
What are the auditors concerns?

18 - 23

The auditor is concerned that the statistical inventory plan: - has statistical validity - is properly applied - achieves reasonable results
18 - 24
Should the auditor test beginning inventory balances?

January
18 - 25

When the auditing firm has not audited beginning balances, the auditors must satisfy themselves as to the appropriateness of beginning balances, if they are satisfied as to the current balances.
18 - 26

how?
18 - 27
how?
analytical procedures review of prior tests of inventory transactions and inventory documents count records
18 - 28
How should the auditor test inventory held at a public warehouse?

client headquarters & auditors office
public warehouse
18 - 29
How should the auditor test inventory held at a public warehouse? - direct written confirmation with the public warehouse
Are additional procedures necessary?

18 - 30
How should the auditor test inventory held at a public warehouse? - direct written confirmation with the public warehouse
Confirmation, alone, will not be sufficient if inventory quantities held at the warehouse are significant.
18 - 31

- direct written confirmation with the public warehouse - if inventory held at the public warehouse is significant: ~ review clients procedures for investigating and evaluating the warehouse
18 - 32
How should the auditor test inventory held at a public warehouse? - direct written confirmation with the public warehouse - if inventory held at the public warehouse is significant: ~ review clients procedures for investigating and evaluating the warehouse ~ obtain report from warehouses auditor regarding internal controls
18 - 33

- direct written confirmation with the public warehouse - if inventory held at the public warehouse is significant: ~ review clients procedures for investigating and evaluating the warehouse ~ obtain report from warehouses auditor regarding internal controls ~ observe warehouses physical counts (if practical)
18 - 34
Some large merchandisers use outside inventory-taking companies that specialize in counting inventory.
18 - 35
What are the auditing implications?

18 - 36
- since the inventory-taking company is a third party, their work has greater reliability than the clients
18 - 37
- since the inventory-taking company is a third party, their work has greater reliability than the clients - the auditor still should observe the physical inventory count
18 - 38
- since the inventory-taking company is a third party, their work has greater reliability than the clients - the auditor still should observe the physical inventory count - the auditor must test the effectiveness of the inventory-taking companys procedures
18 - 39
Inventory Audit Procedures

perform analytical procedures to test inventory reasonableness
18 - 40

regarding the client physical inventory count: Review the clients plan for counting the physical inventory. Attend client count planning meetings.
18 - 41

regarding the client physical inventory count: Observe the physical inventory count. Determine whether clients counting methods are effective.
18 - 42

regarding the client physical inventory count: Observe the quality and condition of the inventory. Consider obsolescence.
18 - 43

regarding the client physical inventory count:
On a random basis: - select a sample of inventory items from the warehouse floor, count them, trace the quantity to client count records
18 - 44

regarding the client physical inventory count:
On a random basis: - select a sample of inventory items from the client count records, find them in the warehouse, count them
18 - 45

regarding the client physical inventory count: On a random basis: - select a sample of inventory items from the client count records, trace them to the perpetual inventory records
4/30/x7 Physical 4/30/04 Physical Inventory Inventory 4/30/04 Physical Inventory 18# widgets 18# widgets - purple 18# widgets - purple - purple perpetual inventory description qty widgets - red 87 widgets - green 4 widgets - purple 18
18 - 46

regarding the client physical inventory count: On a random basis: - select a sample of inventory items from the perpetual inventory records trace them to the client count records
4/30/x7 Physical 4/30/04 Physical Inventory Inventory 4/30/04 Physical Inventory 18# widgets 18# widgets - purple 18# widgets - purple - purple perpetual inventory description qty widgets - red 87 widgets - green 4 widgets - purple 18
18 - 47
determine whether any inventory has been pledged as collateral (disclosure)

18 - 48

Enquire of client management regarding the existence of consigned inventories.
consignments R us
ACE
18 - 49

Enquire of client management regarding the existence of consigned inventories: - if a consignee holds a portion of the
clients inventory, confirm that amount with the consignee
18 - 50

Enquire of client management regarding the existence of consigned inventories: - if a consignee holds a portion of the
clients inventory, confirm that amount with the consignee - if a client consignee holds a portion of a consignors inventory, confirm that amount with the consignor
18 - 51
Consider the effects of sales and purchases cutoff tests on inventories.

18 - 52
Test the clients application of their inventory valuation method (FIFO, LIFO) and the lower-of-cost-ormarket rule.
18 - 53
For manufactured inventories: test the cost accumulation process as it affects valuation of ending inventories and COGS
18 - 54

Audit of The Inventory and Warehousing Cycle

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CHAPTER 18 Audit of the Inventory and Warehousing Cycle

Copyright 2003 Pearson Education Canada Inc.

What is the sequence of functions in the inventory and warehousing cycle?

Copyright 2003 Pearson Education Canada Inc.

Copyright 2003 Pearson Education Canada Inc.

Ace Company RECEIVING REPORT

BIG Chemical Co.

4. Goods are moved from receiving to a warehouse; perpetual inventory is updated.

perpetual inventory description $$ 6/1/04-dry #4 solvent-200 kgs.7680

Copyright 2003 Pearson Education Canada Inc.

Copyright 2003 Pearson Education Canada Inc.

perpetual inventory description $$ 6/9/04-fin.goods 50 litres x7g 9680

Copyright 2003 Pearson Education Canada Inc.

Copyright 2003 Pearson Education Canada Inc.

What are the primary audit

objectives with regard to inventory?

Copyright 2003 Pearson Education Canada Inc.

What are the primary audit objectives with regard to inventory?

What are the primary audit objectives with regard to inventory?

ABC Electronics Co.

Copyright 2003 Pearson Education Canada Inc.

What are the primary audit objectives with regard to inventory?

- existence - rights - accuracy

What are the primary audit objectives with regard to inventory?

- existence - rights - accuracy - realizable value

What is the primary audit procedure with regard to inventory?

Copyright 2003 Pearson Education Canada Inc.

What is the primary audit procedure with regard to inventory?

Observe the clients inventory-taking procedures.

What is the primary audit procedure with regard to inventory?

Observe the clients inventory-taking procedures.

Copyright 2003 Pearson Education Canada Inc.

When do client inventorytaking procedures occur?

Copyright 2003 Pearson Education Canada Inc.

When do client inventorytaking procedures occur?

When do client inventorytaking procedures occur?

Some clients use statistical sampling in their inventory methods.

Some clients use statistical sampling in their inventory methods.

Some clients use statistical sampling in their inventory methods.

What are the auditors concerns?

Some clients use statistical sampling in their inventory methods.

Should the auditor test beginning inventory balances?

Copyright 2003 Pearson Education Canada Inc.

Should the auditor test beginning inventory balances?

Copyright 2003 Pearson Education Canada Inc.

Should the auditor test beginning inventory balances?

How should the auditor test inventory held at a public warehouse?

Are additional procedures necessary?

Copyright 2003 Pearson Education Canada Inc.

How should the auditor test inventory held at a public warehouse?

Copyright 2003 Pearson Education Canada Inc.

How should the auditor test inventory held at a public warehouse?

Copyright 2003 Pearson Education Canada Inc.

What are the auditing implications?

Copyright 2003 Pearson Education Canada Inc.

Copyright 2003 Pearson Education Canada Inc.

Inventory Audit Procedures

Inventory Audit Procedures

Copyright 2003 Pearson Education Canada Inc.

Inventory Audit Procedures

Copyright 2003 Pearson Education Canada Inc.

Inventory Audit Procedures