Transcription
Audit of the Inventoryand Warehousing CycleChapter 21 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley5-5
Learning Objective 1Describe the business functions and therelated documents and records in theinventory and warehousing cycle. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 2
Flow of Inventory and CostsRaw MaterialsBeginning Rawinventory materialsusedPurchasesEndinginventoryDirect LaborActual AppliedManufacturing OverheadActual AppliedWork-in-ProcessBeginning Cost ofinventory goodsmanufacturedEndinginventoryFinished GoodsBeginning Cost ofinventory goods soldCost ofgoods soldEndinginventory 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 3
Functions in the CycleProcess ReceiveStorepurchaserawraworders materials materialsFlowReceiveofrawInventory tionPutcompletedgoods instorageShipfinishedgoods 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 4
Learning Objective 2Explain the five parts of the audit of theinventory and warehousing cycle. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 5
Audit of InventoryPart of auditAcquire and recordraw materials, labor,and overheadInternally transferassets and costsCycle(s) Where tested Acquisition and payment Payroll and personnel 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Inventory andWarehousing21 - 6
Audit of InventoryPart of auditShip goodsand recordrevenueand costsPhysicallyobserveinventoryPrice andcompileinventoryCycle where testedSales and collectionInventory andwarehousing 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/BeasleyInventory andwarehousing21 - 7
Learning Objective 3Design and perform audit tests of costaccounting. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 8
Cost Accounting Controls Physical controls over raw materials,work in process, and finished goods inventory Controls over the related costs 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 9
Methodology for Designing Controlsand Substantive TestsUnderstand internal control –cost accounting systemAssess planned control risk –cost accounting systemDetermine extent of testing controlsDesign tests of controls andAudit proceduressubstantive tests of transactionsSample sizefor the cost accounting systemItems to selectto meet transaction-relatedTimingaudit objectives 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 10
Tests of Cost Accounting Physical controls over inventory Documents and records for transferringinventory Perpetual inventory master files Unit cost records 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 11
Learning Objective 4Apply analytical procedures to the accountsin the inventory and warehousing cycle. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 12
Analytical Procedures: Inventoryand Warehousing CycleAnalytical procedurePossible misstatementCompare gross marginpercentage with that ofprevious yearsOverstatement orunderstatement ofinventory and costof goods soldCompare inventory turnover Obsolete inventory(cost of goods sold divided by overstatement oraverage inventory) with that understatementof previous yearof inventory 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 13
Analytical Procedures: Inventoryand Warehousing CycleAnalytical procedurePossible misstatementCompare unit costs ofinventory with thoseof previous yearsOverstatement orunderstatement of unitcosts, which affectinventory and cost ofgoods soldCompare extended inventoryvalue with that of previousyearsMisstatements incompilation, unit costs, orextensions, which affectinventory and cost ofgoods sold 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 14
Analytical Procedures: Inventoryand Warehousing CycleAnalytical procedurePossible misstatementCompare current yearmanufacturing costs withthose of previous years(variable costs should beadjusted for changesin volume)Misstatements of unitcosts of inventory,especially direct labor andmanufacturing overhead,which affect inventory andcost of goods sold 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 15
Learning Objective 5Design and perform physical observationaudit tests for inventory. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 16
Audit Responsibilities for ClientPhysical Counts Be present at the time the client countsinventory Observe the client’s counting procedures Make inquiries of client personnel abouttheir counting procedures Make their own independent tests of thephysical count 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 17
Controls Over 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 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 18
Audit DecisionsSamplesizeTiming 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/BeasleySelectionof items21 - 19
Physical Observation TestsThe most important part of the observation ofinventory is determining whether the physicalcount is being taken in accordance with theclient’s instructions. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 20
Balance-related Audit ObjectivesExistence: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. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 21
Balance-related Audit ObjectivesCutoff: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. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 22
Learning Objective 6Design and perform audit tests of pricingand compilation for inventory. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 23
Audit of Pricing and CompilationInventory price testsPricing andcompilationproceduresPricing andcompilationcontrolsPurchasedinventory 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/BeasleyValuationof inventoryManufacturedinventory21 - 24
Learning Objective 7Integrate the various parts of the audit ofthe inventory and warehousing cycle. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 25
Interrelationship of VariousAudit TestsTests of acquisitionand payment cycleRaw materialsWork in processAcquisitions ofraw materialsOther manufacturingcostsRaw material usedRaw material used 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 26
Interrelationship of VariousAudit TestsTests of payroll andpersonnel cycleWork in processWork in processDirect laborIndirect labor 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 27
Interrelationship of VariousAudit TestsInventory testsCost accounting records Physical inventory observation Pricing and compilation Raw materialsWork in processEnding inventoryEnding inventoryFinished goodsEnding inventory 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 28
Interrelationship of VariousAudit TestsWork in processFinished goodsCost of goodsmanufacturedCost of goodsmanufacturedTests ofsales andcollection cycleFinished goodsCost of goods sold 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley21 - 29
End of Chapter 21 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley5-5
Audit of Inventory Ship goods and record revenue and costs Cycle where tested Part of audit Sales and collection Physically observe inventory Price and compile inventory Inventory and warehousing Inventory and warehousing 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 8 Learning Objective 3 Design and perform audit tests of cost accounting.
