Upload
omarizaid
View
223
Download
0
Embed Size (px)
Citation preview
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 1/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 1
Audit of the Inventory
and Warehousing Cycle
Chapter 21
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 2/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 2
Learning Objective 1
Describe the business functions
and the related documents and
records in the inventory and
warehousing cycle.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 3/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 3
Flow of Inventory and Costs
Actual
Raw Materials
Beginninginventory
Rawmaterialsused
Purchases
Endinginventory
Direct Labor
Actual
Applied
Applied
Manufacturing Overhead
Work-in-Process
Beginninginventory
Ending
inventory
Cost of goodsmanufactured
Cost of goods soldFinished Goods
Beginninginventory
Endinginventory
Cost of goods sold
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 4/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 4
Learning Objective 2
Describe how e-commerce
affects inventory management.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 5/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 5
How E-Commerce Affects
Inventory Management
The Internet enables companies to provide
complete 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 andsystems is not adequately controlled.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 6/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 6
Learning Objective 3
Explain the five parts of the audit
of the inventory and warehousing
cycle.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 7/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 7
Functions in the Cycle
Process
purchase
orders
Receive
raw
materials
Store
raw
materials
Process
the
goods
Store
f in ished
goods
Ship
f in ished
goods
Receive
raw
materials
Putmaterials
in
storage
Putmaterials
in
production
Putcompleted
goods in
storage
Ship
finished
goods
Flow
of
Inventory
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 8/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 8
Audit of Inventory
Acquire and record
raw materials, labor,and overhead
Part of audit Cycle in which tested
Acquisition and
payment pluspayroll and personnel
Internally transfer
assets and costsInventory and
warehousing
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 9/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 9
Audit of Inventory
Ship goods and record
revenue and costs
Cycle in which tested Part of audit
Sales and collection
Physically observe
inventory
Inventory and
warehousing
Price and compileinventory
Inventory andwarehousing
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 10/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 10
Learning Objective 4
Design and perform audit tests
of cost accounting.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 11/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 11
Cost Accounting Controls
2. Controls over the related costs
1. Physical controls over raw materials,
work in process, and finished goods inventory
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 12/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 12
Methodology for Designing Controls
and Substantive Tests
Understand internal control –
cost accounting system
Assess planned control risk –
cost accounting system
Determine extent of testing controls
Audit proceduresSample size
Items to select
Timing
Design tests of controls andsubstantive tests of transactions
for the cost accounting system
to meet transaction-related
audit objectives
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 13/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 13
Tests of Cost Accounting
Physical controls over inventory
Documents and records for transferring inventory
Perpetual inventory master files
Unit cost records
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 14/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 14
Learning Objective 5
Apply analytical procedures to
the accounts in the inventory
and warehousing cycle.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 15/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 15
Analytical Procedures: Inventory
and Warehousing Cycle
Analytical procedure
Compare gross marginpercentage with that of
previous years
Overstatement or understatement of
inventory and costof goods sold
Possible misstatement
Compare inventory turnover (cost of goods sold divided byaverage inventory) with thatof previous year
Obsolete inventoryoverstatement or understatementof inventory
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 16/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 16
Analytical Procedures: Inventory
and Warehousing Cycle
Analytical procedure
Compare unit costs of inventory with those
of previous years
Overstatement or understatement of unit
costs, which affectinventory and cost of goods sold
Possible misstatement
Compare extended inventory
value with that of previousyears
Misstatements in
compilation, unit costs, or extensions, which affectinventory and cost of goods sold
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 17/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 17
Analytical Procedures: Inventory
and Warehousing Cycle
Analytical procedure
Compare current year manufacturing costs with
those of previous years(variable costs should beadjusted for changesin volume)
Misstatements of unit costsof inventory, especially
direct labor andmanufacturing overhead,which affect inventory andcost of goods sold
Possible misstatement
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 18/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 18
Identify client
business risks
affecting inventory
Methodology for Designing
Tests of Balances – Inventory
Set tolerable misstatement
and assess inherent
risk for inventor
Assess control
risk for
several cycles
Phase I
Phase I
Phase I
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 19/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 19
Methodology for Designing
Tests of Balances – Inventory
Design and perform
tests of controls and
substantive testsof transactions
for several cycles
Phase II
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 20/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 20
Timing
Items to select
Sample size
Audit procedures
Methodology for Designing
Tests of Balances – Inventory
Design and perform
analytical procedures
for inventory
Design tests of
details of inventory
to satisfy balance-related audit
objectives
Phase III
Phase III
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 21/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 21
Learning Objective 6
Design and perform physical
observation audit tests
for inventory.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 22/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 22
Controls Over Perpetual
Inventory Master Files
Proper instructions for the physical count
Supervision by responsible personnel
Independent interval verification of the counts
Independent reconciliations of the physical
counts with perpetual inventory master files
Adequate control over count sheets or tags
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 23/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 23
Audit Decisions
Timing
Sample size
Selection of items
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 24/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 24
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.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 25/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 25
Balance-related Audit
Objectives
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.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 26/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 26
Balance-Related Audit
Objectives
Cutoff:
Transactions are recorded in the proper period.
Realizable value:Obsolete and unusable inventory items are
excluded or noted.
Rights:
The client has rights to inventory recorded
on tags.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 27/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 27
Learning Objective 7
Design and perform audit tests
of pricing and compilation
for inventory.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 28/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 28
Audit of Pricing and
Compilation
Inventory price tests
Valuation of inventory
Pricing and compilation procedures
Pricing and compilation controls
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 29/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 29
Balance-Related Objectives:
Inventory Pricing and Compilation
Detail tie-in
Existence
Completeness Accuracy
Classification
Realizable value Rights
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 30/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 30
Valuation of Inventory
Pricing purchased inventory
Pricing manufactured inventory
Cost or market
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 31/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 31
Learning Objective 8
Integrate the various parts of
the audit of the inventory
and warehousing cycle.
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 32/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 32
Interrelationship of Various
Audit Tests
Tests of acquisition
and payment cycle
Acquisitions of
raw materials
Raw m aterials
Other manufacturing
costs
Work in process
Raw material usedRaw material used
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 33/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 33
Interrelationship of Various
Audit Tests
Tests of payroll and
personnel cycle
Direct labor
Work in process
Indirect labor
Work in process
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 34/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 34
Interrelationship of Various
Audit Tests
Inventory tests
Tests of cost accounting records
Tests of physical inventory observation
Tests of pricing and compilation
Ending inventory
Raw m aterials
Ending inventory
Work in process
Ending inventory
Fin ished goods
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 35/36
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 21 - 35
Interrelationship of Various
Audit Tests
Cost of goods
manufactured
Work in process
Cost of goods
manufactured
Fin ished goods
Tests of
sales andcollection cycle
Cost of goods sold
Fin ished goods
7/23/2019 Auditing Warehouses and Inventories.pdf
http://slidepdf.com/reader/full/auditing-warehouses-and-inventoriespdf 36/36
©2008 Prentice Hall Business Publishing Auditing 12/e Arens/Beasley/Elder 21 36
End of Chapter 21