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.
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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.
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Describe the business functions and the related documents and records in the
inventory and warehousing cycle.
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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
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Processpurchase
orders
Receiveraw
materials
Storeraw
materials
Processthe
goods
Storefinishedgoods
Shipfinishedgoods
Flowof
Inventory
Receiveraw
materials
Putmaterials
instorage
Putmaterials
inproduction
Putcompletedgoods instorage
Shipfinishedgoods
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Explain the five parts of the audit of the inventory and warehousing cycle.
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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
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Part of auditShip goodsand recordrevenue and costs
Physically observeinventory
Price and compile
inventory
Cycle where tested
Sales and collection Inventory andwarehousing
Inventory andwarehousing
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Design and perform audit tests of cost accounting.
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Physical controls over raw materials, work in process, and finished goods inventory
Controls over the related costs
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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
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Physical controls over inventory
Documents and records for transferring inventory
Perpetual inventory master files
Unit cost records
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Apply analytical procedures to the accounts in the inventory and warehousing cycle.
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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
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Analytical procedure Possible misstatement
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
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Analytical procedure Possible misstatement
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
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Design and perform physical observation audit tests for inventory.
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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
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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
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Timing
Sample size
Selection of items
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The most important part of the observation ofinventory is determining whether the physicalcount is being taken in accordance with theclient’s instructions.
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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.
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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.
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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
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Tests of acquisitionand payment cycle
Other manufacturingcosts
Raw material used
Work in processRaw materials
Acquisitions ofraw materials
Raw material used
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Tests of payroll andpersonnel cycle
Work in processWork in process
Indirect laborDirect labor
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Inventory tests Cost accounting records Physical inventory observation Pricing and compilation
Work in process
Ending inventory
Raw materials
Ending inventory
Finished goods
Ending inventory
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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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Copyright © 2014 Pearson Education20-33
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