Addthis Arens Chapter21

(1)

Audit of the Inventory

and Warehousing Cycle

Chapter 21

(2)

Learning Objective 1

Describe the business functions

and the related documents and

records in the inventory and

warehousing cycle.

(3)

Flow of Inventory and Costs

Actual

Raw Materials

Beginning

inventory

Raw

materials

used

Purchases

Ending

inventory

Direct Labor

Applied

Cost of

goods

manufactured

Cost of

goods sold

Finished Goods

(4)

Learning Objective 2

Explain the five parts of the audit

of the inventory and warehousing

cycle.

(5)

Functions in the Cycle

Process

goods in

(6)

Audit of Inventory

Acquire and record

raw materials, labor,

and overhead

Part of audit

Cycle in which tested

Acquisition and

payment plus

payroll and personnel

Internally transfer

assets and costs

(7)

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

(8)

Learning Objective 3

Design and perform audit tests

of cost accounting.

(9)

Cost Accounting Controls

2. Controls over the related costs

1. Physical controls over raw materials,

(10)

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 procedures

Sample size

Items to select

Timing

Design tests of controls and

substantive tests of transactions

for the cost accounting system

(11)

Tests of Cost Accounting



_{Physical controls over inventory}



_{Documents and records for transferring inventory}



_{Perpetual inventory master files}

(12)

Learning Objective 4

Apply analytical procedures to

the accounts in the inventory

and warehousing cycle.

(13)

Analytical Procedures: Inventory

and Warehousing Cycle

Analytical procedure

Compare gross margin

percentage with that of

previous years

Overstatement or

understatement of

inventory and cost

of goods sold

Possible misstatement

Compare inventory turnover

(cost of goods sold divided by

average inventory) with that

(14)

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 affect

inventory and cost of

goods sold

Possible misstatement

Compare extended inventory

value with that of previous

years

Misstatements in

compilation, unit costs, or

extensions, which affect

inventory and cost of

(15)

Analytical Procedures: Inventory

and Warehousing Cycle

Analytical procedure

Compare current year

manufacturing costs with

those of previous years

(variable costs should be

adjusted for changes

in volume)

Misstatements of unit costs

of inventory, especially

direct labor and

manufacturing overhead,

which affect inventory and

cost of goods sold

(16)

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

(17)

Methodology for Designing

Tests of Balances – Inventory

Design and perform

tests of controls and

substantive tests

of transactions

for several cycles

(18)

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

(19)

Learning Objective 5

Design and perform physical

observation audit tests

for inventory.

(20)

Controls Over Perpetual

Inventory Master Files



_{Proper instructions for the physical count}



_{Supervision by responsible personnel}



_{Independent internal verification of the counts}



_{Independent reconciliations of the physical}

counts with perpetual inventory master files

(21)

Audit Decisions



_Timing



_{Sample size}

(22)

Physical Observation Tests

(23)

Balance-related Audit

Objectives

Existence:

Inventory as recorded on tags exist.

Completeness:

Existing inventory is counted and tagged.

Accuracy:

(24)

Balance-Related Audit

Objectives

Cutoff:

Transactions are recorded in the proper period.

Realizable value:

Obsolete and unusable inventory items are

excluded or noted.

Rights:

(25)

Learning Objective 6

Design and perform audit tests

of pricing and compilation

for inventory.

(26)

Audit of Pricing and Compilation

Inventory price tests



_{Valuation of inventory}

(27)

Balance-Related Objectives:

Inventory Pricing and Compilation



_{Detail tie-in}



_Existence



_Completeness



_Accuracy



_{Classification}

(28)

Valuation of Inventory



_{Pricing purchased inventory}



_{Pricing manufactured inventory}

(29)

Learning Objective 7

Integrate the various parts of

the audit of the inventory

and warehousing cycle.

(30)

Interrelationship of Various

Audit Tests

Tests of acquisition

and payment cycle

Acquisitions of

raw materials

Raw materials

Other manufacturing

costs

Work in process

(31)

Interrelationship of Various

Audit Tests

Tests of payroll and

personnel cycle

Direct labor

Work in process

Indirect labor

(32)

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 materials

Ending inventory

Work in process

Ending inventory

(33)

Interrelationship of Various

Audit Tests

Cost of goods

manufactured

Work in process

Cost of goods

manufactured

Finished goods

Tests of

sales and

Cost of goods sold

(34)

End of Chapter 21