Describe the business functions
and the related documents and
Raw Materials Work in Process
Manufacturing Overhead
Flow of Inventory and Costs
Actual Applied Manufacturing
Direct Labor
Actual Applied Beginning
inventory Rawmaterials used
Work in Process Finished Goods
Flow of Inventory and Costs
Beginning inventory Ending inventory
Cost of Goods Sold Cost of goods
manufactured
Beginning inventory Ending inventory
Cost of
Functions in the Inventory and
Warehousing Cycle
Process
Receive raw materials
Receive raw materials
Functions in the Inventory and
Warehousing Cycle
Perpetual inventory master file
Perpetual inventory master file
Describe how e-commerce
How E-Commerce Affects
Inventory Management
The Internet enables clients to provide expanded descriptions of their inventory on a real-time basis.
The use of the Internet and other e-commerce applications may lead to financial reporting
Explain the five parts of
the audit of the inventory
Audit of Inventory
Acquire and record raw materials, labor,
and overhead.
Internally transfer assets and costs.
Part of audit Cycle in which tested
Acquisition and payment plus
payroll and personnel
Audit of Inventory
Ship goods and record revenue and costs.
Physically observe inventory.
Price and compile inventory.
Cycle in which tested Part of audit
Sales and collection
Inventory and warehousing
Cost Accounting Controls
2. Controls over the related costs 1. Physical Controls
Methodology for Designing
Controls and Substantive Tests
Understand internal control – cost accounting system.
Assess planned control risk – cost accounting system.
Methodology for Designing
Controls and Substantive Tests
Design tests of controls and substantive tests of transactions for the cost accounting system to meet
transaction-related audit objectives.
Audit procedures
Sample size
Items to select
Tests of Cost Accounting
Physical Controls
Documents and records for transferring inventory
Apply analytical procedures to
the accounts in the inventory
Analytical Procedures for
Manufacturing Equipment
Analytical Procedure Possible Misstatement Compare gross margin Overstatement or
percentage with that of understatement of previous years. inventory and cost
of goods sold
Analytical Procedures for
Manufacturing Equipment
Analytical Procedure Possible Misstatement Compare unit costs of Overstatement or
inventory with those of understatement of
previous years. unit costs
Analytical Procedures for
Manufacturing Equipment
Analytical Procedure Possible Misstatement Compare current year Misstatement of unit manufacturing costs with costs of inventory, those of previous years especially direct (variable costs should be labor and
adjusted for changes in manufacturing
Methodology for Designing Tests
of
Balances – INVENTORY
Identify client business risks affecting the inventory and warehousing cycles.
Set tolerable misstatement and assess inherent risk for the
inventory and warehousing cycles.
Methodology for Designing Tests
of
Balances – Inventory
Design and perform tests of controls and substantive tests
of transactions for the several cycles.
Design and perform analytical procedures for the inventory
Methodology for Designing Tests
of
Balances – Other Accounts
Design tests of details of inventory to satisfy
balance-related audit objectives.
Audit procedures Sample size
Design and perform
physical observation
Audit Responsibilities for
Client Physical Counts
Be present at the time the client counts inventory
Observe the client’s counting procedures
Make inquiries of client personnel about their counting procedures
Controls Over Physical Count
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
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
Selection of items Sample size
Timing
Physical Observation Tests
The most important part of the observation of inventory is determining whether the physical count is being taken in accordance
Balance-Related Objectives:
Physical Inventory Observation
Existence
Completeness
Accuracy
Inventory as
recorded on tags exist.
Existing inventory is counted and tagged.
Classification
Cutoff
Realizable Value
Inventory is classified correctly on the tags.
Transactions are recorded in the proper period.
Obsolete and unusable inventory items are
Balance-Related Objectives:
Physical Inventory Observation
Rights
The client has rights to inventory recorded
on tags Realizable
Value
Obsolete and unusable inventory items are
Design and perform audit
tests of pricing and
Audit of Pricing and
Compilation
Inventory price tests
Valuation of inventory Pricing and
compilation procedures
Pricing and compilation
controls
Purchased inventory
Audit of Pricing and
Compilation
Valuation of inventory Pricing and
compilation procedures Pricing and
compilation controls
Balance-Related Objectives:
Inventory
Pricing and Compilation
Detail
tie-in Existence
Balance-Related Objectives:
Inventory
Pricing and Compilation
Classification Realizable value
Rights Presentation
Valuation (Pricing)
of Inventory
Pricing Purchased Inventory
Pricing Manufactured Inventory
Integrate the various parts of
the audit of the inventory
Interrelationship of Various
Audit Tests
Tests of acquisition and payment cycle
Acquisitions of raw materials
Raw materials
Other manufacturing costs
Work in process
Interrelationship of Various
Audit Tests
Tests of payroll and personnel cycle
Direct labor
Work in process
Indirect labor
Interrelationship of Various
Audit Tests
Inventory tests
Cost accounting records
Physical inventory observation Pricing and compilation
Ending inventory
Raw materials
Ending inventory
Work in process
Ending inventory
Interrelationship of Various
Audit Tests
Cost of goods manufactured
Work in process
Cost of goods manufactured
Finished goods
Tests of sales and collection cycle
Cost of goods sold
Interrelationship of
Various Audit Tests
Tests of sales and collection cycle
Integration of the Tests
Acquisition and Payment Cycle
Payroll and Personnel Cycle
Sales and Collection Cycle
Cost Accounting
