Materi Lab 6 - Audit of the Inventory and Warehousing Cycle

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

Audit of the InventoryAudit of the Inventoryand Warehousing and Warehousing

CycleCycleChapter 21Chapter 21

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 21 - 21 - 22

Learning Objective 1Learning Objective 1

Describe the business functions and Describe the business functions and the related documents and records in the related documents and records in the inventory and warehousing cycle.the inventory and warehousing cycle.


Flow of Inventory and CostsFlow of Inventory and Costs

Actual

Raw Materials Beginninginventory

Rawmaterialsused

Purchases

Endinginventory

Direct Labor

Actual

Applied

AppliedManufacturing Overhead

Work-in-ProcessBeginninginventory

Endinginventory

Cost ofgoodsmanufactured

Cost ofgoods soldFinished Goods

Beginninginventory

Endinginventory

Cost ofgoods sold


Functions in the CycleFunctions in the CycleProcess

purchaseorders

Receiveraw

materials

Storeraw

materials

Processthe

goods

Storefinishedgoods

Shipfinishedgoods

Receiveraw

materials

Putmaterials

instorage

Putmaterials

inproduction

Putcompletedgoods instorage

Shipfinishedgoods

Flowof

Inventory



Explain the five parts of the audit of Explain the five parts of the audit of the inventory and warehousing cycle.the inventory and warehousing cycle.


Audit of InventoryAudit of Inventory

Acquire and recordraw materials, labor,and overhead

Part of audit

Cycle(s) Where testedAcquisition and paymentPayroll and personnel

Internally transferassets and costs

Inventory and Warehousing


Audit of InventoryAudit of Inventory

Ship goodsand recordrevenue and costs

Cycle where tested

Part of audit

Sales and collection

Physically observe

inventory

Price and compile

inventory

Inventory andwarehousing

Inventory andwarehousing



Design and perform audit tests of cost Design and perform audit tests of cost accounting.accounting.


Cost Accounting ControlsCost Accounting Controls

Physical controls over raw materials, work in process, and finished goods inventory

Controls over the related costs


Methodology for Designing Methodology for Designing Controls and Substantive TestsControls 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 selectTiming

Design tests of controls andsubstantive tests of transactionsfor the cost accounting system

to meet transaction-relatedaudit objectives


Tests of Cost AccountingTests of Cost Accounting Physical controls over inventory

Documents and records for transferring inventory

Perpetual inventory master files

Unit cost records



Apply analytical procedures to the Apply analytical procedures to the accounts in the inventory and accounts in the inventory and warehousing cycle.warehousing cycle.


Analytical Procedures: Analytical Procedures: Inventory and Warehousing Inventory and Warehousing

CycleCycleAnalytical procedureCompare gross marginpercentage with that ofprevious years

Overstatement orunderstatement ofinventory and costof goods sold

Possible misstatement

Compare inventory turnover(cost of goods sold divided byaverage inventory) with thatof previous year

Obsolete inventoryoverstatement orunderstatementof inventory



CycleCycleCompare unit costs ofinventory with thoseof previous years

Overstatement orunderstatement of unitcosts, which affectinventory and cost ofgoods sold

Compare extended inventoryvalue with that of previousyears

Misstatements incompilation, unit costs, orextensions, which affectinventory and cost ofgoods sold

Analytical procedure Possible misstatement



CycleCycleCompare 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

Analytical procedure Possible misstatement



Design and perform physical Design and perform physical observation audit tests for inventory.observation audit tests for inventory.


Audit Responsibilities for Audit Responsibilities for Client Physical CountsClient 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

Make their own independent tests of the physical count


Controls Over Physical Controls Over Physical Count 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


Audit DecisionsAudit Decisions

Timing

Sample size

Selection of items


Physical Observation TestsPhysical Observation Tests

The most important part of the observation ofinventory is determining whether the physicalcount is being taken in accordance with theclient’s instructions.


Balance-related Audit Balance-related Audit ObjectivesObjectives

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.


Balance-related Audit Balance-related Audit ObjectivesObjectives

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.



Design and perform audit tests of Design and perform audit tests of pricing and compilation for inventory.pricing and compilation for inventory.


Audit of Pricing and Audit of Pricing and CompilationCompilation

Inventory price tests

Valuation of inventory

Pricing and compilation procedures

Pricing and compilation

controls

Purchased inventory

Manufactured inventory



Integrate the various parts of the audit Integrate the various parts of the audit of the inventory and warehousing of the inventory and warehousing cycle.cycle.


Interrelationship of VariousInterrelationship of VariousAudit TestsAudit TestsTests of acquisitionand payment cycle

Acquisitions ofraw materials

Raw materialsOther manufacturing

costs

Work in process

Raw material usedRaw material used


Interrelationship of VariousInterrelationship of VariousAudit TestsAudit Tests

Tests of payroll andpersonnel cycle

Direct laborWork in process

Indirect laborWork in process


Interrelationship of VariousInterrelationship of VariousAudit TestsAudit Tests Inventory tests

Cost accounting records Physical inventory observation Pricing and compilation

Ending inventoryRaw materials

Ending inventoryWork in process

Ending inventoryFinished goods


Interrelationship of VariousInterrelationship of VariousAudit TestsAudit Tests

Cost of goodsmanufactured

Work in processCost of goodsmanufactured

Finished goods

Tests ofsales and

collection cycleCost of goods sold

Finished goods

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

End of Chapter 21End of Chapter 21

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