Presented by:
Diana Tai
Ivan Chen
Ronnie Lee
Wilson Wong
Chapter 11 DQ 35CAAT
Background
Client:
• Wholesale cosmetics distributor with an inventory of thousands of individual items
• Keep inventory in its own distribution centre and 2 public warehouses
• Inventory computer file is maintained on a computer disk
Background
Auditor:
• A computer cartridge of the data on the inventory file on the date of the physical count
• A general-purpose computer software package
Scope of Audit Work
Audit Procedure:• Planning/Compliance test/Substantive
testing/Reporting
Assumption:• Planning and Compliance test have performed and
obtain satisfactory result• Focus will be on substantive testing on balance
and transaction only
Assumption
• Collection of data is performed by auditor
• Client maintain a sound and effective control on the accounting system after evaluation
• Client maintain all record in computer format
• Auditor is competence with CAAT
Objective of substantive testing
1. Existence
2. Completeness
3. Ownership
4. Valuation
5. Accuracy
6. Identifying Unusual Items
Basic inventory auditing procedure
How general purpose computer software package and type of the inventory file data might be helpful
Stock count: select sample and then test count to see the existence
Use computer to select sample randomly, orbased on some selection criteria
1. Existence
Send confirmation to confirm the inventories hold by third parties
Select sample by computer randomly or based on selection criteriaPrint confirmation by computer
1. Existence
Basic inventory auditing procedure
How general purpose computer software package and type of the inventory file data might be helpful
Omission of invoice no: Scanning & Cut off
Audit software can detect the gap of invoice no.
2. Completeness
Trace the inventory to documents e.g. invoice, receiving reports and purchase order
Request clients for receiving reports and compare with inventory report with software
Analytical procedure by human calculation (reasonableness)
Compare the inventory records of this year and past years
2. Completeness
Basic inventory auditing procedure
How general purpose computer software package and type of the inventory file data might be helpful
Check company’s policy of recognition criteria Manual records
Check company’s policy of recognition criteria Computerized records
3. Ownership
Check manual records of consignment sales
Check computerized records of consignment sales
Goods held for consignmentGood shipped out for consignment
Goods held for consignmentGood shipped out for consignment
3. Ownership
Check manual records of
purchase order;receiving reports; and vendor’s invoice
Join computerized records of
Receiving report; andOrdering report
Use generated report of unmatched itemsTo check reasonableness
3. Ownership
Prepare manual management representation letter
Print computerized management representation letter Take the letter to client to sign
3. Ownership
4. Valuation
Basic inventory auditing procedure
How general purpose computer software package and type of the inventory file data might be helpful
Check physical condition of inventories during stock-taking
eg: slow-moving and obsolete items
Analyze the inventory balance into age categories, by identifying the date of last purchase or last saleSelect the slow-moving itemsPhysical inspection
Trace unit cost of inventory to supporting documents such as vendor’s invoice
Request for vendor’s invoice file(last year) Join with inventory file and matched by item no. Extract the ‘amount deviated ’ from the ‘cost per item’ by applying equation(COST1<>COST)
4. Valuation
4. Valuation
Trace to subsequent sales invoices and compare the selling price to the cost Consider appropriate write-down to net realizable value(NRV)
Request for sales invoice file(current year)Join with inventory file and matched by item no. Consider ‘write-down to NRV’ by applying equation(COST>INV_AMT)
Perform an analytical review of the overall reasonableness of the inventory valuation
Generate reports showing the total amount of each category of inventories with prior year and budget
5. Accuracy
Basic inventory auditing procedure
How general purpose computer software package and type of the inventory file data might be helpful
Recalculate to check for arithmetical accuracy
Test the accuracy of the client’s computation
– Check the extensions and footings
Check the correctness of discount received
Request for payment record (last year)Join with inventory file and matched by item no. Check ‘incorrect discount’ by applying equation (Discount percent >0 AND Payment period>30)
5. Accuracy
6. Unusual items
Basic inventory auditing procedure
How general purpose computer software package and type of the inventory file data might be helpful
Check the transaction with zero or negative amount
–eg. Purchase return
Request for purchase return record (last year)Join with inventory file and matched by item no.
Check the transaction with cents and odd dollars
Extract purchases with cents in the inventory file by applying equation
(COST-@int(COST)<>0)Extract purchases with odd dollars in the inventory file by applying equation
(COST- @int(COST/10)*10<>0)
6. Unusual items
Conclusion
Advantage of CAAT:
• Time saving
• Accurate result is obtain
• Objectivity in random sampling
• Audit work done can easily transfer internationally to other branches when necessary
Conclusion
Limitation of CAAT:• Program compatibility of document format• Competence of Auditors
Common concern of traditional and CAAT audit:• Evaluation of True and Fairness of inventory
account is base on auditors’ professional judgment