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INVENTORY Issues from Chapter 13

INVENTORY Issues from Chapter 13. Scan the complete chapter, however, issues for the exam and useful for Peach Blossom will come primarily from pages 499 to 507. INHERENT RISK ASSESSMENT. Engagement Characteristics :. Inventory may be difficult to audit

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INVENTORY Issues from Chapter 13

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  1. INVENTORY Issues from Chapter 13 Scan the complete chapter, however, issues for the exam and useful for Peach Blossom will come primarily from pages 499 to 507.

  2. INHERENT RISK ASSESSMENT Engagement Characteristics: • Inventory may be difficult to audit • Valuation may result in disagreements with the client • Possible related party transactions with the acquisition of raw materials and the sales of the finished product • Inventory is likely to contain misstatements.

  3. ANALYTICAL PROCEDURES • Comparison of raw material, finished goods, and total inventory turnover to previous years and industry averages. • Comparison of gross profit percentage by product line with previous years and industry data. • Comparison of current year standard costs with prior years after considering current conditions. • Comparison of actual manufacturing overhead costs with budgeted or standard manufacturing overhead costs.

  4. OBSERVATION OF PHYSICAL INVENTORY • The auditor's observation of inventory is a generally accepted auditing procedure. • The observation of the physical inventory provides evidence primarily on the validity audit objective (also ownership and valuation). .

  5. INVENTORY OBSERVATION CONSIDERATIONS • Observe and test count (but not responsible for taking inventory) • Periodic - At or very close to year end • Perpetual • Counts may be made at interim when records are well kept • Client may use methods, including statistical sampling, that may preclude the necessity to count all items each year • Observations should encompass all significant inventory locations (Independent specialists?) • First-year audits • Confirm inventories in public warehouses

  6. Client's Plan • Employee names, dates, and locations • Detailed instructions • Use and control of prenumbered inventory tags and summary sheets • Provisions for handling receipts and shipments during count

  7. OBSERVATION PROCEDURES • Insure that no production is scheduled. • No movement of goods during the inventory count. • Make sure that the client's count teams are following the inventory instructions. • Insure that inventory tags are issued sequentially to individual departments. • Perform test counts and record a sample of counts in the working papers.

  8. OBSERVATION PROCEDURES (Continued) • Obtain tag control information for testing the client's inventory compilation. • Obtain cutoff information. • Observe the condition of the inventory for items that may be obsolete, slow moving, or in excess quantities. • Inquiry about goods held on consignment for others or held on a "bill and hold" basis.

  9. SAMPLE DISCLOSURE: INVENTORY • Cost method (FIFO, LIFO, retail method) • Components of inventory (Raw Mat., WIP etc.) • Long-term purchase contracts • Consigned inventory • Purchases from related parties • LIFO liquidations • Pledged or assigned inventory • Disclosure of unusual losses from writedowns of inventory or losses on long-term purchase commitments • Warranty obligations

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