Audit of the Inventory and Warehousing Cycle

1. Audit of the Inventoryand Warehousing Cycle Chapter 16

2. Learning Objective 1 Identify the business functions and the related documents and records in the inventory and warehousing cycle.

3. Receive raw materials Store raw materials Process the goods Functions in the Inventoryand Warehousing Cycle Process purchase orders

4. Ship finished goods Functions in the Inventoryand Warehousing Cycle Store finished goods

5. Learning Objective 2 Describe how e-commerce affects inventory management.

6. 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 risks if access to inventory databases and systems is not adequately controlled.

7. Learning Objective 3 Explain the five parts of the audit of the inventory and warehouse cycle.

8. Part of audit Cycle in which tested Acquire and record raw materials, labor, and overhead. Acquisition and payment plus payroll and personnel Audit of Inventory Internally transfer assets and costs. Inventory and warehousing

9. Audit of Inventory Part of audit Cycle in which tested Ship goods and record revenue and costs. Sales and collection Physically observe inventory. Inventory and warehousing Price and compile inventory. Inventory and warehousing

10. Learning Objective 4 Design and perform audit tests of cost accounting.

11. Cost Accounting Controls 1. Physical Controls over Raw materials WIP Finished goods 2. Controls over the related costs

12. Tests of Cost Accounting Physical Controls Documents and records for transferring inventory Perpetual inventory master files Unit cost records

13. Learning Objective 5 Apply analytical procedures to the accounts in the inventory and warehousing cycle.

14. 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 Compare inventory turnover Obsolete inventory (cost of goods sold divided Overstatement or by average inventory) with understatement of that of previous years. inventory

15. 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 Compare extended Misstatements in inventory value with that compilation, unit of previous years. costs, or extensions

16. 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 volume). overhead

17. Set tolerable misstatement and assess inherent risk for the inventory and warehousing cycles. Assess control risk for several cycles. Methodology for DesigningTests of Details of Balances Identify client business risks affecting the inventory and warehousing cycles.

18. Design and perform analytical procedures for the inventory and warehousing cycle. Methodology for DesigningTests of Details of Balances Design and perform tests of controls and substantive tests of transactions for the several cycles.

19. Methodology for DesigningTests of Details of Balances Design tests of details of inventory to satisfy balance-related audit objectives. Audit procedures Sample size Items to select Timing

20. Learning Objective 6 Design and perform physical observation audit tests for inventory.

21. Controls 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 Adequate control over count sheets or tags

22. Audit Decisions Timing Sample size Selection of items

23. Physical Observation Tests The most important part of the observation of inventory is determining whether the physical count is being taken in accordance with the client’s instructions.

24. Inventory as recorded on tags exist. Existing inventory is counted and tagged. Inventory is counted accurately. Balance-Related Objectives: Physical Inventory Observation Existence Completeness Accuracy

25. Transactions are recorded in the proper period. Balance-Related Objectives: Physical Inventory Observation Classification Inventory is classified correctly on the tags. Cutoff

26. The client has rights to inventory recorded on tags Balance-Related Objectives: Physical Inventory Observation Realizable Value Obsolete and unusable inventory items are excluded or noted. Rights

27. Learning Objective 7 Design and perform audit tests of pricing and compilation for inventory.

28. Audit of Pricing and Compilation Inventory price tests Inventory compilation tests

29. Audit of Pricing and Compilation Pricing and compilation controls Pricing and compilation procedures Valuation of inventory

30. Balance-Related Objectives:Inventory Pricing and Compilation Detail tie-in Existence Completeness Accuracy

31. Balance-Related Objectives:Inventory Pricing and Compilation Classification Realizable value Rights Presentation and disclosure

32. Valuation (Pricing) of Inventory Pricing Purchased Inventory Pricing Manufactured Inventory Cost or Market

33. Learning Objective 8 Integrate the various parts of the audit of the inventory and warehousing cycle.

34. Raw materials Acquisitions of raw materials Work in process Other manufacturing overhead Interrelationship ofVarious Audit Tests Tests of acquisition and payment cycle

35. Work in process Direct labor Work in process Indirect labor Interrelationship ofVarious Audit Tests Tests of payroll and personnel cycle

36. Raw materials Ending inventory Work in process Ending inventory Finished goods Ending inventory Interrelationship ofVarious Audit Tests Inventory tests

37. Finished goods Cost of goods sold Interrelationship ofVarious Audit Tests Tests of sales and collection cycle

38. Integration of the Tests • Acquisition and payment cycle • Payroll and personnel cycle • Sales and collection cycle • Cost accounting • Physical inventory, pricing, and compilation

39. End of Chapter 16