Bus 426 - Lecture 8.docx

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Business Administration
BUS 426
Michael Favere- Marchesi

Lecture 8 Audit of inventory can be complex  It may be a major item on the b/s  Inventory could be at a number of locations  Inventory could be made up of very diverse items (chemicals, electronics)  Valuation can be tough, because of potential obsolescence  Client may use several methods for valuing the inventory Business Functions  Process Purchase Orders Acquisition + Payment Cycle Receiving of New Materials Storing of Materials Processing of Goods Shipping Notice, Shipping Finished Goods Sales + Collection Cycle Auditing of Cost Accounting  Varies more than other cycles, due to the wide variety of the types of inventory and in the level of sophistication required by management  Cost accounting controls are related to physical inventory and compilation of costs of that inventory from raw material to finished goods Analytical Procedures  Gross Margin % of the prior year  Inventory Turnover of the prior year  Unit costs for the prior year  Extended Inventory value (Price x Quantity = Cost) with prior year  Current Year Manufacturing Cost with prior year o Manufacturing cost could be: Direct material, direct labor and manufacturing overhead Test of Details for Physical Inventory Observation  Most important element: Existence o Select a random tag number from inventory listing and identify the tag with that number attached to actual inventory o Observe any movement of inventory taking place during the count  Completeness o Examine inventory to make sure it is tagged o Enquire as to inventory in other locations  Accuracy o Recount client’s count to make sure that recorded cousts are accurate on the tags o Compare physical counts with perpetual inventory master files o Record test counts for subsequent testing  Classification o Examine inventory description on tags and compare with actual inventory counted o Evaluation of the completion recorded on the tags for WIP is reasonable  Cut-Off o Record in work-in-process for subsequent follow-up of the last shipping document used at year end o Make sure that the inventory for this last shipment was excluded from the physical count o Walk around the shipping area and look for inventory set aside for shipment  Valuation o Test for obsolete inventory by inquiry of factory employees o Be alert for damaged inventory, rust or dust, or inventory located in odd places  Rights and Obligation o Enquire as to consignment of customer inventory on client’s premises o Be alert for inventory set aside or specially marked as indication of non-ownership  Detail Tie-In  Perform compilation tests  Extend quantity x price on selected intems  Foot inventory listing  Trace the total to general ledger Test of Details for Pricing and Compilation  Existence o Trace inventory listed on the schedule to inventory tags and to auditor’s test counts  Completion o Account for unused tag number shown in the auditor’s working papers to make sure no tags have been added o Account for used tag to make sure that non have been omitted  Accuracy o Trace inventory listed on the schedule to inventory tags and auditor test counts for quantity and description o Perform price test of inventory (FIFO)  Cost inventory latest invoices  Classification o Compare the classifications into raw materials, WIP, finished goods by comparing descriptions on inventory tags and test counts with inventory listing schedule  Valuation o Perform test of LCM (Lower cost of Market), selling price and obsolescence  Rights and Ownership o Trace inventory tags identified as non-owned inventory during the physical observation to inventory listing schedule to make sure these have not been included o Review contracts with customers and suppliers and enquire of management for the possibility of inclusion of consigned and other non-owned inventory  Presentations and Disclosure o Examine financial statement for proper presentation and disclosure, including:  Separate disclosure of raw materials, WIP, finished goods  Proper description of inventory noted  Description of pledged inventory
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