MGAB01H3 Chapter : Inventory Basics

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27 Oct 2010

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MGAB01H3 Full Course Notes

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Inventory affects both the balance sheet and the income statement. To determine inventory quantities: (1) take a physical inventory of goods on hand, and (2) determine the ownership of goods. N usually done when business is closed or slow. N units costs are then applied to the quantities in order to determine the total cost of the inventory. N to make sure that inventory quantities truly belong to the company. N goods in transit: the shipping details allow the company to decide if the inventory in transit is their responsibility or the other . 425,308 responsibility. If it is the responsibility is in our company, then the inventory in transit should be taken into consideration. N consigned goods: under a consignment arrangement, the holder of the goods (consignee) does not own the goods. Ownership remains with the shipper of the goods (consignor). Therefore, the goods should not be considered for the consignee and should be considered for the consignor.

Related Questions

24. What is the purpose of the auditorâs observation of the taking of the physical inventory?

25. What is the purpose of the auditorâs making and recording test counts of inventory quantities during their observation of the taking of the physical inventory? Explain.

26. List at least three audit procedures that auditors would employ to detect slow moving or obsolete inventory.

27. What part, if any, do the auditors play in the clientâs planning for the physical inventory?

rubyminnow674

Auditing and Assurance Services (16th Edition)

question 7-29

objective (7-4) The following audit procedures were performed inthe audit of inventory to satisfy specific balance-related auditobjective as discussed in chapter 6. The audit procedures assumethat the auditor has obtained the inventory count sheets that listthe clients inventory. The general balance-related audit objectivesfrom chapter 6 are also included.

Audit procedures

1) select a sample of inventory items in the factory warehouseand trace each item to the inventory count sheets to determine ifit has been included and if the quantity and description arecorrect.

2) trace selected quantities from the inventory list to thephysical inventory to make sure that it exists and the quantitiesare the same.

3) compare the quantites on hand and unit prices on this yearsinventory count sheets with those in the preceding year as a testfor large differences.

4) test the extension of unit prices times quantity on theinventory list for a sample of the inventory items, test foot thelist, and compare the total to the general ledger.

5) send letters directly to third parties who hold the clientsinventory, and request that they respondf directly to theauditors.

6) examine sales invoices and contracts with customers todetermine whether any goods are out on consignment with customers.Similarly, examine vendors in-voices and contracts with vendors todetermine whether any goods on the inventory listing are owned byvendors.

7) question operating personnel about the possibility ofobsolete or slow-moving inventory.

General balance-related audit objective

existence,completeness,accuracy,classification,cutoff,detailtie-in,realizable vaule,rights and obligations

a) identify the type of audit evidence used for each aduitprocedure.

b) identify the general balance-related audit objective orobjectives satisfied by each audit procedure.