arens_C11e_PPT_ch19

Auditing, Canadian Eleventh Edition
Tests of Details for Physical Inventory Observation: Existence
• Select a random sample of tag numbers and identify the tag with that number attached to the actual inventory. • If inventory is not tagged (e.g. scanned), may need to select a location number. • Observe whether movement of inventory takes place during the count.
Chapter 19 Learning Objectives
1. Identify the components of the inventory and warehousing cycle. 2. Describe the five different parts of the inventory and warehousing cycle that are audited. 3. Explain the role of each of the following types of tests in the audit of inventory: (i) analytical review, (ii) physical observation of inventory, and (iii) pricing and compilation tests. 4. Describe how the relationships among the tests of different cycles affect the audit of inventory.
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Auditing, Canadian Eleventh Edition
Five Parts of the Audit of Inventory
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Auditing, Canadian Eleventh Edition
Tests of Details for Physical Inventory Observation: Accuracy
• Recount client’s counts to make sure the recorded counts are accurate on the tags (or as recorded in the computer system if recorded into hand-held computer devices). • Compare physical counts with perpetual inventory master file. • Record client counts test-counted for subsequent testing.
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Auditing, Canadian Eleventh Edition
Discussion Problem 19-20, p. 663
• Calculate ratios for analytical review of inventory • Assess the results
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Auditing, Canadian Eleventh Edition
Functions in the Inventory and Warehousing Cycle
• • • • • • Process purchase orders Receive new materials Store materials Process goods Store finished goods Ship finished goods
– Physical control over inventory movement – Controls over related costs
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Auditing, Canadian Edition
Designing Tests of Controls for Cost Accounting
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Auditing, Canadian Eleventh Edition
Designing Tests of Details of Balances for Inventory
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Compare gross margin percentage with previous years Compare inventory turnover with previous years Compare unit costs of inventory with previous years
19-9
Auditing, Canadian Eleventh Edition
Analytical Procedures for the Inventory and Warehousing Cycle (Continued)
Analytical procedure Compare extended inventory value with previous years Possible misstatement Misstatements in compilation, unit costs, or extensions that affect inventory and cost of goods sold.
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Auditing, Canadian Eleventh Edition
Cost Accounting Controls
• These are controls that are related to the physical inventory and the compilation of the costs of that inventory from raw material requisition through to finished product. • Broken into two categories:
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Auditing, Canadian Eleventh Edition
Tests of Details for Physical Inventory Observation: Classification
• Examine inventory descriptions on the tags (or in the handheld computers) and compare with the actual inventory counted. • Evaluate whether the percent of completion recorded on the tags (or job cost records) for work in process is reasonable.
19-13 Copyright © 2011 Pearson Canada Inc.
Auditing, Canadian Eleventh Edition
Tests of Details for Physical Inventory Observation: Completeness
• Examine inventory to make sure it is tagged. • If tags are not used, the auditor may need to examine exception reports identifying locations/items not counted. • Enquire as to inventory in other locations.
Auditing, Canadian Eleventh Edition
Audit of Cost Accounting
• Cost accounting systems vary more than the other transaction cycle areas due to the wide variety of types of inventory and the differences in level of sophistication required by management.
Auditing: The Art and Science of Assurance Engagements
Chapter 19: Audit of the Inventory and Warehousing Cycle
Copyright © 2011 Pearson Canada Inc.
Auditing, Canadian Eleventh Edition
Compare current-year Misstatement of unit costs of manufacturing costs inventory, especially direct labour with previous year and manufacturing overhead.