chap 12 Flashcards
designing the substantive audit procedures for inventory
1.adt for inventories mainly based on substantive procedures applied at end of reporting year EXCEPT IF PERPETUAL RECORDS ARE USED FOR DETERMINING INV AT END OF REPORTING YEAR
2.Assertions TESTEd FROM SUBS testing :
-EXISTENCE
-AVA
- This is because IR USUALLY HIGH
4.the DR for AVA and existence is set low and DR for other assertion is low to moderate
initial procedures
1.Trace opening inventory balances to the previous year’s working papers.
2.Review activity in inventory accounts and investigate entries that appear unusual in amount or source.
3.Verify totals of perpetual inventory records and their agreement with closing general ledger balance. adtr needs to also identify for any unusual trsn in amount or in nature from control accounts
Analytical procedures
Analytical procedures useful in developing expectations. application is thus extensive.Can also perform data analytics if data is reliable. when physical count id done other than year, more attention will be given to trsn in the intervening period
1.Review industry and entity trends.
-if industry wide there is fall in inventory turnover, then can expect same. otherwise could indicate errors of occurrence/existence , completeness
2.Examine an analysis of inventory turnover and gross profit.
-unexpected high Inventory T.O or low GP INDICATES an overstatement of COS and understatement of inventory
-if ratio results give expected result, then it provides assurance of the fairness data used in the calculations
3.Review relationships of inventory balances to recent purchasing, production, and sales activities to explain inventory changes.
Test of details of trsn
1.Test entries in inventory records to and from supporting documentation.
2.Test the cut-off of purchases, inventory transfers, and sales.
performed at end of reporting year where inventory at end is determined partly or wholly on perpetual records
Test of details of trsn//test entries in inventory records
1.inventory determination wholly dependent on pepertual records, test of details of trsn performed during interim audit as dual purpose test
- if inventory count happening at a different time than the year-end and keep track of changes, adtr only need to check transactions for the period between the count and the year-end.
Test of details of trsn//Testing Cut-Off of Purchase, Manufacturing, and Sale Transactions
purchase and sales cut-off test performed in relation of acc rev and acc pay and to ensure near year end trsn recorded In the correct accounting period
- purchases in transit not included in inventory and acc pay
- sales goods in transit included in sales and excluded from inv.
3 entries for allocation direct labour andOH cost and work in process correctly recorded to the accounting period
- adtr needs to make sure thru inspection and observation that paperwork cutoff and physical inventory count paperwork are coordinated
- adtr should document details related to movements of gds at date of count
- count at date other than reporting date, need to check that movement of gds trsn that occurred before the count are not included in th period between count date and end of reporting period
- assertions tested:
-occurrence
-AVA
-completeness
test of balances // procedures
1.Observe the entity’s physical inventory count.
2.Test the clerical accuracy of inventory listings.
3.Test inventory pricing.
4.Confirm inventories at locations outside the entity
5.Examine consignment agreements and contracts.
test of balances // list of observation procedures
1.evaluate the adequacy of entity inventory count plan
- observe physical inventory and whether it complies with prescribed procedures
3.make test counts
- Look for indications of slow-moving, damaged, or obsolete inventory.
5.Account for all inventory tags and count sheets used in the physical count.
6.Record cut-off data.
test of balances //observation P1
1.during observation ,adtrs not reponsible for supervising process. but they can help gain knowledge abt reliability of mgt inventory counting procedures and extent of reliance that can be placed on mgt assertion regarding qty and conditions of inventories
- even when entity employ external inventory specialist to do counting, adtr should regard them as entity employees and be present during inventory count
3.timing of inventory count negotiated with mgt while taking into account Inventory system and CR
4.Unless relying on perpetual records, physical count should be determined at or near reporting date with adtr being present.
- for multi locations, adtr can vary locations each year as long as sample of inventory observed is sufficient. Can also rely on internal audit attendance or seek component adtrs assistance
test of balances //observation P2
- for multi locations, adtr can vary locations each year as long as sample of inventory observed is sufficient. Can also rely on internal audit attendance or seek component adtrs assistance
6.While attending inventory count, adtrs will perform test of controls and substantive procedures simultaneously
- adtr should review and evaluate the inventory count plan in advance of count date
- in case of perpetual records, test of controls and substantive procedures applied to sample
test of balances //observation P2
- for multi locations, adtr can vary locations each year as long as sample of inventory observed is sufficient. Can also rely on internal audit attendance or seek component adtrs assistance
6.While attending inventory count, adtrs will perform test of controls and substantive procedures simultaneously
7.
test of balances // procedures by adtrs during attendance
- adtrs will perform test of controls and substantive procedures simultaneously
- adtr should review and evaluate the inventory count plan in advance of count date
- in case ops perpetual records, test of controls and substantive procedures applied to sample
test of balances// observation
1.adtr should review and evaluate the inventory count plan in advance of count date
- in case ops perpetual records, test of controls and substantive procedures applied to sample
