Chapter 13 - Auditing the Inventory Management Process

Question 1

!! Types of Inventory Documents and Records (1-4) !!

Answer 1

1. Production schedule - Based on expected demand
2. Receiving report - Receipt of goods from vendors
3. Materials requisition - Tracks materials during production
4. Inventory Master File - Contains all important inventory info

Question 2

!! Types of Inventory Documents and Records (5-8) !!

Answer 2

5. Production Data Information - Contains info about transfer of goods & cost accumulation at each stage of production
6. Cost accumulation and variance report - material, labor, and overhead costs
7. Inventory status report - Type and amount of product on hand
8. Shipping Order - Removes goods from perpetual inventory records

Question 3

ESSAY QUESTION - During the Observation of Physical Inventory Count, the Auditor should do the Following (1-5)

Answer 3

1. Ensure no production is scheduled
2. Ensure there is no movement of goods during the count
3. Make sure the count teams are following instructions
4. Ensure that inventory tags are issued sequentially
5. Perform test counts and record a sample of counts in the working papers

Question 4

ESSAY QUESTION - During the Observation of Physical Inventory Count, the Auditor should do the Following (6-9)

Answer 4

6. Obtain tag control info for testing the entity’s inventory compilation
7. Obtain cutoff information
8. Observe the condition of the inventory for items that may be obsolete, slow moving, or carried in excess quantities
9. Inquire about goods held on consignment

Question 5

!! What is a receiving report? !!

Answer 5

The receiving report records the receipt of goods from vendors. A copy of this document accompanies the goods to the inventory department and is used to update the perpetual inventory records

Question 6

!! What are we testing for when valuing inventory by vouching the costs to vendors’ invoices? !!

Answer 6

The assertion being tested for here is the valuation, accuracy, and allocation of the inventory account balances at period end.

Question 7

!! If you have a sequence of inventory tags and you trace them to the inventory count sheets, what assertion are we testing for with that? Why do we do this?

Answer 7

We are testing for the Completeness assertion of the account balances here. Tracing test counts and tag control information into the inventory compilation provide assurance that the inventory counted during the physical observation is included.

Question 8

ESSAY QUESTION - Explain the importance of observing physical inventory during the audit

Answer 8

The primary reason for observing physical inventory is to establish the existence of the inventory. The observation of physical inventory also provides evidence on the accuracy, rights and obligations, and valuation assertions.

Question 9

!! If our physical count of inventories was higher than our records, how could that happen? !!

Answer 9

If there is not a proper segregation of duties (e.g. not segregating cost-accounting from inventory management), production and inventory costs can be manipulated, leading to an over or understatement of inventory.

Question 10

!! When we’re trying to gain an understanding of the entity’s internal control of inventory, what would we do? !!

Answer 10

We would document internal control, and plan and perform tests of these controls.