Module 9 - Inventory/warehousing Flashcards

1
Q

Flow of accounts of the inventory and warehousing cycle:

A

Notice the connection to the acquisition cycle and payroll cycle

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2
Q

What are the primary business functions involved in the inventory and warehousing cycle?

A
  1. Process Purchase Orders
  2. Receive raw materials
  3. Store Raw materials
  4. Process the Goods
  5. Store Finished Goods
  6. Ship Finished Goods
    7.
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3
Q

Provide a brief description of these business functions involved in the inventory/warehousing cycle:

  • Process Purchase Orders
  • Receive Raw Materials
A

Note: these functions part of acquisition cycle as well

Process Purchase Orders

  • Acquisition of raw materials/finished goods
  • Adequate controls in form of purchase requisitions and purchase orders

Receive Raw Materials

  • Goods received, inspected, receiving report made and compared to invoice before payment is disbursed
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4
Q

Provide a brief description of these business functions involved in the inventory/warehousing cycle:

  • Store Raw Materials
  • Process the Goods
A

Store Raw Materials

  • Material normally placed in warehouse
  • Other dept. submits requisition form for disbursement of materials; req form substantiates perpetual invetory

Process the Goods

  • Separate production/cost accounting dept. determines cost accounting records
  • When jobs completed, costs transferred from WIP to finished goods based on prod. dept reports
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5
Q

What is a perpetual inventory master file?

A
  • File that is updated continuously as raw material moved from storeroom to production or as goods purchased
  • Includes info about units acquired, sold, and on-hand and includes unit cost
  • In manufactures: Separate master file kept for raw material, WIP, and finished goods
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6
Q

What are the two primary cost systems that exist to transfer costs between inventory accounts?

A

1) Job Order Costing

  • Each job is unique
  • Costs of mat./labor accumulated by individual job

2) Process Cost System

  • Mass producing the same product
  • Costs accumulated per process and unit cost assigned to goods
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7
Q

Provide a brief description of these business functions involved in the inventory/warehousing cycle:

  • Store into finished goods
  • Ship Finished goods
A

Store into finished goods

  • Once processing complete, product moved to finished goods
  • Finished goods perpetual master file added to

Ship Finished goods

  • Goods sold to customer
  • Shipping document produced and FG master file reduced
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8
Q

What are the 5 parts of the audit of inventory?

A
  1. Acquire and record raw materials, labor, and overhead
    • Tested in acq./pay and payroll cycle
  2. Internally Transfer assets and costs
  3. Ship goods and record revenue and costs
    • Tested in sales/collection cycle
  4. Physically Observe inventory
  5. Price and compile inventory
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9
Q

The auditor tests internal transfers of assets and costs (part 2 of inventory audit) by:

A

designing and performing audit tests of cost accounting:

  • Test of cost accounting controls
  • tests of cost accounting
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10
Q

Cost accounting controls can be divided into two categories:

A
  1. Physical controls over raw materials, WIP, and finished goods inventory
  2. Controls over related costs
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11
Q

How do perpetual inventory master files serve as a cost accounting control?

A
  • Provides record of inventory on hand
    • Used to initiate production/acquistion of additional inventory
  • Proves record of use of raw materials/sale of finished goods
  • Provide record to pinpoint responsibility when differences in inventory counts are discovered
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12
Q

What are the 4 main tests of cost accounting?

A
  1. Physical controls over inventory
  2. Documents and records for transferring inventory
  3. Perpetual inventory master files
  4. Unit Costs records
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13
Q

What are some tests for physical control of inventory types?

A

Generally limited to observation and inquiry

  • Inventory protected from theft/misuse
    • Locks/assignment of assets
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14
Q

What are the auditor’s primary objectives when observing documents/records for transferring inventory?

What controls tests may be performed?

A
  • Recorded transferes exist (Occurence)
  • All transfers recorded (completeness)
  • Details of transfer (quant/date) are accurate

Tests:

  • Inspect raw materials requisitions for proper approval and compare to perpetual inventory master file
  • Compare completed production records with perpetual inventory master file
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15
Q

How can the auditor test the perpetual inventory master files?

What is the importance of testing perpetual inventory master files?

A
  • Examining documentation that supports additions/reductions
    • Usually done in the acquisitons/payment cycle (raw materials) and sales cycle (fin. goods)

Importance:

  • Affects the timing and extent of physical examination of inventory
    • Can be tested throughout period
    • when accurate, reduces capacity of inv. count
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16
Q

What is the importance of unit cost records during tests of cost accounting?

What are the tests performed to verify cost records?

A

Accurate cost data (raw mat/labor/overhead) is essential for fairly stated inventories

Tests:

  • Trace units/unit cost of raw materials to master files
    • Performed in acq/pay cycle
  • Determine and vouch overhead allocation method; usually affected by labor hours
    • performed in payroll cycle
17
Q

Are analytical procedures effective in the inventory cycle?

A

Yes; can be helpful, though substantive procedures always required

18
Q

What are some analytical procedures auditors can perform for the inventory cycle?

  • What possible misstatements can they indicate?
A

Compare gross margin % with previous years

Over/understatement of inventory and COGS

Compare inv. turnover (COGS/avg inv) with prev. years

Obsolete inventory ; over/understatement of inv.

Compare manufacturing costs with previous years

Misstatement of unit costs for direct labor/overhead

19
Q

The most important part of the inventory cycle audit is:

A

Physical observation of the client’s inventory count and the subsequent testing

20
Q

Are physical examinations required?

A

Yes; auditing standards required auditors to satisfy themselves about the effectiveness of client’s representation of quantities and condition

21
Q

Explain the differences between the client’s and auditor’s requirements for the physical observation of inventory.

A

Client’s requirements

  • Schedule inventory count
  • Count 100% of the inventory
  • Reconcile differences between files and inventory and make adjustments to master file

Auditor’s requirements

  • Understand client’s inventory and protocols
  • Evaluating and observing client’s inventory count
  • Performing independent tests and counts
  • drawing conclusions on adequacy of inventory and client’s policies
22
Q

What type of test is physical obsevation of inventory?

A

Dual test: Serves as both an control and substantive test

Control test: Observing client count and ensuring the counting policy/reconciliation works effectively

Substantive test: Auditor’s secondary count substantiates inventory and provides assurance

23
Q

What key auditing assertions does physical observation address and how?

A

Key Assetions: Important to test both ways

Completeness: Full testing: Select sample out of items on floor (warehouse) and trace to sheet (inv. records)

Existence: False testing: Select items from sheet (inv. records) and find on floor (warehouse)

Secondary assertions: Cut-off and Realizable value

24
Q

What controls should be in place and tested during a physical observation of inventory:

A
  • Proper instructions for count

Separation of duties:

  • Independent supervisor part of count
  • Independent internal verification of counts; 1 employee counts while 1 employee consults record for match
  • Reconcilations and adjustments performed by independent employee
25
Q

Explain the 5th activity of the inventory cycle audit:

Price and compile inventory

A

Auditors must verify that the physical counts or perpetual records are correctly priced and compiled

Auditor performs inventory price tests

26
Q

What are inventory price tests?

What are some examples?

A

Tests of client’s unit prices of inventory for correctness

Include:

  • Testing client’s summarization of inventory counts
  • Recalculating price * quantity
  • footing inventory summary
  • Tracing totals to general ledger
27
Q

What types of tests are performed during the audit of pricing and compilation (part 5 of audit)?

A
  • Pricing and compilation controls
  • Pricing and Compilation procedures
  • Valuation of inventory tests
28
Q

How can auditor ensure pricing and compilation controls are effective?

A

Auditor should ensure cient has proper controls in place like:

  • Formal review and reporting of obsolete/slow-moving inv
  • Controls to ensure physical counts are correctly summarized and priced at correct unit cost
  • Internal verification by employee by reviewing cost records and physical exam. records
29
Q

How can auditor ensure valuation of inventory is accurate and effective?

A

Consider whether inventory is purchased:

  • Raw materials, supplies, and parts are included at cost less any discounts/other items
  • Understand client’s inventory valuation system (FIFO)

Consider whether inventory is manufactured:

  • Cost of raw materials, direct labor, overhead
  • Evaluation of overhead rate for reasonableness