Purchases-Payables-Inventory Cycle Flashcards
How could I learn whether inventory is moving slow or not?
By reviewing perpetual inventory records
Why?: Because issuances of goods are recorded as the transactions occur
E.g. I could easily identify slow-moving and possibly obsolete inventory
What are Material Requisitions?
They are authorization documents used to release materials for use in production
E.g. I can use them to test quantity of materials charged to work-in-process
This is Vouch testing or “Vouching”
What is the best way I could identify unrecorded liabilities?
By vouching a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices
What ratio would my engagement partner most likely consider in forming an overall audit conclusion
The Cost of Goods to Average Inventory ratio
Why? Because this ratio is usually very predictable; and
- It is a good indicator of unusual or unexpected balances
NOTE: This is called the “Inventory Turnover” ratio
What procedure could I use in search for unrecorded payables?
Compare cash payments occurring after the balance sheet date with the accounts payable trial balance
E.g. This may disclose liabilities that were unrecorded
In what situations would I need to confirm accounts payable with creditors?
- Creditor statements are not available
- Internal controls relating to accounts payable are unsatisfactory
- Documentary evidence is lacking
- Individual creditors have relatively large balances
- Unusual transactions are involved
What is an appropriate test I could use for the completeness assertion of inventory?
Performing cutoff procedures for shipping and receiving
What is an important auditing procedure
if I were to audit a public warehouse and want to identify unrecorded liabilities?
Inspection of receiving and issuing procedures
E.g. Shipping orders/ receiving reports not reflected in the records suggest that transactions are not properly recorded
How could I test whether checks are being issued for unauthorized expenditures?
By “Tracing” from the canceled checks to the related supporting documentation
E.g. Checks should not have been written before the dates on the supporting documents
What do tests of year-end physical inventories of purchases and sales cutoffs tell me?
Whether merchandise included in the physical count at year end was recorded as a Sale in the same year
E.g. If client sold “it”, they could not have owned “it” at year end
- Items purchased and items not yet sold should be in inventory
- Items sold or not yet purchased should not be in inventory
When confirming Accounts Payable, which form of confirmation should I use?
Positive confirmation
E.g. Ideally, the blank form of positive confirmation should be used
- It requests that the balance due be provided by the creditor
What test would I perform (e.g. what population would I use) to determine whether all merchandise the client was billed for was received?
Vendors’ invoices
E.g. Tracing these invoices to the related receiving reports will tell me whether merchandise the client was billed for was received
What procedure should I use to test the validity of inventory items in a client’s inventory listing schedule?
Vouch the:
Items listed in the inventory listing schedule
to the inventory tags and my auditor recorded count sheets
E.g. Validity = “Existence”
Validity relates to which Assertion?
Validity relates to the “Existence” assertion
When testing the cutoff assertion for inventory, when should an entity include goods in its inventory?
If the entity holds legal title to the goods
