S10.2 - Auditing Inventory Flashcards
TYPES OF DOCUMENTS AND RECORDS
What is based a production schedule?
On the expected demand for the entity’s products
TYPES OF DOCUMENTS AND RECORDS
What does the receiving report record?
Records the receipt of goods from vendors.
TYPES OF DOCUMENTS AND RECORDS
Why is a materials requisition used?
Used to track materials during the production process.
TYPES OF DOCUMENTS AND RECORDS
What does the inventory master file contain?
All the important information related to the entity’s inventory, including the perpetual inventory records
TYPES OF DOCUMENTS AND RECORDS
What does the production data information contain?
Contains information about the transfer of goods and related cost accumulation at each stage of production
TYPES OF DOCUMENTS AND RECORDS
What are the cost accumulation and variance report?
Material, labor, and overhead costs are charged to inventory as part of the manufacturing process.
The variance report compares actual costs to standard or budgeted costs
TYPES OF DOCUMENTS AND RECORDS
What does the inventory status report show?
The type and amount of products on hand
TYPES OF DOCUMENTS AND RECORDS
What is a shipping order used for?
Used to remove goods from the perpetual inventory records
Regarding inherent risk assessment for inventory, what factors should the auditor consider (2)?
Industry related factors
and
Operating and engagement characteristics when assessing the possibility of a material misstatement
If industry competition is intense, what may be a problem regarding inventory?
What about technology changes?
Problems with the valuation of it.
Technology changes in certainindustries may also promotematerial misstatement due toobsolescence.
What may be an issue with small products of higher value?
They are more susceptible to theft.
The auditor must be alert to related-party transactionsfor acquiring raw materials and selling finished products. Prior-year misstatements are good indicators of potential misstatements in the current year.
CONTROL RISK ASSESSMENT
What are the 3 major steps in setting the control risk in the inventory management process.
- Understand and document the inventory management process based on a reliance strategy.
- Plan and perform tests of controls on inventory transactions.
- Set and document the control risk for the inventory management process
CONTROL ACTIVITIES AND TESTS OF CONTROLS
Occurence of Inventory Transactions
Main concerns and Tests of controls
MC: Did all recorded inventory transactions actually occurred? Also some concerns about goods being stolen.
TC: Review and Observation are the main ones
CONTROL ACTIVITIES AND TESTS OF CONTROLS
Completeness of Inventory Transactions
What is the primary control procedure?
The primary control procedure relates to recording inventory that has been received. The controls are closely related to the purchasing process.
CONTROL ACTIVITIES AND TESTS OF CONTROLS
Authorization of inventory transactions
What is the auditor’s main concern
Unauthorized purchase or production activity that may lead to excess levels of certain types of finished goods.
CONTROL ACTIVITIES AND TESTS OF CONTROLS
Accuracy of inventory transactions
What 2 types of transactions regarding inventory may lead to misstatements that directly affect the amounts reported in the financial statements?
Inventory purchases must be recorded at the correct price and actual quantity received.
Inventory shipped must be properly recorded in cost of goods sold and the related revenue recognized
CONTROL ACTIVITIES AND TESTS OF CONTROLS
Cutoff of Inventory Transactions
What accounts can be affected by recording inventory in the wrong period ? (3)
Inventory transactions recorded in the improper period could affect a number of accounts, including inventory, purchases and cost of goods sold.
CONTROL ACTIVITIES AND TESTS OF CONTROLS
Classification of Inventory Transactions
What is meant by classification of inventory transactions?
The entity must have control procedures to ensure that inventory is properly classified as raw materials, work in process, or finished goods.
By knowing which manufacturing department holds the inventory, the auditor is able to classify it by type.
CONTROL ACTIVITIES AND TESTS OF CONTROLS
Presentation of Inventory Transactions
What are 3 components of the test of controls the auditor can check?
Auditor’s tests of controls around
* management’s use of a chart of accounts,
* proper codes for recording inventory transactions
* the financial reporting process, including the use of a disclosure checklist,
should provide adequate assurance for the presentation assertion.
Controls over the aggregation or disaggregation of transactions are important to properly allocate costs to appropriate classes of inventory.
What are the 9 requirements an auditor should follow when auditing physical inventory?
Ensure that no production is scheduled. If production is scheduled proper controls must be established for movement between departments in order to prevent double counting.
Ensure that there is no movement of goods during the inventory count.
Make sure that the entity’s count teams are following the inventory count instructions.
Ensure that inventory tags are issued sequentially to individual departments.
Perform test counts and record a sample of counts in the working papers.
Obtain tag control information for testing the entity’s inventory compilation.
Obtain cutoff information, including the number of the last shipping and receiving documents issued.
Observe the condition of the inventory for items that may be obsolete, slow moving, or carried in excess quantities.
Inquire about goods held on consignment for others or held on a “bill-and-hold” basis.
What are some possible causes of book-to-physical differences ? (3)
Inventory cutoff errors
Unreported scrap or spoilage
Pilferage or theft
What is an example of substantive test of transaction for occurence?
Vouch a sample of inventory additions (purchases) to the receiving reports and purchase requisitions
What is an example of substantive test of transaction for completeness?
Trace a sample of receiving reports to the inventory records (master file or status report)
What is an example of substantive test of transaction for Authorization?
Test a sample of inventory shipments to ensure there are approved shipping tickets and customer sales
