Week 10 - Seminar Notes

Question 1

What are the key assertions for inventory?

Answer 1

• Existence
• Valuation
• Completeness
• Rights & Obligations

Question 2

What are the sources of evidence for inventory?

Answer 2

• Aged Inventory Listing
• Inventory Assets
• Inventory Count Sheets
• Purchase Invoices
• Goods Received Notes
• Sales Invoices
• Goods Dispatch Notes

Question 3

What should we value inventory at?

Answer 3

The lower - what it cost to buy.

Question 4

What is net realisable value?

Answer 4

What inventory can be sold at.

Question 5

What are the tests of control for inventory?

Answer 5

• Observe the count to ensure that the inventory count instructions are being followed. For example, no movements of inventory occur during the count, teams of two people perform the count and sections of inventory are tagged as counted to prevent double counting.
• Damaged/obsolete items have been separately identified so they can be valued appropriately (to be written off).
• Inspect the count sheets.
• Enquire of the counting staff, which department they work in to ensure they are not warehouse staff (eliminates the possibility of stealing stock).

Question 6

What are the substantive procedures for inventory?

Answer 6

• Select a sample of items from the inventory count sheets and physically inspect the items in the warehouse: verifies existence.
• Select a sample of physical items from the warehouse and trace to the inventory count sheets to ensure that they are recorded accurately: verifies completeness.
• Inspect the inventory being counted for evidence of damage or obsolescence that may affect the net realisable value: verifies valuation.
• Obtain copies of inventory count sheets at the end of the inventory count and check against final inventory listing at the final audit: verifies completeness & existence.
• Inspect purchase invoices for a sample of inventory items to agree their cost: verifies valuation.
• Inspect post year-end sales invoices for a sample of inventory items if the net realisable value is reasonable: verifies valuation.
• Inspect the ageing of inventory items to identify old/slow moving amounts that may require an allowance and discuss these with management: verifies valuation.
• Trace the goods received immediately prior to the year-end to year-end payables and inventory balances: verifies completeness & existence.
• Trace goods dispatched immediately prior to year-end to the nominal ledgers to ensure the items are not included in inventory and revenue (and receivables where relevant) has been recorded: verifies completeness & existence.
• Calculate the inventory holding period and compare this to prior year to identify slow-moving inventory, which requires an allowance to bring the value down to the lower of cost and NRV: verifies valuation.
• Calculate gross profit margin and compare this to prior year, investigate any significant differences that may highlight an error in cost of sales and closing inventory: verifies valuation.

Question 7

What is the focus of testing fo receivables?

Answer 7

Valuation & Existence.

Question 8

What are the sources of evidence for receivables?

Answer 8

• Aged Receivables Listing
• Sales Invoices
• Goods Dispatch Notes
• Receivables Circularisation Letters
• Post Year-End Bank Statements
• Policy for Allowance for Doubtful Receivables

Question 9

What are the (substantive) procedures for receivables?

Answer 9

• Obtain the aged receivables listing, cast it and agree the total to the financial statements: verifies accuracy & presentation.
• Agree the receivables ledger control account with the receivables ledger list of balances: verifies completeness & existence.
• Select a sample of year-end receivable balances and agree back to valid supporting documentation, invoice, GDN and sales order: verifies existence.
• Inspect after date cash receipts and follow through to pre year-end receivable balances: verifies valuation, rights and obligations & existence.
• Select a sample of goods dispatched notes (GDN) before and just after the year-end and follow through to the sales invoice to ensure they are recorded in the correct accounting period: verifies completeness & existence (cut-off of revenue).
• Inspect the aged receivables report to identify any slow moving balances and discuss these with the credit control manager to assess whether an allowance or write-down is necessary: verifies valuation & allocation.
• Inspect board minutes to assess whether there are any material disputed receivables that may require write off: verifies valuation.
• Inspect a sample of post year-end credit notes to identify any that relate to pre year-end transactions to ensure that they have not been included in receivable: verifies existence (occurrence of revenue).
• Calculate the average receivables collection period and compare this to prior year, investigate any significant differences: verifies completeness & valuation.

Question 10

What is the main focus of testing for payables & accruals?

Answer 10

Completeness.

Question 11

What are the sources of evidence for payables & accruals?

Answer 11

• Aged Payables Listing
• Purchase Invoices
• Goods Received Notes
• Post Year-End Bank Statements
• Supplier Statements

Question 12

What are the procedures for just payables?

Answer 12

• Obtain a list of trade payables, cast to verify arithmetical accuracy and agree to the general ledger and the financial statements: verifies completeness, classification, presentation.
• Reconcile the total of the individual payables accounts with the control account: verifies completeness.
• Obtain supplier statements and reconcile these to the payables balances. Investigate any reconciling items: existence, completeness, obligations & valuation.
• Inspect invoices received after the year-end in respect of goods delivered before the year-end and trace through to the accruals listing: completeness.
• Enquire of management their process for identifying goods received but not invoiced and ensure that it is reasonable: completeness.
• Select a sample of goods received notes immediately before the year-end and follow through to inclusion in the year-end payables balance: completeness of payables and cut-off of purchases.
• Inspect the trade payables ledger for any debit balances, for any significant amounts discuss with management and consider reclassification as current assets: valuation of payables and completeness of receivables, classification.
• Compare the list of trade payables and accruals against the prior year list to identify any significant omissions: completeness.
• Calculate the trade payables payment period and compare to prior year, investigate any significant diferences: completeness & valuation.