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CHAPTER 18 Audit of the
Inventory and Warehousing
What is theWhat is the sequence of functionsse

inventory and warehousing cycle?inventory and warehousing cycle?

18 - 3Copyright 2003 Pearson Education Canada Inc.

he production dept. needs 2 gs. of dry 4 solvent.
authoried employee

0$+,$ o7 ig %hemical %o.
"lease ship 2 gs. of dry 4 solvent 5y 9:2:4 "rice ;38.4:g.
purchasing agent
18 - <Copyright 2003 Pearson Education Canada Inc.

Ace %ompany $,%,(=()*
$,"0$ $eceived 2 gs. of dry 4 solvent on 9:1:4. %ondition7 0>
receiving employee(* %hemical %o.
WA$,&0#',

"$0+#%(0) +,"A$,)
WA$,&0#',
<. When needed6 goods are moved from the warehouse to production! perpetual inventory and cost accounting records are updated.

WA$,&0#',
9. When finished6 goods are moved from production to the warehouse! perpetual inventory and cost accounting records are updated.
perpetual inventory description $$ 6/(/04-)in.goods *0 litres +7g (680

"$0+#%(0) +,"A$,)

18 - @Copyright 2003 Pearson Education Canada Inc.
. When sold6 goods are shipped and perpetual inventory records are updated.
A % ,
perpetual inventory description $$ 6/(/04-)in.goods *0 litres-+7g (680 8/*/0- sold 0 litres-+7g -*808
Ace %o.
What are theWhat are the primary





What is theWhat is the primary


procedures.

procedures.

18 - 1@Copyright 2003 Pearson Education Canada Inc.
WhenWhen do client inventory-do client inventory- taing procedures occur?taing procedures occur?

WhenWhen do client inventory-do client inventory- taing procedures occur?taing procedures occur?

every inventory item Esample results can 5e statistically eBtended
to the populationF

'hould the auditor test'hould the auditor test 5eginning

5eginning inventory 5alances?inventory 5alances?

how?

how?
documents

18 - 2@Copyright 2003 Pearson Education Canada Inc.
&ow should the auditor test&ow should the auditor test inventory held at a pu5licinventory held at a pu5lic
warehouse?warehouse?
office
&ow should the auditor test inventory&ow should the auditor test inventory held at a pu5lic warehouse?held at a pu5lic warehouse?
- direct written confirmation with the pu5lic warehouse
Are additional procedures necessary?
%onfirmation6 alone6 will not 5e sufficient if inventory quantities held
at the warehouse are significant.

- if inventory held at the pu5lic warehouse is significant7 H review clientCs procedures for investigating and evaluating the
warehouse

warehouse H o5tain report from warehouseCs auditor regarding internal controls H o5serve warehouseCs physical
counts Eif practicalF

'ome large merchandisers use'ome large merchandisers use outsideoutside inventory-taing companiesinven



(nventory Audit "rocedures(nvento

ry Audit "rocedures regarding the client physical inventory count7

05serve the physical inventory count. +etermine whether clientCs counting methods are effective.
regarding the client physical inventory count7

05serve the quality and condition of the inventory. %onsider o5solescence.

ry Audit "rocedures
0n a random 5asis7 - select a sample of inventory items from the warehouse floor6 count them6 trace the quantity to client count records

ry Audit "rocedures
0n a random 5asis7 - select a sample of inventory items from the client count records6 find them in the
warehouse6 count them

ry Audit "rocedures


ry Audit "rocedures
idgets - red 87 idgets - green 4 idgets - purple 18

pledged as collateral EdisclosureF
regarding the eBistence of consigned inventories.

,nquire of client management regarding the eBistence of

regarding the eBistence of consigned inventories7

cutoff tests on inventories.
method EI(I06 J(I0F and the lower-of-cost-or-
maret rule.
ry Audit "rocedures
Ior manufactured inventories7
test the cost accumulation process as it affects valuation of ending
inventories and %0*'

ch18

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