2
What are the What are the primaryprimary audit audit objectives with regard to objectives with regard to inventoryinventory??
- existence
3
What are the What are the primaryprimary audit audit objectives with regard to objectives with regard to inventoryinventory??
- existence- rights
ABC Electronics Co.
Sales Invoice
4
What are the What are the primaryprimary audit audit objectives with regard to objectives with regard to inventoryinventory??
- existence- rights- accuracy
5
What are the What are the primaryprimary audit audit objectives with regard to objectives with regard to inventoryinventory??
- existence- rights- accuracy- realizable value
6
What is the What is the primaryprimary audit audit procedureprocedure with regard to with regard to inventoryinventory??
Observe the client’s inventory-taking
procedures.
7
What is the What is the primaryprimary audit audit procedureprocedure with regard to with regard to inventoryinventory??
Observe the client’s inventory-taking
procedures.
required by AU 331
8
WhenWhen do client inventory- do client inventory-taking procedures occur?taking procedures occur?
If the client has aperiodic inventory system, the physical inventory count determinesthe balance in inventory accounts and will probablyoccur on the balance sheet date.
December
9
WhenWhen do client inventory- do client inventory-taking procedures occur?taking procedures occur?
If the client has aperpetual inventory system, the physical inventory count may occurany time during the accounting period.Whenever the count occurs, the auditoris required to observe.
June
10
Some clients use Some clients use statistical sampling statistical sampling in their in their
inventory methods.inventory methods.
why?
11
Some clients use Some clients use statistical sampling statistical sampling in their in their
inventory methods.inventory methods.
reduces the need to count
every inventory item (sample results can be statistically extended
to the population)
12
Some clients use Some clients use statistical sampling statistical sampling in their in their
inventory methods.inventory methods.
What are the auditor’s
concerns?
13
Some clients use Some clients use statistical sampling statistical sampling in their in their
inventory methods.inventory methods.
The auditor is concerned thatthe statistical inventory plan:- has statistical validity- is properly applied- achieves reasonable results
14
Should the auditor test Should the auditor test beginningbeginning inventory balances? inventory balances?
how?
When the auditing firm has not auditedbeginning balances, the auditors mustsatisfy themselves as to the appropri-ateness of beginning balances, if theyare satisfied as to the current balances.
15
how?analytical
procedures
review of priorinventory
count records
tests of inventorytransactions and
documents
When the auditing firm has not auditedbeginning balances, the auditors mustsatisfy themselves as to the appropri-ateness of beginning balances, if theyare satisfied as to the current balances.
16
How should the auditor test How should the auditor test inventory held at a public inventory held at a public
warehouse?warehouse?
client head-quarters &auditor’s
officepublicwarehouse
17
How should the auditor test inventory How should the auditor test inventory held at a public warehouse?held at a public warehouse?
- direct written confirmation with the public warehouse
Confirmation, alone, will not be sufficient if inventory quantities
held at the warehouse are significant.
18
How should the auditor test inventory How should the auditor test inventory held at a public warehouse?held at a public warehouse?
- direct written confirmation with the public warehouse- if inventory held at the public ware- house is significant: ~ review client’s procedures for investigating and evaluating the warehouse
19
How should the auditor test inventory How should the auditor test inventory held at a public warehouse?held at a public warehouse?
- direct written confirmation with the public warehouse- if inventory held at the public ware- house is significant: ~ review client’s procedures for investigating and evaluating the warehouse ~ obtain report from warehouse’s auditor regarding internal controls
20
How should the auditor test inventory How should the auditor test inventory held at a public warehouse?held at a public warehouse?
- direct written confirmation with the public warehouse- if inventory held at the public ware- house is significant: ~ review client’s procedures for investigating and evaluating the warehouse ~ obtain report from warehouse’s auditor regarding internal controls ~ observe warehouse’s physical counts (if practical)
21
Some large merchandisers use Some large merchandisers use outside outside inventory-taking companiesinventory-taking companies that that specialize in counting inventory.specialize in counting inventory.
What are theauditing
implications?
22
Some large merchandisers use Some large merchandisers use outside outside inventory-taking companiesinventory-taking companies that that specialize in counting inventory.specialize in counting inventory.
- since the inventory-taking company is a third party, their work has greater reliability than the client’s
23
Some large merchandisers use Some large merchandisers use outside outside inventory-taking companiesinventory-taking companies that that specialize in counting inventory.specialize in counting inventory.
- since the inventory-taking company is a third party, their work has greater reliability than the client’s- the auditor still should observe the physical inventory count
24
Some large merchandisers use Some large merchandisers use outside outside inventory-taking companiesinventory-taking companies that that specialize in counting inventory.specialize in counting inventory.
- since the inventory-taking company is a third party, their work has greater reliability than the client’s- the auditor still should observe the physical inventory count- the auditor must test the effectiveness of the inventory-taking company’s procedures
25
inventory audit proceduresinventory audit procedures
perform analytical
proceduresto test inventoryreasonableness
26
inventory audit proceduresinventory audit proceduresregarding the client physical inventory count:
Review the client’s plan for counting the physical inventory. Attendclient count planningmeetings.
27
inventory audit proceduresinventory audit procedures
Observe the physical inventory count.Determine whether client counting methodsare effective.
regarding the client physical inventory count:
28
inventory audit proceduresinventory audit procedures
Observe the quality and condition of theinventory. Consider obsolescence.
regarding the client physical inventory count:
29
inventory audit proceduresinventory audit procedures
On a random basis:- select a sample of inventory items from the warehouse floor, count them, trace the quantity to client count records
regarding the client physical inventory count:
30
inventory audit proceduresinventory audit procedures
On a random basis:- select a sample of inventory items from the client count records, find them in the warehouse, count them
regarding the client physical inventory count:
31
inventory audit proceduresinventory audit procedures
On a random basis:- select a sample of inventory items from the client count records, trace them to the perpetual inventory records
4/30/x7 PhysicalInventory
18# widgets - purple
4/30/x7 PhysicalInventory
18# widgets - purple
4/30/x7 PhysicalInventory
18# widgets - purple
perpetual inventorydescription qtywidgets - red 87widgets - green 4widgets - purple 18
regarding the client physical inventory count:
32
inventory audit proceduresinventory audit procedures
4/30/x7 PhysicalInventory
18# widgets - purple
4/30/x7 PhysicalInventory
18# widgets - purple
4/30/x7 PhysicalInventory
18# widgets - purple
perpetual inventorydescription qtywidgets - red 87widgets - green 4widgets - purple 18
regarding the client physical inventory count:On a random basis:- select a sample of inventory items from the perpetual inventory records trace them to the client count records
33
inventory audit proceduresinventory audit procedures
determine whether any inventory has been pledged as
collateral (disclosure)
34
inventory audit proceduresinventory audit proceduresInquire of client management
regarding the existence of consigned inventories.
consignments “R” us
ACE
35
inventory audit proceduresinventory audit procedures
Inquire of client management regarding the existence of
consigned inventories:- if a consignee holds a portion of the client’s inventory, confirm that amount with the consignee
36
inventory audit proceduresinventory audit proceduresInquire of client management
regarding the existence of consigned inventories:
- if a consignee holds a portion of the client’s inventory, confirm that amount with the consignee- if a client consignee holds a portion of a consignor’s inventory, confirm that amount with the consignor
37
inventory audit proceduresinventory audit procedures
Consider the effects of sales and purchases cutoff tests on
inventories.
38
inventory audit proceduresinventory audit proceduresTest the client’s
application of their inventory valuation method (FIFO, LIFO)
and the lower-of-cost-or-market rule.
39
inventory audit proceduresinventory audit procedures
For manufactured inventories:
test the cost accumulation process as it affects valuation of ending
inventories and COGS
40
Auditing Plant AssetsAuditing Plant Assets
- perform analytical procedures- verify current-year acquisitions- verify current-year disposals- verify ending asset balances- verify depreciation expense- verify ending accumulated de- preciation balances
41
- perform analytical procedures examples: depreciation expense / equipment manufacturing costs / production
Auditing Plant AssetsAuditing Plant Assets
42
Auditing Plant AssetsAuditing Plant Assets- verify current-year acquisitions
~Select a sample of entries in the acqui- sitions journal and trace to fixed asset master file.~Select a sample of entries in the acqui- sitions journal and trace to vendor in- voices and receiving reports.~Select a sample of entries in the acqui- sitions journal and physically examine the related assets.
43
Auditing Plant AssetsAuditing Plant Assets- verify current-year disposals ~ analyze gains on the disposal of as- sets and miscellaneous income for receipts from asset disposals ~ review plant modifications and changes in product line, taxes, or in- surance coverage for indications of deletions of equipment ~ make inquiries of management and production personnel about disposals
44
Auditing Plant AssetsAuditing Plant Assets
- verify ending asset balances
EXAMPLE PROCEDURE: Trace totalsfrom fixed asset master file to the general ledger.
45
Auditing Plant AssetsAuditing Plant Assets
- verify depreciation expense
- recalculate depreciation expense- determine whether the client’s depreciation policy is consistent