Auditing and assurance services 14e by arens chapter 21

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Audit of the Inventory and Warehousing Cycle Chapter 21 http://downloadslide.blogspot.com ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 Learning Objective Describe the business functions and the related documents and records in the inventory and warehousing cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - Flow of Inventory and Costs Raw Materials Beginning Raw inventory materials used Purchases Ending inventory Direct Labor Actual Applied Manufacturing Overhead Actual Applied Work-in-Process Beginning Cost of inventory goods manufactured Ending inventory Finished Goods Beginning Cost of inventory goods sold Cost of goods sold Ending inventory ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - Functions in the Cycle Process Receive purchase raw orders materials Store raw materials Process the goods Store finished goods Ship finished goods Flow Receive of raw Inventory materials Put materials in storage Put materials in production Put completed goods in storage Ship finished goods ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - Learning Objective Explain the five parts of the audit of the inventory and warehousing cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - Audit of Inventory Part of audit Acquire and record raw materials, labor, and overhead Internally transfer assets and costs Cycle(s) Where tested Acquisition and payment Payroll and personnel ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Inventory and Warehousing 21 - Audit of Inventory Part of audit Ship goods and record revenue and costs Physically observe inventory Price and compile inventory Cycle where tested Sales and collection Inventory and warehousing ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Inventory and warehousing 21 - Learning Objective Design and perform audit tests of cost accounting ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - Cost Accounting Controls Physical controls over raw materials, work in process, and finished goods inventory Controls over the related costs ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - Methodology for Designing Controls and Substantive Tests Understand internal control – cost accounting system Assess planned control risk – cost accounting system Determine extent of testing controls Design tests of controls and Audit procedures substantive tests of transactions Sample size for the cost accounting system Items to select to meet transaction-related Timing audit objectives ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 10 Learning Objective Design and perform physical observation audit tests for inventory ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 16 Audit Responsibilities for Client Physical Counts  Be present at the time the client counts inventory  Observe the client’s counting procedures  Make inquiries of client personnel about their counting procedures  Make their own independent tests of the physical count ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 17 Controls Over Physical Count  Proper instructions for the physical count  Supervision by responsible personnel  Independent internal verification of the counts  Independent reconciliations of the physical counts with perpetual inventory master files  Adequate control over count sheets or tags ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 18 Audit Decisions Sample size Timing ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Selection of items 21 - 19 Physical Observation Tests The most important part of the observation of inventory is determining whether the physical count is being taken in accordance with the client’s instructions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 20 Balance-related Audit Objectives Existence: Inventory as recorded on tags exist Completeness: Existing inventory is counted and tagged Accuracy: Inventory is counted accurately Classification: Inventory is classified correctly on the tags ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 21 Balance-related Audit Objectives Cutoff: Transactions are recorded in the proper period Realizable value: Obsolete and unusable inventory items are excluded or noted Rights: The client has rights to inventory recorded on tags ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 22 Learning Objective Design and perform audit tests of pricing and compilation for inventory ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 23 Audit of Pricing and Compilation Inventory price tests Pricing and compilation procedures Pricing and compilation controls Purchased inventory ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Valuation of inventory Manufactured inventory 21 - 24 Learning Objective Integrate the various parts of the audit of the inventory and warehousing cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 25 Interrelationship of Various Audit Tests Tests of acquisition and payment cycle Raw materials Work in process Acquisitions of raw materials Other manufacturing costs Raw material used Raw material used ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 26 Interrelationship of Various Audit Tests Tests of payroll and personnel cycle Work in process Work in process Direct labor Indirect labor ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 27 Interrelationship of Various Audit Tests Inventory tests  Cost accounting records  Physical inventory observation  Pricing and compilation Raw materials Work in process Ending inventory Ending inventory Finished goods Ending inventory ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 28 Interrelationship of Various Audit Tests Work in process Finished goods Cost of goods manufactured Cost of goods manufactured Tests of sales and collection cycle Finished goods Cost of goods sold ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 21 - 29 End of Chapter 21 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 ... functions and the related documents and records in the inventory and warehousing cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 21 - Flow of Inventory and Costs... Publishing, Auditing 14/e, Arens/ Elder/Beasley Inventory and Warehousing 21 - Audit of Inventory Part of audit Ship goods and record revenue and costs Physically observe inventory Price and compile... tested Sales and collection Inventory and warehousing ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley Inventory and warehousing 21 - Learning Objective Design and perform
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