Documentos de Académico
Documentos de Profesional
Documentos de Cultura
1. Introduction
For most companies, inventory is the largest
asset on the balance sheet, and cost of sales is
the largest expense on the income statement.
Further, inherent risk for inventory is fairly high.
Accordingly, inventory is usually the most
significant audit area for most audits.
Inventory is also an interesting area because of
the importance of physical observation of
inventory. It is important that inventory
observation procedures are adequate because it
is difficult to reperform these audit procedures if
they are not done correctly the first time.
We start on the next page with a brief refresher
on the accounting for inventory. The example is
for a manufacturing operation with perpetual
inventories, since this is the complex case. Note
that purchases are recorded directly in the
inventory account, rather than a purchases
account.
The example highlights the importance of the
year-end physical inventory. Not all companies
take an annual physical inventory, especially if
they have adequate perpetual records. Most of
151
152
Inventory Transactions
Manufacturer - Perpetual Inventory
Raw Material
1. Purchases
Direct Labor
2. Transfer to
WIP
1. Payroll
2. Transfer to
WIP
6. Physical
inventory
adjustment
Finished Goods
3. Transfer to
Finished Goods
3. Transfer from
WIP
6. Physical
inventory
adjustment
4. Transfer to
Cost of Sales
6. Physical
inventory
adjustment
Cost of Sales
Manufacturing overhead
1. Purchases
5. Underapplied
overhead
2. Applied to
WIP
5. Underapplied
OH applied to
COS
6. Book to
physical
inventory
adjustment
1. Purchases of raw materials are tested as part of the acquisition cycle. Direct
labor is tested as part of the payroll cycle.
2. Raw material, labor and overhead are added to work-in-process as incurred.
Although management needs a sound system of recording costs for internal
purposes, the auditor can usually perform minimal tests of this system (see
#5).
3. Upon completion, the completed items are transferred from WIP to finished
goods. The auditor also usually performs minimal tests of this process (see
#5).
4. Upon sale, finished goods are relieved from inventory and transferred to cost of
sales. This is tested as part of the sales cycle.
153
2.
Other
Sports
Shoes
Shoes
154
Total
Total
Equip
Report
ed
Correct
Report
ed
Correct
Sales
COS
GM
10,000
6,000
4,000
5,000
3,000
2,000
5,000
3,200
1,800
15,000
9,000
6,000
15,000
9,200
5,800
GM%
40%
40%
36%
40%
38.7%
155
B.
Non-error explanations
C.
Individual
reasonableness
tests
Compare prices and quantities of individual
inventory items to prior year to test the
reasonableness of year-end inventory.
156
B.
Timing
Many companies take a complete physical
inventory at year-end, although it may be
taken earlier. As with receivables, it is then
necessary to test activity between the
physical inventory and the balance sheet
date.
Perpetual systems - A complete physical is
not necessary if the client has adequate
perpetual records, and takes periodic cycle
counts. The auditor would then test the
accuracy of the perpetual records.
C.
B.
Physical inventory
1. Determine all goods are tagged and
counted, trace test counts into inventory
compilation. (Primarily a completeness
158
test)
2. How do we test existence for the
inventory compilation? (Discussion)
Pricing
1.
2.
3.
4.
5.
161
Adjustment examples:
1. January sale ($10,000; GP margin 25%) recorded in December
detected by sales cutoff tests.
Goods included in
inventory (physical
taken)
Sales
Sales
Inventory
COS
AR
10,000
AR
10,000
10,000
7,500
7,500
10,000
COS
Inventory
10,000
Accts. Pay
10,000
Accts. Pay
Chapter 21
Discussion Case Doughties Foods
Homework Problems
21-24
21-25
21-29
Sample Multiple Choice
Text
162
10,000
10,000
Audit procedure
Type of
test
Objective(s)
1.
Test of
control
Existence
Completeness
Accuracy
Classification
2.
Substantive
Existence
3.
4.
Substantive
Substantive
Completeness
Existence
Accuracy
(Since test is a comparison of the
count with the recorded inventory,
rather than a directional test, it has
multiple objectives. In contrast,
tracing tests counts to the
perpetual is primarily a
completeness test, tracing from
the perpetual to the inventory
items is an existence test.)
Completeness (test count is
included)
Existence (tag is from valid
sequence)
Accuracy (quantity agrees)
Classification (description)
5.
Substantive
Accuracy
6.
Test of
control
Existence
7.
Substantive
Accuracy
Classification
163
Problem 21-24
Error or omission
a.
Internal control to
prevent
b.
Substantive procedure
1.
Internal verification by
another person.
Computer limit checks
1) Compare prices to
vendor invoices, carefully
noting of units of
measure.
2) Reasonableness tests
comparing current year to
prior year.
2.
3.
Separation of duties.
People responsible for
taking physical inventory
should be independent of
custody of records.
Independent second
counts.
4.
5.
Internal verification of
prices.
Reporting of price
variances.
6.
Segregation of obsolete
inventory from regular
inventory.
Count by knowledgeable
1) Examination of quality
of inventory during
observation.
2) Perform net realizable
164
7.
Due to increases in
volume and controlling
of costs, applied
overhead far exceed
actual cost.
personnel.
Periodic review of
overhead rate.
Test reasonableness of
overhead rate.
Determine whether
amount overapplied to
inventory is material.
165
Problem 21-29
a.
Gross margin %
Inventory turnover
(based on ave. inventory)
b.
2009
2008
2007
2006
26.3%
22.6%
22.4%
22.4%
6.6
7.6
7.6
7.9
166
167