Audit Final- Ch 13

Major Functions of the Inventory Management Process and related key documents

***1. Inventory Management 2. Raw Materials Store 3. Manufacturing 4. Finished Goods Store 5. Cost Accounting 6. General Ledger

Special significance of auditing inventory

1. The valuation of goods on hand and in process often presents complex and difficult issues 2. Determining the quantities of inventories may require specialized techniques 3. Inventories often represent the largest current asset of a company 4. Misstatements of inventories directly affect cost of goods sold and, therefore, net income 5. Management fraud has often involved the fraudulent overstatement of inventories

Which assertion is most directly being tested-- Perform price testing by tracing inventory prices listed on invoices to approved client prices list

Accuracy

Five Major steps for auditing Inventory-- Step 3

Assess the risks of material misstatement and design further audit procedures

Which assertion is most directly being tested-- Trace a sample of test counts to the client's final inventory listing

Completeness

Which assertion is most directly being tested-- Examine a sample of purchase invoices and receiving reports to verify that the inventory purchase was recorded in the correct period

Cutoff/Timeliness

Important assertions related to auditing Inventory-- Most important assertion when auditing inventory?

Existence

Physical Inventory Observation-- Assertions being tested

Existence

Which assertion is most directly being tested-- Observe the count of the physical inventory and perform test counts of inventory listed on the client's final inventory listing

Existence/Occurrence

Five Major steps for auditing Inventory-- Step 2

Obtain an understanding of internal control over inventories and cost of goods sold

Five Major steps for auditing Inventory-- Step 5

Perform further audit procedures—substantive procedures for inventories and cost of goods sold

Five Major steps for auditing Inventory-- Step 4

Perform further audit procedures—tests of controls

Physical Inventory Observation-- Test Counts

Sample being counted to make sure it exists

Five Major steps for auditing Inventory-- Step 1

Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to inventories and cost of goods sold

Which assertion is most directly being tested-- Perform price testing by tracing inventory prices listed on invoices to market prices in order to verify the use of a reasonable pricing method

Valuation

Inventory Price Testing-- Assertions being tested

Valuation, Accuracy, Completeness, Existence, & Cutoff