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