Arens_Chapter21

7/24/2019 Arens_Chapter21

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2010 Prentice Hall Business Publishing,2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e,Arens//Elder/BeasleyArens//Elder/Beasley 21 - 1

Audit of the InentoryAudit of the Inentory

and !arehousing "ycleand !arehousing "ycle

"ha#ter 21"ha#ter 21


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2010 Prentice Hall Business Publishing,2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e,Arens//Elder/BeasleyArens//Elder/Beasley 21 -21 - 22

$earning %b&ectie 1$earning %b&ectie 1

'escribe the business functions'escribe the business functions

and the related docu(ents andand the related docu(ents and

records in the inentory andrecords in the inentory and)arehousing cycle*)arehousing cycle*


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2010 Prentice Hall Business Publishing,2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e,Arens//Elder/BeasleyArens//Elder/Beasley 21 -21 - ++

lo) of Inentory and "ostslo) of Inentory and "osts

Actual

Raw Materials

Beginninginventory

Rawmaterialsused

Purchases

Endinginventory

Direct Labor

Actual

Applied

Applied

Manufacturing Overhead

or!"in"Process

Beginninginventory

Ending

inventory

#ost ofgoodsmanufactured

#ost ofgoods sold$inished %oods

Beginninginventory

Endinginventory

#ost ofgoods sold


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2010 Prentice Hall Business Publishing,2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e,Arens//Elder/BeasleyArens//Elder/Beasley 21 -21 -

$earning %b&ectie 2$earning %b&ectie 2

E.#lain the fie #arts of the auditE.#lain the fie #arts of the audit

of the inentory and )arehousingof the inentory and )arehousing

cycle*cycle*


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unctions in the "ycleunctions in the "ycle

Process

purchase

orders

Receive

raw

materials

Store

raw

materials

Process

the

goods

Store

finished

goods

Ship

finished

goods

Receive

raw

materials

Putmaterials

in

storage

Putmaterials

in

production

Putcompleted

goods in

storage

&hip

finished

goods

$low

of

'nventory


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Audit of InentoryAudit of Inentory

Acuire and record

ra) (aterials, labor,and oerhead

Part of audit Cycle in which tested

Acuisition and

#ay(ent #lus#ayroll and #ersonnel

Internally transfer

assets and costs

Inentory and

)arehousing


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$earning %b&ectie +$earning %b&ectie +

'esign and #erfor( audit tests'esign and #erfor( audit tests

of cost accounting*of cost accounting*


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"ost Accounting "ontrols"ost Accounting "ontrols

2* "ontrols oer the related costs

1* Physical controls oer ra) (aterials,

)or6 in #rocess, and finished goods inentory


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7ethodology for 'esigning "ontrols7ethodology for 'esigning "ontrols

and 3ubstantie 8estsand 3ubstantie 8ests

(nderstand internal control )

cost accounting system

Assess planned control ris! )

cost accounting system

Determine e*tent of testing controls

Audit procedures&ample si+e

'tems to select

,iming

Design tests of controls andsubstantive tests of transactions

for the cost accounting system

to meet transaction"related

audit ob-ectives


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8ests of "ost Accounting8ests of "ost Accounting

Physical controls oer inentory

'ocu(ents and records for transferring inentory

Per#etual inentory (aster files

9nit cost records


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$earning %b&ectie $earning %b&ectie

A##ly analytical #rocedures toA##ly analytical #rocedures to

the accounts in the inentorythe accounts in the inentory

and )arehousing cycle*and )arehousing cycle*


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2010 Prentice Hall Business Publishing,2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e,Arens//Elder/BeasleyArens//Elder/Beasley 21 -21 - 1+1+

Analytical Procedures: InentoryAnalytical Procedures: Inentory


Analytical procedure

#ompare gross marginpercentage with that ofprevious years

Overstatement orunderstatement ofinventory and costof goods sold

Possible misstatement

#ompare inventory turnover.cost of goods sold divided by

average inventory/ with thatof previous year

Obsolete inventoryOverstatement or

understatementof inventory


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#ompare unit costs ofinventory with thoseof previous years

Overstatement orunderstatement of unitcosts0 which affectinventory and cost ofgoods sold


#ompare e*tended inventory

value with that of previousyears

Misstatements in

compilation0 unit costs0 ore*tensions0 which affectinventory and cost ofgoods sold


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#ompare current yearmanufacturing costs withthose of previous years.variable costs should bead-usted for changesin volume/

Misstatements of unit costsof inventory0 especiallydirect labor andmanufacturing overhead0which affect inventory andcost of goods sold



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Identify client

business ris6s

affecting inentory

7ethodology for 'esigning7ethodology for 'esigning

8ests of Balances ; Inentory8ests of Balances ; Inentory

3et tolerable (isstate(ent

and assess inherent

ris6 for inentor

Assess control

ris6 for

seeral cycles

Phase I

Phase I

Phase I


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7ethodology for 'esigning7ethodology for 'esigning

8ests of Balances ; Inentory8ests of Balances ; Inentory

'esign and #erfor(

tests of controls and

substantie testsof transactions

for seeral cycles

Phase II


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8i(ing

Ite(s to select

3a(#le si


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'esign and #erfor( #hysical'esign and #erfor( #hysical

obseration audit testsobseration audit tests

for inentory*for inentory*


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"ontrols %er Per#etual"ontrols %er Per#etual

Inentory 7aster ilesInentory 7aster iles

Pro#er instructions for the #hysical count

3u#erision by res#onsible #ersonnel

Inde#endent internal erification of the counts

Inde#endent reconciliations of the #hysical

counts )ith #er#etual inentory (aster files

Adeuate control oer count sheets or tags


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Audit 'ecisionsAudit 'ecisions

8i(ing

3a(#le si


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Physical %bseration 8estsPhysical %bseration 8ests

8he (ost i(#ortant #art of the obseration of

inentory is deter(ining )hether the #hysical

count is being ta6en in accordance )ith theclient=s instructions*


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2010 Prentice Hall Business Publishing,2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e,Arens//Elder/BeasleyArens//Elder/Beasley 21 -21 - 2+2+

Balance-related AuditBalance-related Audit

%b&ecties%b&ecties

E.istence:

Inentory as recorded on tags e.ist*

"o(#leteness:E.isting inentory is counted and tagged*

Accuracy:

Inentory is counted accurately*"lassification:

Inentory is classified correctly on the tags*


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Balance->elated AuditBalance->elated Audit

%b&ecties%b&ecties

"utoff:

8ransactions are recorded in the #ro#er #eriod*

>ealiights:8he client has rights to inentory recorded

on tags*


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'esign and #erfor( audit tests'esign and #erfor( audit tests

of #ricing and co(#ilationof #ricing and co(#ilation

for inentory*for inentory*


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Audit of Pricing and "o(#ilationAudit of Pricing and "o(#ilation

'nventory price tests

?aluation of inentory

Pricing and co(#ilation #rocedures

Pricing and co(#ilation controls


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Balance->elated %b&ecties:Balance->elated %b&ecties:

Inentory Pricing and "o(#ilationInentory Pricing and "o(#ilation

'etail tie-in

E.istence

"o(#letenessAccuracy

"lassification

>ealiights


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?aluation of Inentory?aluation of Inentory

Pricing #urchased inentory

Pricing (anufactured inentory

"ost or (ar6et


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Integrate the arious #arts ofIntegrate the arious #arts of

the audit of the inentorythe audit of the inentory

and )arehousing cycle*and )arehousing cycle*


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2010 Prentice Hall Business Publishing,2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e,Arens//Elder/BeasleyArens//Elder/Beasley 21 -21 - +0+0

Interrelationshi# of ?ariousInterrelationshi# of ?arious

Audit 8estsAudit 8ests

,ests of ac1uisition

and payment cycle

Ac1uisitions of

raw materials

Raw materials

Other manufacturing

costs

Work in process

Raw material usedRaw material used


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,ests of payroll and

personnel cycle

Direct labor

Work in process

'ndirect labor

Work in process


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Inventory tests,ests of cost accounting records,ests of physical inventory observation,ests of pricing and compilation

Ending inventory

Raw materials

Ending inventory

Work in process

Ending inventory

Finished goods


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2010 Prentice Hall Business Publishing,2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e,Arens//Elder/BeasleyArens//Elder/Beasley 21 -21 - ++++



#ost of goods

manufactured

Work in process

#ost of goods

manufactured

Finished goods

,ests of

sales andcollection cycle

#ost of goods sold

Finished goods


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2010 Prentice Hall Business Publishing2010 Prentice Hall Business Publishing Auditing 13/eAuditing 13/e Arens//Elder/BeasleyArens//Elder/Beasley 21 - +

End of "ha#ter 21End of "ha#ter 21

Arens_Chapter21

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