stock audit/ inventory audit 1 1

What is the sequence of functions in the inventory and warehousing cycle? 2 2

1. An employee recognizes a need for a purchase; com- pletes a requisition and sends it to purchasing. PURCHASING DEPARTMENT Ace Company PURCHASE REQUISITION The production dept. needs 200 kgs. of dry #4 solvent. authorized employee 3 3

2. Purchasing shops for the ap- propriate quality at the best price, then prepares a pur- chase order. PURCHASING DEPARTMENT Ace Company PURCHASE ORDER BIG Chemical Co. To: Big Chemical Co. Please ship 200 kgs. of dry #4 sol- vent by 6/2/04 Price $38.40/kg. purchasing agent 4 4

3. When goods arrive from the vendor, the receiving dept. inspects, counts, and pre- pares a receiving report. Ace Company RECEIVING REPORT RECEIVING DEPARTMENT BIG Chemical Co. Received 200 kgs. of dry #4 solvent on 6/1/04. Condition: OK BIG Chemical Co. receiving employee 5 5

4. Goods are moved from re- ceiving to a warehouse; per- petual inventory is updated. RECEIVING DEPARTMENT WAREHOUSE perpetual inventory description $$ 6/1/04-dry #4 solvent-200 kgs.7680 6 6

5. When needed, goods are moved from the warehouse to production; perpetu- al inventory and cost accounting re- cords are updated. WAREHOUSE PRODUCTION DEPARTMENT cost acctg. system description _ $$ _ June 8, 2004 Raw mat’l added - dry #4 solvent (200 kgs.) 7680 perpetual inventory description $$ 6/1/01-dry #4 solvent-200 kgs.7680 6/8/04-trans.200 kgs.to prod. -7680 7 7

6. When finished, goods are moved from production to the warehouse; perpetu- al inventory and cost accounting re- cords are updated. WAREHOUSE PRODUCTION DEPARTMENT perpetual inventory description $$ 6/9/04-fin.goods 50 litres x7g 9680 cost acctg. system description _ $$ _ 6/9/04-trans. 50 litres of finished x7g to warehouse 9680 8 8

7. When sold, goods are shipped and perpetual inventory re- cords are updated. Ace Co. A C E perpetual inventory description $$ 6/9/04-fin.goods 50 litres-x7g 9680 8/5/03- sold 30 litres-x7g -5808 9 9

What are the primary audit objectives with regard to inventory? 10 10

What are the primary audit objectives with regard to inventory? - existence 11 11

What are the primary audit objectives with regard to inventory? - existence - rights ABC Electronics Co. Sales Invoice 12 12

What are the primary audit objectives with regard to inventory? - existence - rights - accuracy 13 13

What are the primary audit objectives with regard to inventory? - existence - rights - accuracy - realizable value 14 14

What is the primary audit procedure with regard to inventory? 15 15

What is the primary audit procedure with regard to inventory? Observe the client’s inventory-taking procedures. 16 16

What is the primary audit procedure with regard to inventory? Observe the client’s inventory-taking procedures. 17 17

Some clients use statistical sampling in their inventory methods. why? 21 21

Some clients use statistical sampling in their inventory methods. reduces the need to count every inventory item (sample results can be statistically extended to the population) 22 22

Inventory Audit Procedures perform analytical procedures to test inventory reasonableness 40 40

Inventory Audit Procedures regarding the client physical inventory count: Review the client’s plan for counting the physical inventory. Attend client count planning meetings. 41 41

Inventory Audit Procedures regarding the client physical inventory count: Observe the physical inventory count. Determine whether client’s counting methods are effective. 42 42

Inventory Audit Procedures regarding the client physical inventory count: Observe the quality and condition of the inventory. Consider obsolescence. 43 43

Inventory Audit Procedures regarding the client physical inventory count: On a random basis: - select a sample of inventory items from the warehouse floor, count them, trace the quantity to client count records 44 44

Inventory Audit Procedures regarding the client physical inventory count: On a random basis: - select a sample of inventory items from the client count records, find them in the warehouse, count them 45 45

Inventory Audit Procedures regarding the client physical inventory count: On a random basis: - select a sample of inventory items from the client count records, trace them to the perpetual inventory records perpetual inventory description qty widgets - red 87 widgets - green 4 widgets - purple 18 4/30/x7 Physical Inventory 18# widgets - purple 4/30/04 Physical Inventory 18# widgets - purple 4/30/04 Physical Inventory 18# widgets - purple 46 46

Inventory Audit Procedures regarding the client physical inventory count: On a random basis: - select a sample of inventory items from the perpetual inventory records trace them to the client count records 4/30/x7 Physical Inventory 18# widgets - purple perpetual inventory description qty widgets - red 87 widgets - green 4 widgets - purple 18 4/30/04 Physical Inventory 18# widgets - purple 4/30/04 Physical Inventory 18# widgets - purple 47 47

Inventory Audit Procedures determine whether any inventory has been pledged as collateral (disclosure) 48 48

Inventory Audit Procedures Enquire of client management regarding the existence of consigned inventories. consignments “R” us ACE 49 49

Inventory Audit Procedures Enquire of client management regarding the existence of consigned inventories: - if a consignee holds a portion of the client’s inventory, confirm that amount with the consignee 50 50

Inventory Audit Procedures Consider the effects of sales and purchases cutoff tests on inventories. 52 52

Inventory Audit Procedures Test the client’s application of their inventory valuation method (FIFO, LIFO) and the lower-of-cost-or-market rule. 53 53

Inventory Audit Procedures For manufactured inventories: test the cost accumulation process as it affects valuation of ending inventories and COGS 54 54