1. Presented by: Diana Tai Ivan Chen Ronnie Lee Wilson Wong Chapter 11 DQ 35 CAAT

2. Background Client: Wholesale cosmetics distributor with an inventory of thousands of individual items Keep inventory in its own distribution centre and 2 public warehouses Inventory computer file is maintained on a computer disk

3. Background Auditor: A computer cartridge of the data on the inventory file on the date of the physical count A general-purpose computer software package

4. Scope of Audit Work Audit Procedure: Planning/Compliance test/Substantive testing/Reporting Assumption: Planning and Compliance test have performed and obtain satisfactory result Focus will be on substantive testing on balance and transaction only

5. Assumption Collection of data is performed by auditor Client maintain a sound and effective control on the accounting system after evaluation Client maintain all record in computer format Auditor is competence with CAAT

6. Objective of substantive testing 1.Existence 2.Completeness 3.Ownership 4.Valuation 5.Accuracy 6.Identifying Unusual Items

7. Basic inventory auditing procedure How general purpose computer software package and type of the inventory file data might be helpful Stock count: select sample and then test count to see the existence Use computer to select sample randomly, or based on some selection criteria 1. Existence

8. Send confirmation to confirm the inventories hold by third parties Select sample by computer randomly or based on selection criteria Print confirmation by computer 1. Existence

9. Basic inventory auditing procedure How general purpose computer software package and type of the inventory file data might be helpful Omission of invoice no: Scanning & Cut off Audit software can detect the gap of invoice no. 2. Completeness

10. Trace the inventory to documents e.g. invoice, receiving reports and purchase order Request clients for receiving reports and compare with inventory report with software Analytical procedure by human calculation (reasonableness) Compare the inventory records of this year and past years 2. Completeness

11. Basic inventory auditing procedure How general purpose computer software package and type of the inventory file data might be helpful Check companys policy of recognition criteria Manual records Check companys policy of recognition criteria Computerized records 3. Ownership

12. Check manual records of consignment sales Check computerized records of consignment sales Goods held for consignment Good shipped out for consignment Goods held for consignment Good shipped out for consignment 3. Ownership

13. Check manual records of purchase order; receiving reports; and vendor s invoice Join computerized records of Receiving report; and Ordering report Use generated report of unmatched items To check reasonableness 3. Ownership

14. Prepare manual management representation letter Print computerized management representation letter Take the letter to client to sign 3. Ownership

15. 4. Valuation Basic inventory auditing procedure How general purpose computer software package and type of the inventory file data might be helpful Check physical condition of inventories during stock-taking eg: slow-moving and obsolete items Analyze the inventory balance into age categories, by identifying the date of last purchase or last sale Select the slow-moving items Physical inspection

16. Trace unit cost of inventory to supporting documents such as vendors invoice Request for vendors invoice file(last year) Join with inventory file and matched by item no. Extract the amount deviated from the cost per item by applying equation(COST1<>COST) 4. Valuation

17. Trace to subsequent sales invoices and compare the selling price to the cost Consider appropriate write-down to net realizable value(NRV) Request for sales invoice file(current year) Join with inventory file and matched by item no. Consider write-down to NRV by applying equation(COST>INV_AMT) Perform an analytical review of the overall reasonableness of the inventory valuation Generate reports showing the total amount of each category of inventories with prior year and budget

18. 5. Accuracy Basic inventory auditing procedure How general purpose computer software package and type of the inventory file data might be helpful Recalculate to check for arithmetical accuracy Test the accuracy of the clients computation –Check the extensions and footings

19. Check the correctness of discount received Request for payment record (last year) Join with inventory file and matched by item no. Check incorrect discount by applying equation (Discount percent >0 AND Payment period>30) 5. Accuracy

20. 6. Unusual items Basic inventory auditing procedure How general purpose computer software package and type of the inventory file data might be helpful Check the transaction with zero or negative amount –eg. Purchase return Request for purchase return record (last year) Join with inventory file and matched by item no.

21. Check the transaction with cents and odd dollars Extract purchases with cents in the inventory file by applying equation (COST-@int(COST)<>0) Extract purchases with odd dollars in the inventory file by applying equation (COST- @int(COST/10)*10<>0) 6. Unusual items

22. Conclusion Advantage of CAAT: Time saving Accurate result is obtain Objectivity in random sampling Audit work done can easily transfer internationally to other branches when necessary

23. Conclusion Limitation of CAAT: Program compatibility of document format Competence of Auditors Common concern of traditional and CAAT audit: Evaluation of True and Fairness of inventory account is base on auditors professional judgment