Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
20
DON’T IGNORE
RED FLAGS
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Inventory is generally a major item on the
balance sheet,and it is often the largest
item making up the accounts included
in working capital.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
The inventory is in different locations,which makes
physical control and counting difficult.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
BUSINESS FUNCTIONS IN THE CYCLE
AND RELATED DOCUMENTS AND RECORDS
Process Purchase Orders
Receive Raw Materials
Store Raw Materials
Process the Goods
Ship finished Goods
Perpetual Inventory Master Files
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
PARTS OF THE AUDIT OF INVENTORY
Acquire and
Record Raw
Materials,
Labor,and
Overhead
Transfer
Assets
and
Costs
Ship Goods
and
Record
Revenue
and Costs
Physically
Observe
Inventory
Price and
Compile
Inventory
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Audit of
Cost Accounting
Cost Accounting Controls
Tests of cost Accounting
Physical controls
Documents and Records for Transferring Inventory
Perpetual Inventory Master Files
Unit cost Records
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
ANALYTICAL PROCEDURES
After performing the appropriate tests of the
cost accounting records and analytical procedures,
the auditor is prepared to design and perform
tests of details of the ending inventory balance.
Analytical procedures are as important in auditing
and warehousing as in any other cycle.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
… it is ordinarily necessary for the
independent auditor to be present at the time
of count and,by suitable observation,tests,and
inquiries,satisfy himself respecting the
effectiveness of the methods of inventory-
taking and the measure of reliance which may
be placed upon the client’s representations
about the quantities and physical condition of
the inventories
Physical Observation of Inventory
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Audit of Pricing and Compilation
Pricing Purchased Inventory
Pricing Manufactured Inventory
Cost or Market
Pricing and Compilation
Controls
Procedures
Valuation of Inventory
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
INTEGRATION
OF THE
TESTS
Acquisition and Payment Cycle
Payroll and Personnel Cycle
Sales and collection Cycle
Cost Accounting
Physical Inventory,Pricing,and Compilation
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Cost accounting controls
Cost accounting records
Inventory and warehousing cycle
Inventory compilation tests
Inventory price tests
Job cost systems
Perpetual inventory master file
Process cost systems
Standard cost records
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
FIGURE 20 - 6
Interrelationship
of Various Audit Tests
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Relationship of Inventory to
Other Accounts When There
Are No Perpetual records
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
STEPS IN DETERMINING
INVENTORY VALUE
Count inventory
using tags
or count sheets
Summarize
inventory by
description
Determine
correct unit cost
of inventory
Extend price and
quantity and add
pages = total
inventory value
Record in general
ledger by a
journal entry
Include in
financial
statements
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
PERPETUAL RECORD
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Tag 267 Tag 267
Department______
Description______
Quantity________
Condition_______
Counter________
Department______
Description______
Quantity________
Condition_______
Counter________