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Inventory Cycle.ppt
1.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-1 Chapter 13 CHAPTER 13 AUDITING THE INVENTORY CYCLE AND RELATED ACCOUNTS
2.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-2 OVERVIEW OF THE INVENTORY CYCLE Figure 13-1 shows how other cycles interact with the inventory cycle. Figure 13-2 presents a flowchart for a reasonably sophisticated inventory cycle.
3.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-3 DOCUMENTS AND RECORDS Production schedule. Receiving report. Material requisition. Inventory master file. Production data information. Cost accumulation and variance report. Inventory status report. Shipping order.
4.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-4 SEGREGATION OF DUTIES The inventory management function should be segregated from the cost accounting function. The inventory stores function should be segregated from the cost-accounting function. The cost-accounting function should be segregated from the general ledger function. The responsibility of supervising physical inventory taking should be separated from the inventory management and inventory stores functions.
5.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-5 INHERENT RISK ASSESSMENT Industry-related factors Competition Inventory valuation issues Rapid technology changes Engagement and Operating Characteristics Types of product Valuation can lead to disagreements with client Possible related-parties transactions
6.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-6 CONTROL RISK ASSESSMENT Planning and performing tests of controls on inventory cycle transactions Understanding and documenting the inventory internal control system based on the planned level of control risk Assessing and documenting the control risk for the inventory cycle
7.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-7 AUDITING INVENTORY Substantive tests of transactions Analytical procedures Tests of account balances
8.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-8 SUBSTANTIVE TESTS OF TRANSACTIONS Because the inventory cycle interacts with the revenue, purchasing, and payroll cycles, control procedures over the receipt of raw materials, shipment of goods, and assignment of labor costs are normally tested as part of those cycles. If the auditor intends to obtain substantive evidence on the perpetual inventory records, the tests of receipt and shipment of goods can be extended by tracing the transactions into the perpetual inventory records.
9.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-9 ANALYTICAL PROCEDURES Compare raw material, finished goods, and total inventory turnover to previous years’ and industry averages. Compare days outstanding in inventory to previous years’ and industry averages. Compare gross profit percentage by product line with previous years and industry data. Compare actual cost of goods sold to budgeted amounts.
10.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-10 ANALYTICAL PROCEDURE (continued) Compare current year standard costs with prior years’ after considering current conditions. Compare actual manufacturing overhead costs with budgeted or standard manufacturing overhead costs.
11.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-11 AUDITING STANDARD COSTS Materials costs Labor costs Overhead costs
12.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-12 OBSERVATION OF PHYSICAL INVENTORY The auditor's observation of inventory is a generally accepted auditing procedure. The observation of the physical inventory provides evidence primarily on the validity audit objective (also ownership and valuation).
13.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-13 OBSERVATION PROCEDURES Insure that no production is scheduled. Ensure that there is no movement of goods during the inventory count. Make sure that the client's count teams are following the inventory count instructions. Perform test counts and record a sample of counts in the working papers.
14.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-14 OBSERVATION PROCEDURES (continued) Obtain tag control information for testing the client's inventory compilation. Obtain cutoff information. Observe the condition of the inventory for items that may be obsolete, slow moving, or in excess quantities. Inquiry about goods held on consignment for others or held on a "bill and hold" basis.
15.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-15 TESTS OF ACCOUNT BALANCES Table 13-8 summarizes the tests of the inventory account balance for each audit objective.
16.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-16 POSSIBLE CAUSES OF BOOK-TO- PHYSICAL DIFFERENCES Inventory cutoff errors. Unreported scrap or spoilage. Pilferage or theft.
17.
© 2000 The
McGraw-Hill Companies, Inc., Irwin/McGraw-Hill 13-17 SAMPLE DISCLOSURE ITEMS FOR INVENTORYAND RELATED ACCOUNTS Cost method (FIFO, LIFO, retail method). Components of inventory. Long-term purchase contracts. Consigned inventory. Purchases from related parties. LIFO liquidations. Pledged or assigned inventory. Disclosure of unusual losses from writedowns of inventory or losses on long-term purchase commitments. Warranty obligations.
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