Audit Program Design Part Iii

Inventory and warehousing cycle

The audit of the inventory and warehousing cycle is designed to test inventory counts, processes, and operations. The classes of transactions in this cycle include sales, value of inventory, cost of goods sold, sales returns and allowances, and estimates of allowance for slow moving inventory. Tests of Controls and Substantive Tests of TransactionsTable WK6-1 displays the interrelationships of the transaction related to audit objectives, tests of controls, and substantive tests of transactions that should be approved during the audit process of Apollo Shoes, Inc.

Select a random sample of tag numbers and identify the tag with that number attached to the actual inventory.

• Observe whether movement of inventory takes place during the count.
• Existing inventory is counted and tagged, and tags are accounted for to make sure none are missing (completeness).
• Examine inventory to make sure it is tagged.
• Observe whether movement of inventory takes place during the count.
• Inquire as to inventory in other locations. | Inventory is counted accurately (accuracy).
• Recount client’s counts to make sure the recorded counts are accurate on the tags (also check descriptions and unit of count, such as dozen or gross).
• Compare physical counts with perpetual inventory master file.
• Record client’s counts for subsequent testing. Inventory is classified correctly on the tags (classification).
• Examine inventory descriptions on the tags and compare with the actual inventory for raw material, work-in-process, and finished goods.
• Evaluate whether the percent of completion recorded on the tags for work-in-process is reasonable.
• Information is obtained to make sure sales and inventory purchases are recorded in the proper period (cutoff).
• Record in the audit files for subsequent follow-up the last receiving report number used at year-end.
• Make sure the inventory for the above item was included in the physical count.
• The client has rights to inventory recorded on tags (rights).
• Inquire about consignment or customer inventory included on client’s premises.
• Be alert for inventory that is set aside or specially marked as indications of non-ownership.

Analytical Procedures

Analytical procedures can be performed several times during an engagement:

• In the planning phase to assist in determining the nature, extent, and timing of work to be performed. During the testing phase of the audit in conjunction with the audit procedures,
• During the completion phase of the audit as a final review for material misstatements for financial problems and to help the auditor take a final “objective look” at the financial statements that have been audited (Arens, Elder, & Beasley, 2006, p.208).

1. Receipt and tests of a bank confirmation.
2. Proof account exists and balances are accurate. Existing cash in the bank is recorded (completeness).
3. Receipt and tests of a cutoff bank statement.
4. Tests of the bank reconciliation| Cash in the bank as stated on the reconciliation is accurate (accuracy).
5. Tests of the bank reconciliation.
6. Extended tests of the bank reconciliation.
7. Cash in the bank is properly presented and disclosed (presentation and disclosure).
8. Examine minutes, loan agreements, and obtain confirmation for restrictions on the use of cash and compensating balances.

Review financial statements to make sure

• material savings accounts and certificates of deposit are disclosed separately from cash in the bank,
• cash restricted to certain uses and compensating balances are adequately disclosed,
• bank overdrafts are included as current liabilities.

References

1. Arens, A. A., Elder, R.J., & Beasley, M. S. (2006). Auditing and assurance services: an integrated approach (11th ed.).
2. Upper Saddle River, NJ: Pearson. Louwers, T. J.,  Reynolds, J. K. (2007). Apollo shoes, inc. : An audit case to accompany auditing and assurance services. [University of Phoenix Custom Edition e-Text]. New York, NY: McGraw-Hill/Irwin. Retrieved from University of Phoenix, ACC546 – Auditing website.