Kế toán, kiểm toán - Chapter thirteen: Auditing the inventory management process

Auditing the InventoryManagement ProcessChapter ThirteenOverview of the Inventory Management ProcessPurchasingprocessInventorymanagementprocessRevenueprocess Purchase ofraw materials Payment ofmanufacturingoverheadHuman resourcemanagementprocess Assignment ofdirect and indirectlabour costs Sale ofgoodsTypes of Documents and RecordsProduction Schedule – Based on the expected demand for the entity’s products.Receiving Report – Records the receipt of goods from vendors.Materials Requisition – Used to track materials during the production process.Inventory Master File – Contains all the important information related to the entity’s inventory, including the perpetual inventory records.Production ScheduleInventory Master FileProduction Data Information – Contains information about the transfer of goods and related cost accumulation at each stage of production.Cost Accumulation and Variance Report – Material, labour, and overhead costs are charged to inventory as part of the manufacturing process. The variance report compares actual costs to standard or budgeted costs.Inventory Status Report – Shows the type and amount of products on hand.Shipping Order – Used to remove goods from the perpetual inventory records.Type of Documents and Records (continued)Shipping OrderThe Major FunctionsKey Segregation of DutiesKey Segregation of DutiesSegregation of duties is a particularly important control in the inventory management process because of the potential for theft and fraud.Inherent Risk AssessmentThe auditor should consider industry-related factors and operating and engagement characteristics when assessing the possibility of a material misstatement.If industry competition is intense, there may be problems with the proper valuation of inventory.Technology changes in certainindustries may also promotematerial misstatement due toobsolescence.Products that are small and ofhigh value are more susceptibleto theft. The auditor must be alert to related-party transactionsfor acquiring raw materials andselling finished products. Prior-year misstatements are good indicators of potential misstatements in the current year.Control Risk AssessmentMajor steps in setting the control risk in the inventory management process.Understand and document the inventory management process based on a reliance strategy.Set and document the control risk for the inventory management process.Plan and perform tests of controls on inventory transactions.Control Activities and Tests of Controls – Inventory TransactionsControl Activities and Tests of Controls – Inventory TransactionsOccurrence of Inventory TransactionsThe auditor’s main concern is that all recorded inventory exists. The auditor should also be concerned that goods may be stolen. Review and observation are the main tests of controls used by the auditor to test the control activities.Control Activities and Tests of Controls – Inventory TransactionsCompleteness of Inventory TransactionsThe primary control activity for completeness relates to recording inventory that has been received. Controls are closely related to the purchasing process.Control Activities and Tests of Controls – Inventory TransactionsAuthorization of Inventory TransactionsThe auditor’s concern with authorization in the inventory system is with unauthorized purchase or production activity that may lead to excess levels of certain types of finished goods.Control Activities and Tests of Controls – Inventory TransactionsAccuracy of Inventory TransactionsInventory transactions that are not properly recorded result in misstatements that directly affect the amounts reported in the financial statements. Inventory purchases must be recorded at the correct price and actual quantity received. Inventory shipped must be properly recorded in cost of goods sold and the related revenue recognized. Control Activities and Tests of Controls – Inventory TransactionsCut-off of Inventory TransactionsInventory transactions recorded in the improper period could affect a number of accounts, including inventory, purchases and cost of goods sold. Control Activities and Tests of Controls – Inventory TransactionsClassification of Inventory TransactionsThe client must have control activities to ensure that inventory is properly classified as raw materials, work in process, or finished goods. By knowing which manufacturing department holds the inventory, the auditor is able to classify it by type. Relating the Assessed Level of Control Risk to Substantive ProceduresRelating the Assessed Level of Control Risk to Substantive ProceduresRelating the Assessed Level of Control Risk to Substantive ProceduresAuditing InventorySubstantive Analytical ProceduresAuditing InventoryAuditing Standard CostsMaterialTest the quantity and type of materials included in the product and the price of the materials.LabourGather evidence about the type and amount of labour needed for production and the labour rate.OverheadReview the client’s method of overhead allocation for reasonableness, compliance with applicable financial reporting framework, and consistency.Auditing InventoryObserving Physical InventoryDuring the observation of the physical inventory count, the auditor should do the following:Ensure that no production is scheduled. If production is scheduled proper controls must be established for movement between departments in order to prevent double counting.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.Ensure that inventory tags are issued sequentially to individual departments.Auditing InventoryObserving Physical Inventory (continued)Perform test counts and record a sample of counts in the working papers.Obtain tag control information for testing the client’s inventory compilation.Obtain cut-off information, including the number of the last shipping and receiving documents issued.Observe the condition of the inventory for items that may be obsolete, slow moving, or carried in excess quantities.Inquire about goods held on consignment for others or held on a ‘bill-and-hold’ basis.Tests of Details of Transactions, Account Balances and DisclosureTests of Details of Transactions, Account Balances and DisclosureTests of Details of Transactions, Account Balances and DisclosureTests of Details of Transactions, Account Balances and DisclosurePossible causes of book-to-physical differences:Inventory cut-off errors.Unreported scrap or spoilage.Pilferage or theft.Tests of Details of Transactions, Account Balances and DisclosureExamples of Disclosure Items:Cost method (e.g. FIFO or weighted average).Components of inventory.Long-term purchase contracts.Consigned inventory.Purchases from related parties.Pledged or assigned inventory.Expenses from write-downs.Warranty obligations.Evaluating the Audit FindingsThe auditor compares the aggregated identified misstatement to materiality to determine if the identified misstatement would affect the audit. The auditor requests the client to correct the identified misstatements and then compares the uncorrected misstatements with materiality to conclude whether the financial statements are fairly stated.If uncorrected misstatements in inventory, and when considered together with other uncorrected misstatements, are less than materiality, the auditor may accept that the financial statements are fairly presented. Conversely, if the uncorrected misstatement exceeds the materiality, the auditor should conclude that the financial statements are not fairly presented.End of Chapter 13