Professional Documents
Culture Documents
2D - 1
OVERVIEW OF THE
INVENTORY
MANAGEMENT PROCESS
Figure
2D - 2
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.
2D - 3
Work in Process
Manufacturing
Overhead
Actual Applied
2D - 4
Finished Goods
Beginning
inventory Cost of
goods sold
Ending
inventory
Cost of Goods Sold
2D - 5
Receive
Receive raw
raw
materials
materials
Store
Store
raw
raw
materials
materials
Process
Process the
the materials
materials
2D - 6
Store
Store
finished
finished
goods
goods
Ship
Ship
finished
finished
goods
goods
Perpetual
Perpetual inventory
inventory
master
master file
file
2D - 7
Audit of Inventory
Part of audit
Acquisition and
payment plus
payroll and personnel
Internally transfer
assets and costs.
Inventory and
warehousing
2D - 8
Audit of Inventory
Part of audit
Sales and
collection
Physically observe
inventory.
Inventory and
warehousing
Inventory and
warehousing
2D - 9
SEGREGATION OF DUTIES
2D - 10
INHERENT RISK
ASSESSMENT
Industry-related factors
Competition
Inventory valuation issues
Rapid technology changes
Types of product
Valuation can lead to disagreements with client
Possible related-parties transactions
2D - 11
CONTROL RISK
ASSESSMENT
Understanding and documenting
the inventory management process based
on the planned level of control risk
2D - 12
AUDITING INVENTORY
Substantive tests of transactions
Analytical procedures
Tests of account balances
2D - 13
SUBSTANTIVE TESTS OF
TRANSACTIONS
Because the inventory management process interacts with
the revenue, purchasing, and payroll processes, control
procedures over the receipt of raw materials, shipment of
goods, and assignment of labor costs are normally tested
as part of those processes.
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.
2D - 14
ANALYTICAL
PROCEDURES
2D - 15
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.
2D - 16
Possible Misstatement
Overstatement or
understatement of
unit costs
Misstatements in
compilation, unit
costs, or extensions
2D - 17
Possible Misstatement
Misstatement of unit
costs of inventory,
especially direct
labor and
manufacturing
overhead
2D - 18
Raw materials
WIP
Finished goods
2D - 20
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).
2D - 21
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.
Ensure that inventory tags are issued sequentially to
individual departments.
Perform test counts and record a sample of counts in the
working papers.
2D - 22
OBSERVATION
PROCEDURES
(continued)
2D - 23
Controls
Proper instructions for the physical count
Supervision by responsible personnel
Independent interval verification of the counts
Independent reconciliations of the physical
counts with perpetual inventory master files
Adequate control over count sheets or tags
2D - 24
2D - 25
Pricing and
compilation
procedures
Valuation
of inventory
2D - 26
Valuation (Pricing)
of Inventory
Pricing Purchased Inventory
Pricing Manufactured Inventory
Cost or Market
2D - 27
TESTS OF ACCOUNT
BALANCES
Table 13-8 summarizes the tests of the inventory
account balance for each audit objective.
2D - 28
POSSIBLE CAUSES OF
BOOK-TO-PHYSICAL
DIFFERENCES
Inventory cutoff errors.
Unreported scrap or spoilage.
Pilferage or theft.
2D - 29
Interrelationship of
Various Audit Tests
Tests of acquisition
and payment cycle
Raw materials
Acquisitions of
raw materials
Work in process
Other manufacturing
overhead
2D - 31
Interrelationship of
Various Audit Tests
Tests of payroll
and personnel cycle
Work in process
Direct labor
Work in process
Indirect labor
2D - 32
Interrelationship of
Various Audit Tests
Inventory tests
Raw materials
Ending inventory
Work in process
Ending inventory
Finished goods
Ending inventory
2D - 33
Interrelationship of
Various Audit Tests
Tests of sales and
collection cycle
Finished goods
Cost of goods sold
2D - 34