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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,16 -,38,2003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/Beasley,Audit of the Inventoryand Warehousing Cycle,Chapter 16,Learning Objective 1,Identify the business functions,and the related documents,and records in the inventory,and warehousing cycle.,Functions in the Inventoryand Warehousing Cycle,Process,purchase,orders,Store,raw,materials,Process the goods,Receive raw,materials,Functions in the Inventoryand Warehousing Cycle,Store,finished,goods,Ship,finished,goods,Learning Objective 2,Describe how e-commerce,affects inventory management.,How E-Commerce Affects Inventory Management,The Internet enables clients to provide expanded,descriptions of their inventory on a real-time basis.,The use of the Internet and other e-commerce,applications may lead to financial reporting,risks if access to inventory databases and,systems is not adequately controlled.,Learning Objective 3,Explain the five parts of,the audit of the inventory,and warehouse cycle.,Audit of Inventory,Internally transfer,assets and costs.,Acquire and record,raw materials, labor,and overhead.,Part of audit,Cycle in which tested,Acquisition and,payment plus,payroll and personnel,Inventory and,warehousing,Audit of Inventory,Physically observe,inventory.,Price and compile,inventory.,Cycle in which tested,Ship goods and record,revenue and costs.,Part of audit,Sales and,collection,Inventory and,warehousing,Inventory and,warehousing,Learning Objective 4,Design and perform audit,tests of cost accounting.,Cost Accounting Controls,2. Controls over the related costs,1. Physical Controls,Raw materials,WIP,Finished goods,over,Tests of Cost Accounting,Physical Controls,Documents and records for,transferring inventory,Perpetual inventory master files,Unit cost records,Learning Objective 5,Apply analytical procedures to,the accounts in the inventory,and warehousing cycle.,Analytical Procedures for Manufacturing Equipment,Analytical ProcedurePossible Misstatement,Compare gross marginOverstatement or,percentage with that ofunderstatement of,previous years.inventory and cost,of goods sold,Compare inventory turnoverObsolete inventory,(cost of goods sold dividedOverstatement or,by average inventory) withunderstatement of,that of previous years.inventory,Analytical Procedures for Manufacturing Equipment,Analytical ProcedurePossible Misstatement,Compare unit costs ofOverstatement or,inventory with those ofunderstatement of,previous years.unit costs,Compare extendedMisstatements in,inventory value with thatcompilation, unit,of previous years.costs, or extensions,Analytical Procedures for Manufacturing Equipment,Analytical ProcedurePossible Misstatement,Compare current yearMisstatement of unit,manufacturing costs withcosts of inventory,those of previous yearsespecially direct,(variable costs should belabor and,adjusted for changes inmanufacturing,volume).overhead,Methodology for DesigningTests of Details of Balances,Identify client business risks affecting,the inventory and warehousing cycles.,Set tolerable misstatement and,assess inherent risk for the,inventory and warehousing cycles.,Assess control risk for several cycles.,Methodology for DesigningTests of Details of Balances,Design and perform tests of,controls and substantive tests,of transactions for the,several cycles.,Design and perform analytical,procedures for the inventory,and warehousing cycle.,Methodology for DesigningTests of Details of Balances,Design tests of details,of inventory to satisfy,balance-related,audit objectives.,Audit procedures,Sample size,Items to select,Timing,Learning Objective 6,Design and perform,physical observation,audit tests for inventory.,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,Selection,of items,Sample size,Timing,Audit Decisions,Physical Observation Tests,The most important part of the observation,of inventory is determining whether the,physical count is being taken in accordance,with the clients instructions.,Balance-Related Objectives: Physical Inventory Observation,Existence,Completeness,Accuracy,Inventory as,recorded on tags exist.,Existing inventory is,counted and tagged.,Inventory is counted,accurately.,Classification,Cutoff,Inventory is classified,correctly on the tags.,Transactions are recorded,in the proper period.,Balance-Related Objectives: Physical Inventory Observation,Balance-Related Objectives: Physical Inventory Observation,Rights,The client has rights,to inventory recorded,on tags,Realizable,Value,Obsolete and unusable,inventory items are,excluded or noted.,Learning Objective 7,Design and perform audit,tests of pricing and,compilation for inventory.,Audit of Pricing and Compilation,Inventory compilation tests,Inventory price tests,Valuation,of inventory,Pricing and,compilation,procedures,Pricing and,compilation,controls,Audit of Pricing and Compilation,Balance-Related Objectives:Inventory Pricing and Compilation,Detail,tie-in,Existence,Completeness,Accuracy,Balance-Related Objectives:Inventory Pricing and Compilation,Classification,Realizable,value,Rights,Presentation,and disclosure,Valuation (Pricing) of Inventory,Pricing Purchased Inventory,Pricing Manufactured Inventory,Cost or Market,Learning Objective 8,Integrate the various parts of,the audit of the inventory,and warehousing cycle.,Interrelationship ofVarious Audit Tests,Tests of acquisition,and payment cycle,Raw materials,Acquisitions of,raw materials,Work in process,Other manufacturing,overhead,Interrelationship ofVarious Audit Tests,Tests of payroll,and personnel cycle,Work in process,Direct labor,Work in process,Indirect labor,Interrelationship ofVarious Audit Tests,Inventory tests,Raw materials,Ending inventory,Work in process,Ending inventory,Finished goods,Ending inventory,Interrelationship ofVarious Audit Tests,Tests of sales and,collection cycle,Finished goods,Cost of goods sold,Integration of the Tests,Acquisition and payment cycle,Payroll and personnel cycle,Sales and collection cycle,Cost accounting,Physical inventory, pricing, and compilation,End of Chapter 16,
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