Question

The client has inventory at approximately 50 locations in a three-province region. The inventory is difficult to count and can be observed only by travelling by automobile. The internal controls over acquisitions, cash disbursements, and perpetual records are considered effective. This is the fifth year that you have done the audit, and audit results in past years have always been excellent. The client is in excellent financial condition.

Required

Recommend an evidence mix for the five types of tests for the audit of inventory and cost of goods sold. Justify your answer. Include in your recommendations both tests of controls and substantive tests.

Answer 1

Ans:-

• Review client’s plan for performing inventory count. Plan should included procedures relating to count and should allocate staff responsible for each of inventory at different locations.
• Evidence of Appropriate supervision for those performing count should be examined.
• Ensuring the accounting of all stock sheets.
• When control Risk is high or client uses periodic system – inventory client should be taken at the end of the year.
• If client uses perpetual system, inventory should be count at interim dates.
• Perform Analytical Procedures.
• Reconcile physical inventory amounts with perpetual records.
• Examine evidences for ownership.
• To examine the operating effectiveness of control, relating to inventory counts with physical records.
• If due to previous experience and judgment of Auditor, if there is effective control over the inventory during the audit visit, then auditor can rely on inventory counts.
• If there is a weakness in the inventory control, then auditors should increase test of details which includes analytical procedures, Vouching and Verification.
• The auditor can request the management for written representations from the management that management has fulfilled their responsibility relating to inventory management.
• If the auditor has a strong relationship with the client, then it will lead to wrong opinion. There is a change that independence of the audit will not maintain