In: Accounting
21-19 Following are audit procedures commonly performed in the inventory and warehousing cycle for a manufacturing company:
1. Account for a sequence of raw material requisitions and examine each requisition for an authorized approval.
2. Trace the recorded additions on the finished goods perpetual inventory master file to the records for completed production.
3. Compare the client’s count of physical inventory at an interim date with the perpetual inventory master file.
4. Use audit software to compute inventory turnover by major product line and compare it to turnover in the prior year.
5. Read the client’s physical inventory instructions and observe whether they are being followed by those responsible for counting the inventory.
6. Account for a sequence of inventory tags and trace each tag to the physical inventory to make sure it actually exists.
7. Trace the auditor’s test counts recorded in the audit files to the final inventory compilation and compare the tag number, description, and quantity.
8. Compare the unit price on the final inventory summary with vendor’s invoices.
a. Identify whether each of the procedures is primarily a test of control or a substantive test.
b. State the purpose(s) of each of the procedures.
Test of Control OR Substantive Test |
Purpose of Procedure |
|
1. |
Test of Control |
Examining raw material requisitions for proper authorization and approval is to check the internal control that only the authorized individuals of the company are actually approving requisition or to check if each requisition was actually approved by authorized personnel. |
2. |
Substantive Test |
This is a substantive test designed to check the existence of assertion of finished goods, meaning it will check if the recorded finished goods balance actually represents goods completed and available for sale. |
3. |
Substantive Test |
Comparing the physical count with the perpetual inventory records will be a means of checking if there are any discrepancies between the two. If there are differences, the variances may be investigated and reconciled so as to arrive at the correct interim inventory balance. |
4. |
Substantive Test |
Computing inventory turnover by major product line and compare it to turnover in the prior year is a analytical procedure performed to ensure that there is no major variation in current year’s inventory as compared to previous year and if there is a major variation and then valid reason for the such variation should be there. |
5. |
Test of Control |
Understanding the client's procedures for inventory count and observing whether they are actually performed is a test of control designed to see if the client's internal control during a physical count is reliable. If it is indeed reliable, the need for intensive substantive procedures might be lessened. |
6. |
Substantive Test |
This is a substantive test designed to check the existence of assertion, whether the balance of inventory recorded in the journals actually exist.. |
7. |
Substantive Test |
This will test the completeness assertion of inventory, to check if the items accounted for in the test count was appropriately counted in the final inventory compilation. |
8. |
Substantive Test |
This is a substantive test used to determine the correctness of the valuation of inventory in invoice issued to vendors. |