Question

In: Accounting

21-19 Following are audit procedures commonly performed in the inventory and warehousing cycle for a manufacturing...

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.

Solutions

Expert Solution

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.


Related Solutions

7-29 - The following audit procedures were performed in the audit of INVENTORY to satisfy specific...
7-29 - The following audit procedures were performed in the audit of INVENTORY to satisfy specific balance-related audit objectives (management assertions). The audit procedures assume that the auditor has obtained the inventory count sheets that list the client’s inventory. The general balance-related audit objectives from Chapter 6 are also included. Audit Procedures Select a sample of inventory items in the factory warehouse and trace each item tothe inventory count sheets to determine if it has been included and if the...
1. Which of the following audit procedures are usually performed to audit the allowance for doubtful...
1. Which of the following audit procedures are usually performed to audit the allowance for doubtful accounts? A) Test the aging of the accounts receivable balances B) Compare the aging of the accounts receivable balance to prior years C) Compare the ratio of the allowance for doubtful accounts to the accounts receivable balance to previous years D) All of the above 2. The accounts payable accounting clerk recorded the same purchase twice. Which of the following tests would most likely...
Which of the following audit procedures most likely will involve sampling? A. Risk assessment procedures performed...
Which of the following audit procedures most likely will involve sampling? A. Risk assessment procedures performed to obtain an understanding of internal control. B. Tests of automated application controls when effective information technology general controls are present. C. Analyses of controls to determine the appropriate segregation of duties. D. Testing of process for approval of credit to customers for sales on account.
Identify major procedures in the manufacturing cycle of a business
Identify major procedures in the manufacturing cycle of a business
Explain the normal business process in the inventory and warehousing cycle. As part of your explanation,...
Explain the normal business process in the inventory and warehousing cycle. As part of your explanation, state which documents firms would normally use to record activities in that cycle.
Explain the normal business process in the inventory and warehousing cycle. As part of your explanation,...
Explain the normal business process in the inventory and warehousing cycle. As part of your explanation, state which documents firms would normally use to record activities in that cycle. 2. Describe the control procedures that firms commonly use for inventory. Explain which controls and tests of controls would be appropriate for each of the specific controls that you mentioned. 3. Describe common substantive analytical procedures that would be used for account balances related to inventory.
Designing Audit Procedures and Preparing Audit Workpapers Consider the following scenario and design the audit procedures...
Designing Audit Procedures and Preparing Audit Workpapers Consider the following scenario and design the audit procedures for gathering, documenting and analyzing information on the client. ABC Ltd is an established private company incorporated in Jamaica. It manufactures rubber flipflops for both the local and Caricom markets. Its operations include a factory, an administrative offce and two sale depots. It obtains its supply of rubber from RubberR-Us Ltd located in the United States. The company was started ten years ago when...
Describe two types of substantive analytical procedures often performed in the audit of the sales and...
Describe two types of substantive analytical procedures often performed in the audit of the sales and collection cycle and describe how they might indicate a possible misstatement in the financial statements. Identify and select the two types of substantive analytical procedures and then choose the possible misstatement in the financial statements. compare aging categories as a percentage of net income with previous years compare bad debt expense as a percentage of net sales with precvious years compare gross margin percentage...
Analytical procedures are required on every audit. Should the procedure be performed before or after the...
Analytical procedures are required on every audit. Should the procedure be performed before or after the calculation of the expected result? If the result of an analytical procedure differs significantly from the expectation, is that conclusive evidence that there is an error in the books? If the result of an analytical procedure differing significantly from the expectation does not necessarily mean the books are in error, what does it mean?
Audit Risk Model- Example 1 You are assigned to conduct the audit procedures for the inventory...
Audit Risk Model- Example 1 You are assigned to conduct the audit procedures for the inventory account at Tech Toys, a public company in the technology industry that sells the latest technology for fitness watches. Inventory obsolescence and the product’s susceptibility to theft is a business risk that management has identified for its inventory.  As part of your procedures you have to evaluate the overall risk assessment for the inventory account using the audit risk model.  Your team has decided that the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT