Question

Case 8: Abel Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse but instead uses statistical sampling to estimate the year-end inventory. Abel maintains a perpetual inventory record of parts and supplies and believes that statistical sampling is highly effective in determining inventory values and is sufficiently reliable to make a physical count of each item of inventory unnecessary. Required: A. Identify the audit procedures that should be used by the independent auditor that change, or are in addition to, normal required audit procedures when an entity utilizes statistical sampling to determine inventory value and does not conduct a 100 percent annual physical count of inventory items. B. List at least 10 normal audit procedures that should be performed to verify physical quantities whenever an entity conducts a periodic physical count of all, or part, of its inventory.

Answer 1

A The audit procedure when statistical sampling is used to determine inventory value are explained below :-

Determine the sample size:- Determining the sample size is the most crucial and important aspect of the audit procedure .The sample selected will not be identical exactly to the population . Post determining the sample size the auditor should decide the deviation which is allowable from the sample. Here it will be advisable to allow for a smaller allowance based on the risk tolerance.

Selection and testing the sample:- The auditors should obtain a list of inventory item numbers and based on the numbering in the list should use a random number generator for selecting samples. The use of random number generator will help in getting an ideal and more real representation of the populaion. Based on the inventory item selected the auditor should physicall verify and test the presence of inventory and confirm if the inventory actually belongs to the client

Evaluate results : - Post testing the samples based on random number generator the auditor has to analyse and reach at conclusion in terms of deviations observed , nature of deviations, percentage of deviations observed etc. If the auditors are skeptical to reach at any conclusions based on the deviations , they should carry out further testing procedures which are more stringent and compliant to help him asertain true value of inventory.

B) The normal audit procedures for physical inventory count of all or part of its inventory are detailed as below:-

1) Preview of inventory in advance :- The inventory items needs to be previewed in advance of physical count to identify inventory which is not having appropriate tags and which are not in a proper position to take count. Such items should be identified and informed to Head Inventory or Head of stores

2) Pre count of inventory: The inventory which can be counted should be packed in seperate cartoons containers with Number of inventories in that particular container or cartoons having mentioned on the tapes to speed up the physical count of inventory at the time of inventory audit.

3) Freezing of dates :- Receiving inventory in warehouses is a continous process and will create a hurdle in smoothly carrying out the inventory audits. Hencce a date should be fixed as on which the warehouse aactivities will be freezed and new inventory received will be stored in a seperate area.

4)Assigning areas to various teams:- The entire warhouse departments should be divided into various teams which should be supervised and monitored by a warehouse head or manager with a master data base/ list prepared.

5)Count tags :- Appropriate number of count tags should be made available with the expected inventory to be counted . The tags are supposed to be numbered numerically to track them individually at the time of actual counting process.

6) Completion of Data entry:- One day prior to the date of audit the stores manager should assure that all the entries related to fresh receipts, issues, returns of damaged material and transfers are completed to make the inventory audit more effective.

7) Notify Storage locations outside the company premises :- All the storage locations outside the company premises should be notified to take inventory count on a particular date fixed and send the details to the warehouse head.

8) Counting of inventory :- Counting of inventory and marking the details of inventory on the bin should be done by two seperate persons with the details of inventory item, bin location, part number, quantity, measurement unit being mentioned on the count tag , original tag being fixed to the inventory item and retain the duplicate.

9) Return of unused tags: - Each count team should return the pre numbered count tags upon completion of audit and the warehouse head or stores head to enquire for the tags with missing number.

10) Enuire for unsual results : - The data collected based on the count tags to be entered online and should be queried based on various parameters to locate and enquire for the unusual results or discrepancies.

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