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In: Accounting

Explain, how cost of goods sold for a wholesale company can be verified by each of...

Explain, how cost of goods sold for a wholesale company can be verified by each of the following tests: analytical procedures, tests of controls and substantive tests of transactions, analysis of account balances, and tests of details of balance sheet accounts.

Expert Solution

Answer-

Information on cost of goods sold can be verified from the below list :-

a. Analytical Procedurres which help an auditor understand the client's business and to identify potential risk areas. It helps in financial information with checking with

prior periods items
budgets of current year
forecast of last month
similar industries and so on.

b. Test of Controls :A test of controls is an audit procedure to test the effectiveness of a control used by a client entity to prevent or detect material misstatements. Auditors may choose to rely upon a client's system of controls as part of their auditing activities.

The following are general classifications of tests of controls:

1. Reperformance. Auditors may initiate a new transaction, to see which controls are used by the client and the effectiveness of those controls.

2. Observation. Auditors may observe a business process in action, and in particular the control elements of the process.

3.Inspection. Auditors may examine business documents for approval signatures, stamps, or review checkmarks, which indicate that controls have been performed.

c. Substantive tests of transactions : It examines the financial statements and supporting documentation to see if they contain errors. These tests are needed as evidence to support the assertion that the financial records of an entity are complete, valid, and accurate;

1. Conduct a bank confirmation to test ending cash balances

2. Contact customers to confirm that accounts receivable balances are correct

3. Observe the period-end counting of inventory

4. Confirm the validity of inventory valuation calculations and other checks as well;

d. Analysis of account balances : Verifying all the account balances

e. Balance Sheet Details test : Checking all the balances for balance sheet.

ekkarill92 answered 2 years ago

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