Question

Instructions: Answer the following questions about auditing inventory, goods and services, and Accounts Payable:

Question 1: What are the specific 5 management assertions related to Accounts Payable?

ANSWER:

Question 2: What are some inherent risk factors that often make inventory material, complex, and subject to manipulation?

ANSWER:

Question 3: What are some examples of specific frauds in the acquisition and payment cycle?

ANSWER:

Question 4: What 4 things does an effective inventory control system provide reasonable assurance about?

ANSWER:

Question 5: What types of audit documentation are related to the substantive procedures for accounts in the acquisition and payment cycle?

ANSWER:

Answer 1

1)Management assertions related to Accounts Payable

completeness	Accounts payable balances reported on the balance sheet include all payable transactions that have occurred during the accounting period.
Existence	Accounts payable balances reported on the balance sheet actually exist at the reporting date.
Valuation	Accounts payable have been recorded in the correct amount and their balances reflect the actual economic value.
Rights and obligation	The company actually owes a liability for accounts payable as at reporting date.
Presentation and disclosure	Accounts payable are properly classified on the balance sheet and disclosed in the notes to the financial statements.

2)inherent risk factors that often make inventory material, complex, and subject to manipulation

Susceptibility to theft: All inventory, regardless of its nature, can potentially be stolen by either employees or customers. In the retail world, this problem is commonly known as inventory shrinkage, and in the United States it results in tens of billions of dollars in losses each year.

You may think that inventory theft occurs only if an employee or shoplifter has a personal use for the inventory.  For example, an employee needs a new computer for home use and liberates one from her place of employment. But more and more, employees and shoplifters steal merchandise and raw materials to sell on venues such as eBay.

Complexity of the year-end inventory procedure: Another risk factor you have to consider is the often complicated year-end inventory procedure. A wide variety of disagreements can surface that you need to address and resolve as quickly as possible. For example, maybe the client doesn’t write down obsolete or damaged merchandise, or it claims that the merchandise is still valuable, or it asserts what you believe to be unreasonable net realizable value for those items.

Prior-period misstatements: When you’re auditing inventory management for a continuing client, check out past years’ work to see what types of misstatements existed. A big issue with inventory is valuation. If you’re auditing a manufacturing plant, a major issue with valuation is the degree of processing required to move products from the work-in-process stage to finished goods.

3)examples of fraud in the acquisition and payment cycle include

theft of inventory by an employee
-INVENTORY SHRINKAGE: reduction in inventory presumed to be due to physical loss/theft
-employee schemes involving fictitious vendors

4)4 things does an effective inventory control system provide reasonable assurance about

A well-conceived inventory control system should provide reasonable assurance that all purchases are authorized and that inventory transaction are recorded accurately, completely, and in a timely manner.

5) Types of audit documentation are related to the substantive procedures for accounts in the acquisition and payment cycle

i)substantive analytical procedures conducted, the conclusion reached and related actions that were taken

ii)Evidence about physical inventory observation for all amount

iii)Evidence about Product Costing

iv)Evidence pertaining to net Realizable value calculations

v)Evidence from inventory specialist

vi)Summary of evidence obtained and conclusions reached about material amounts of inventory on consignment

vii)Vendor Statement