Question

What are subsequent events? How do auditors treat subsequent events?

Describe the process used for a physical count of inventory.

Answer 1

1.SUBSEQUENT EVENT

A subsequent event is an event that occurs after a reporting period, but before the financial statements for that period have been issued or are available to be issued. Depending on the situation, such events may or may not require disclosure in an organization's financial statements.

2. SUBSEQUENT EVENTS AUDITORS TREATMENT:

the auditor performs audit procedures that are designed to obtain sufficient appropriate audit evidence to give reasonable assurance that all events up to the (expected) date of the auditor's report have been identified, properly accounted for or disclosed in the financial statements.

3.PHYSICAL COUNT PROCEDURE OF INVENTORY:

a)Cutoff Procedures

Auditors closely examine company cutoff procedures for physical inventory counts and audits. It's difficult to accurately count inventory when new goods are coming in from vendors and goods are flowing out for customer orders. Companies should have clear procedures to halt the reception of new inventory and temporarily stop shipment of customer orders. Auditors can also test the inventory received and disbursed near the cutoff of the period to ensure they were counted in the right period.

b)Count Accuracy

Auditorsneed to ensure the company has the ability to accurately count inventory. They'll discuss count procedures with management, observe a physical count and test inventory items to ensure they were counted correctly. Auditors look for a system of prenumbered inventory tagging when evaluating count accuracy. Without tags, auditors can't test random inventory items to check if they were included in the inventory count. Auditors will also ask to see unused and voided tags to ensure the company maintains tight internal controls.

c)Ownership

Justbecause a piece of physical inventory is sitting in a warehouse doesn't mean that management actually owns it. A company can have physical custody of an asset but not actually own it. This typically happens when a company is selling inventory on consignment. For example, a car dealership may have a combination of cars it owns and cars it is selling on consignment sitting on its lot. Auditors will typically ask for documentation proving ownership of all inventory, such as a certificate of ownership or a bill of sale.

d)Valuation

Managementmay own the inventory and count it correctly, but that doesn't mean they've valued it correctly. According to U.S. generally accepted accounting principles, inventory that has a market value less than its original cost should be marked down. Older inventory has a tendency to lose value when it's gone out of fashion or become obsolete. Auditors will pay special attention to older inventory by testing more items and performing specific valuation testing. Items that are slow-moving or possibly obsolete should be segregated from normal inventory to improve warehouse efficiency and facilitate the auditing process.