Question

Assignment #4

Accounting 403

Name ________________________________

You are on the audit team of Apollo Shoes Inc. for the year ending December 31, 2015. Your manager has asked you to plan the audit of Inventory Instructions: Prepare an audit plan for inventory to follow for Apollo Shoes Inc. Also prepare a list of instructions Apollo Shoes Inc. should follow while performing inventory

This assignment is due May 1, 2017

Answer 1

Inventory Audit Procedures

There are two types of substantive procedures. Substantive procedures are methods of substantiating (i.e. verifying) the actual numbers on financial statements. It is different from testing of controls, which are procedures that test the systems/policies that give rise to the numbers.

Analytical Procedures

Procedures with inventory typically include:

A comparison of gross margin numbers with previous years
A comparison of the inventory turnover ratio with previous years

A comparison of the unit costs of inventory with previous years

Tests of Details of Balances

Auditor observation at the inventory count

The Inventory Count – Before

Before the client performs their inventory count, the auditor will typically review the client proposed policies/procedures pertaining to the inventory count. Some of these policies typically include:

Two-person count teams
Pre-numbered tags and proper sequencing
Halting the shipping and receiving of goods
Segregation of goods that are based on consignment
A master count sheet that is controlled only by the supervisor

The auditor will also select a sample of items, in advanced, to tests themselves on the day of the count. The auditor will use both representative and specific item (stratification) testing when possible.

The Inventory Count – During

The auditor observes whether the client complies with the proposed policies/procedures for the count – Are these procedures being performed correctly and efficiently?
Observe the quality and the condition of the goods – Is there any sign of impairment/obsolescence?
The auditor runs own tests and makes note of the results. Any necessary adjustments must be followed up to ensure that the inventory records and general ledger reflect the adjustments.
Obtain important cut-off information to make sure that the inventory is counting goods that need to be counted and not counting goods that shouldn’t be counted. For example, obtain the last 5 shipping documents and receiving reports.

The Inventory Count – After

Match the quantities brought forward from the count to the recorded amounts on the ledger and book any adjustments that need to be made
Inventory must be valued at the lower of cost or market (also known as net realizable value)

Cost: Calculate the unit cost of inventory again to make sure pricing is accurately determined
Market: Examine subsequent sales of inventory to see if it was sold for more/less than cost or look at the gross profit margins.

Other Inventory Audit Issues

Other issues that may arise and be of concern to an auditor include the timing of the inventory observation. The observations usually take place at the end of October or the end of December. Typically, due to year-end holidays and/or weather issues, inventory observations are held in October. However, if the client is more prone to fraud/manipulation and is notorious for that, auditors may show up at the end of December to obtain more reliable data.

Another issue is whether the auditor needs to bring in a specialist or run some off-site testing to make sure that the inventory in the warehouse is genuine. For example, for some goods such as jewelry, grain, or other high-tech products, it is uncommon for the regular auditor to differentiate between real and fake goods. Auditors may want to bring in a specialist for a thorough examination or send some samples to a lab for proper testing.