Question

Explain the normal business process in the inventory and warehousing cycle. As part of your explanation, state which documents firms would normally use to record activities in that cycle.

2. Describe the control procedures that firms commonly use for inventory. Explain which controls and tests of controls would be appropriate for each of the specific controls that you mentioned.

3. Describe common substantive analytical procedures that would be used for account balances related to inventory.

Answer 1

1.Documents firms would normally use to record activities in that cycle are as follows:

For inventory, Purchasing Dept should maintain purchase orders . They should be prepared , issued to the accounting & receiving departments. Warehousing is the place where custodian for the verified quantity of goods received.

2. Control Procedure for inventory are as follows:

- Requistioner Dept : 1 Prenumbered requistion, 2. obtain approvals needed. 3. send original to purchasing.

- Purchasing Dept: 1 . Receive approved requsition. 2. Contact Approved vendors . 3. Issued prenumber purchase order.

- Receiving Dept: 1 Receive goods from vendor. 2. inspect goods. All shipments received must have a PO. 3. Prepare receiving report (RR). 4. Match details or order received with blind copy of PO & indicate quantity received.

-Warehoue: deparment acts as custodian for the goods received. confirmation needed from the warehouse keeper on the no of the goods stored and maintained.

- Shipping. Responsible for the shipment of goods after authorization.

3.substantive analytical procedures : the observation of the begining and ending physical inventory counts is a required genreally accepted auditing procedure. The observation & related procedures provide evidence regarding the existence. completeness & valuation of ending inventory. An Auditor who is not present to observe the physical inventory must use alternative procedure to justify any opinion expressed. This is acceptable when it is impractical or impossible to observe physical inventory, or when inventores are not material

Completeness: Auditor should also test the physical inventory report by tracing counts to the report, thereby verifying its completeness. The auditor should trace from a sample of prenumbered inventory tags to the physical inventory sheets to test the completness of the inventory report sheets.