Audit Notes

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Audit of the Inventory and Warehousing Cycle
Chapter 21

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 1
Describe the business functions and the related documents and records in the inventory and warehousing cycle.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

21 - 2

Flow of Inventory and Costs
Raw Materials Beginning Raw inventory materials used Purchases Ending inventory Direct Labor Actual Applied Manufacturing Overhead Actual Applied Work-in-Process Beginning Cost of inventory goods manufactured Ending inventory Cost of goods sold

Finished Goods Beginning Cost of inventory goods sold Ending inventory

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 2
Describe how e-commerce affects inventory management.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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How E-Commerce Affects Inventory Management
The Internet enables companies to provide complete descriptions of their inventory on a real-time basis.

The use of the Internet and other e-commerce applications may lead to financial reporting risks if access to inventory databases and systems is not adequately controlled.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 3
Explain the five parts of the audit of the inventory and warehousing cycle.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Functions in the Cycle
Process Receive purchase raw orders materials Flow Receive of raw Inventory materials Store raw materials Put materials in storage Process the goods Put materials in production Store finished goods Put completed goods in storage Ship finished goods Ship finished goods

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Audit of Inventory
Part of audit
Acquire and record raw materials, labor, and overhead Internally transfer assets and costs

Cycle in which tested
Acquisition and payment plus payroll and personnel

Inventory and warehousing

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Audit of Inventory
Part of audit
Ship goods and record revenue and costs Physically observe inventory Price and compile inventory

Cycle in which tested
Sales and collection Inventory and warehousing Inventory and warehousing

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 4
Design and perform audit tests of cost accounting.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Cost Accounting Controls
1. Physical controls over raw materials, work in process, and finished goods inventory 2. Controls over the related costs

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Methodology for Designing Controls and Substantive Tests
Understand internal control – cost accounting system Assess planned control risk – cost accounting system

Determine extent of testing controls
Design tests of controls and substantive tests of transactions for the cost accounting system to meet transaction-related audit objectives ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Audit procedures Sample size Items to select Timing
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Tests of Cost Accounting
 Physical controls over inventory  Documents and records for transferring inventory

 Perpetual inventory master files
 Unit cost records

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 5
Apply analytical procedures to the accounts in the inventory and warehousing cycle.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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