1. stock audit/ inventory audit1 1

2. What is the sequence of functions in the inventory and warehousing cycle?2 2

3. 1. An employee recognizes a need for a purchase; com-
pletes a requisition and sends
it to purchasing.
PURCHASING
DEPARTMENT
Ace Company
PURCHASE
REQUISITION
The production
dept. needs 200
kgs. of dry #4
solvent.
authorized
employee 3 3

4. 2. Purchasing shops for the ap- propriate quality at the best
price, then prepares a pur-
chase order.
PURCHASING
DEPARTMENT
Ace Company
PURCHASE
ORDER
BIG
Chemical Co.
To: Big Chemical Co.
Please ship 200
kgs. of dry #4 sol-
vent by 6/2/04
Price $38.40/kg.
purchasing agent 4 4

5. 3. When goods arrive from the vendor, the receiving dept.
inspects, counts, and pre-
pares a receiving report.
Ace Company
RECEIVING
REPORT
RECEIVING
DEPARTMENT
BIG
Chemical Co.
Received 200
kgs. of dry #4
solvent on 6/1/04.
Condition: OK
BIG
Chemical Co.
receiving employee 5 5

6. 4. Goods are moved from re- ceiving to a warehouse; per-
petual inventory is updated.
RECEIVING
DEPARTMENT
WAREHOUSE
perpetual inventory
description $$
6/1/04-dry #4
solvent-200 kgs.7680 6 6

7. 5. When needed, goods are moved from
the warehouse to production; perpetu-
al inventory and cost accounting re-
cords are updated.
WAREHOUSE
PRODUCTION
DEPARTMENT
cost acctg. system
description _ $$ _
June 8, 2004
Raw mat’l added
- dry #4 solvent
(200 kgs.)
perpetual inventory
description $$
6/1/01-dry #4
solvent-200 kgs.7680
6/8/04-trans.200
kgs.to prod 7 7

8. 6. When finished, goods are moved from
production to the warehouse; perpetu-
al inventory and cost accounting re-
cords are updated.
WAREHOUSE
PRODUCTION
DEPARTMENT
perpetual inventory
description $$
6/9/04-fin.goods
50 litres x7g 9680
cost acctg. system
description _ $$ _
6/9/04-trans.
50 litres of
finished x7g
to warehouse 9680 8 8

9. 7. When sold, goods are shipped and perpetual inventory re-
cords are updated.
Ace Co. A C E
perpetual inventory
description $$
6/9/04-fin.goods
50 litres-x7g 9680
8/5/03- sold 30
litres-x7g 9 9

10. What are the primary audit objectives with regard to inventory?10 10

11. What are the primary audit objectives with regard to inventory?
- existence 11 11

12. What are the primary audit objectives with regard to inventory?
- existence
- rights
ABC Electronics Co.
Sales Invoice 12 12

13. What are the primary audit objectives with regard to inventory?
- existence
- rights
- accuracy 13 13

14. What are the primary audit objectives with regard to inventory?
- existence
- rights
- accuracy
- realizable value 14 14

15. What is the primary audit procedure with regard to inventory?15 15

16. What is the primary audit procedure with regard to inventory?
Observe the client’s
inventory-taking
procedures. 16 16

17. What is the primary audit procedure with regard to inventory?
Observe the client’s
inventory-taking
procedures. 17 17

18. Some clients use statistical sampling in their inventory methods.
why? 21 21

19. Some clients use statistical sampling in their inventory methods.
reduces
the need to count
every inventory item
(sample results can be
statistically extended
to the population) 22 22

20. Inventory Audit Procedures
perform analytical procedures
to test inventory
reasonableness 40 40

21. Inventory Audit Procedures
regarding the client physical inventory count:
Review the client’s plan for counting
the physical inventory. Attend
client count planning
meetings. 41 41

22. Inventory Audit Procedures
regarding the client physical inventory count:
Observe the physical inventory count.
Determine whether client’s counting methods
are effective. 42 42

23. Inventory Audit Procedures
regarding the client physical inventory count:
Observe the quality and condition of the
inventory. Consider obsolescence. 43 43

24. Inventory Audit Procedures
regarding the client physical inventory count:
On a random basis:
- select a sample of inventory items from the
warehouse floor, count them, trace the
quantity to client count records 44 44

25. Inventory Audit Procedures
regarding the client physical inventory count:
On a random basis:
- select a sample of inventory items from the
client count records, find them in the
warehouse, count them 45 45

26. Inventory Audit Procedures
regarding the client physical inventory count:
On a random basis:
- select a sample of inventory items from the
client count records, trace them to the
perpetual inventory records
perpetual inventory
description qty
widgets - red 87
widgets - green 4
widgets - purple 18
4/30/x7 Physical
Inventory
18# widgets
- purple
4/30/04 Physical
Inventory
18# widgets
- purple
4/30/04 Physical
Inventory
18# widgets
- purple 46 46

27. Inventory Audit Procedures
regarding the client physical inventory count:
On a random basis:
- select a sample of inventory items from the
perpetual inventory records trace them to
the client count records
4/30/x7 Physical
Inventory
18# widgets
- purple
perpetual inventory
description qty
widgets - red 87
widgets - green 4
widgets - purple 18
4/30/04 Physical
Inventory
18# widgets
- purple
4/30/04 Physical
Inventory
18# widgets
- purple 47 47

28. Inventory Audit Procedures
determine whether any inventory has been pledged as collateral (disclosure) 48 48

29. Inventory Audit Procedures
Enquire of client management regarding the existence of consigned inventories.
consignments “R” us
ACE 49 49

30. Inventory Audit Procedures
Enquire of client management regarding the existence of consigned inventories:
- if a consignee holds a portion of the
client’s inventory, confirm that amount
with the consignee 50 50

31. Inventory Audit Procedures
Consider the effects of sales and purchases cutoff tests on inventories. 52 52

32. Inventory Audit Procedures
Test the client’s application of their inventory valuation method (FIFO, LIFO) and the lower-of-cost-or-market rule. 53 53

33. Inventory Audit Procedures
For manufactured inventories:
test the cost accumulation process as it affects valuation of ending inventories and COGS 54 54