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Inventory Chapter 12 Juan M. Garcia Merced Cont 4017.

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Presentation on theme: "Inventory Chapter 12 Juan M. Garcia Merced Cont 4017."— Presentation transcript:

1 Inventory Chapter 12 Juan M. Garcia Merced Cont 4017

2 CPA Juan M. Garcia Merced Sources and Nature of Inventory Includes goods on hand ready for sale, either the merchandise of a trading concern or the finished goods of a manufacturer. Goods in the process of production. Goods to be consumed in production.

3 CPA Juan M. Garcia Merced Auditors Objectives - Inventory Substantiate the existence of inventory. Establish the completeness of recorded inventory. Determine that the client has rights to recorded inventory. Determine that the valuation of inventory is appropriate. Determine that the presentation and disclosure are appropriate.

4 CPA Juan M. Garcia Merced Audit Time for Inventory Auditors devote a larger proportion of the total audit hours to inventory due to materiality and audit risk. Also: –Very susceptible to major errors and fraud. –Numerous alternatives for valuation. –Directly affects cost of goods sold. –Quality, condition, and value is a more complex task.

5 CPA Juan M. Garcia Merced Audit Program – Substantive Procedures for Inventories

6 CPA Juan M. Garcia Merced Obtain analyses of inventory balances and trace or reconcile them to the general ledger

7 CPA Juan M. Garcia Merced Observe the taking of Physical Inventory and make test counts

8 CPA Juan M. Garcia Merced Review the Year End Cut-off of Purchases and Sales Transactions

9 CPA Juan M. Garcia Merced Obtain a Copy of the Completed Physical Inventory, Tests Its Clerical Accuracy, and Trace Test Counts

10 CPA Juan M. Garcia Merced Evaluate the Bases and Methods of Inventory Pricing

11 CPA Juan M. Garcia Merced Tests the Pricing of Inventories

12 CPA Juan M. Garcia Merced Perform Analytical Reviews Gross profit margins percentages Gross profit by store Inventory turnover Number of days in inventory Inventory per square foot

13 CPA Juan M. Garcia Merced Determine Whether Any Inventories Have Been Pledged and Review Purchase and Sales Commitments

14 CPA Juan M. Garcia Merced Evaluate proper financial statement presentation and disclosure of cash Classified among the current assets. Disclosure of the inventory pricing method. Various classifications of inventory. Deduction of valuation allowance for inventories. Arrangements relating to any pledged inventory. Existence and terms of inventory purchase commitments.

15 CPA Juan M. Garcia Merced `

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