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Substantive Auditing Procedures for Inventory

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Brown, CPA, is auditing the financial statements of Big Z Wholesaling, Inc., a continuing audit client, for the year ended January 31, 20X2. On January 5, 20X2, Brown observed the tagging and counting of Big Z's physical inventory and made appropriate test counts. These test counts have been recorded on a computer file. As in prior years, Big Z gave Brown two computer files. One file represents the perpetual inventory (FIFO) records for the year ended January 31, 20X2. The other file represents the January 5 physical inventory count. Assume:

-Brown issued an unqualified opinion on the prior year's financial statements.
-All inventory is purchased for resale and located in a single warehouse.
-Brown has appropriate computerized audit software.
-The perpetual inventory file contains the following information in item number sequence:
- Beginning balances at February 1, 20X1: Item number, item description, total
quantity and prices.
- For each item purchased during the year: Date received, receiving report
number, vendor, item number, item description, quantity, and total collar
- For each item sold during the year: date shipped, invoice number, item
number, item description, quantity shipped, and dollar amount of the cost
removed from inventory.
- For each item adjusted for physical inventory count differences: date, item
number, item description, quantity, dollar amount.
- The physical inventory file contains the following information in item number
sequence: tag number, item number, item description, and count quantity.

Describe the substantive auditing procedures Brown may consider performing with computerized audit software using Big Z's two computer files and Brown's computer files of test counts. The substantive auditing procedures described may indicate the reports to be printed out for Brown's followup by subsequent application of manual procedures. Do not describe subsequent manual auditing procedures.

Group the procedures by those using (a) the perpetual inventory file and (b) the physical inventory and test count files.

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Solution Summary

This solution provides procedures which have to be carried out as part of substantive inventory audit and how computer software can assist in those procedures. The solution is provided in an attached Word document.