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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
amount.
- 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.

Required
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.

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See Also This Related BrainMass Solution

12-56 Auditing Procedures and Objectives: acquisition and payment cycle

12-56 (Audit Procedures and Objectives) The following audit procedures are found in audit programs addressing the acquisition and payment cycle.

Required

For each audit procedure described:
a. Identify the objective of the procedure or the audit assertion being tested.
b. Classify the procedure as primarily a substantive test, a test of controls, or both.

Audit Procedures
1. The auditor examines payments to vendors following year end and then reviews any open accounts payable files.

2. The auditor reviews computer-center records on changes to passwords and the client's procedures to monitor unusual amounts of accesses by password type. The auditor makes inquiries of purchasing agents about how often passwords are changed, and whether assistants are allowed to access computer files in their absence in order to efficiently handle inquiries or process standing orders.

3. The auditor reviews a report of all accounts payable items that were not matched by the automated matching system, but had been paid upon authorization of the accounts payable department. A sample of selected items is taken and traced to the vendor payment and supporting documentation.

4. The auditor uses software to prepare a report of all debits to Accounts Payable other than payments to vendors. A sample of the debits is selected and examined for support.

5. The auditor uses software to access all recorded receipts of merchandise that have not been matched to an open purchase order.

6. The client prepares a report from a database showing inventory write-downs by product line and by purchasing agent. The auditor reviews the report and analyzes the data in relation to sales volume by product.

7. The auditor creates a spreadsheet showing the amount of scrap generated monthly, by product line.

8. The auditor downloads client data to create a report showing monthly sales and inventory levels, by product line.

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