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Auditing: inventory issues

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REQUIRED:

1.Explain the complexities inherent in auditing inventory.

2.Discuss appropriate internal controls over inventory.

3.Discuss the procedures for testing the details of inventory and cost of goods sold

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Solution Summary

The 641 word solution first lists the general issues relating to the audit of inventory including the major objectives. Secondly, the solution lists the seven types of documentation for substantive testing and the possible problems which may be encountered. Last is a section including a conclusion about the importance of inventory testing with several examples to demonstrate real-world issues with inventory testing.

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First, the general issues relating to the audit of inventory are:

Existence
Completeness
Accuracy
Classification
Cutoff
Detail tie-in
Realizable value
Rights and obligations
Presentation and disclosure

The general balance sheet objective in inventory auditing is to assess the control risk over purchase and cash disbursement transactions as it relates to inventory. One of the analytical procedures beyond the test of transactions is to compare expenses in the cost of goods sold section with that of the prior year. Any significant differences in either dollar amounts or ratio comparison should be investigated.

The substantive tests of inventory are designed to provide assurance as to the existence, the completeness, the ownership rights, and the valuation of inventory. The information gained leads to proper disclosure in the financial statements.

1. Internal documentation: accounting records. The procedure tests the accuracy and completeness of the records as they tie into the general ledger account for total ...

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