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Auditing: inventory issues

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

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 ...

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.

See Also This Related BrainMass Solution

Auditing Problem - Inventories & Cost of Goods Sold

You have been engaged by the management of Alden, Inc., to review its controls over the purchase, receipt, storage, and issue of raw materials. You have prepared the following comments, which describe Alden's procedures.

1) Raw materials, which consist mainly of high-cost electronic components, are kept in a locked storeroom. Storeroom personnel include a supervisor and four clerks. All are well trained, competent, and adequately bounded. Raw materials are removed from the storeroom only upon written or authorization of one of the production supervisors.

2) There are no perpetual-inventory records; hence, the storeroom clerks do not keep records of goods received or issued. To compensate for lack of perpetual records, a physical-inventory count is taken monthly by the storeroom clerks, who are well supervised. Appropriate procedures are followed in making the inventory count.

3) After the physical count, the storeroom supervisor matches quantities counted against a predetermined recorder level. If the count for a given part is below the reorder, the supervisor enters the part number on a material requisition list and sends this list to the accounts payable clerk. The accounts payable clerk prepares a purchase order to the vendor from whom the part was last purchased.

4) When ordered materials arrive at Alden, they are received by the storeroom clerks. The clerks count the merchandise and agree the counts to the carrier's bill of lading. All bills of lading are initialed, dated, and filed in the storeroom to serve as receiving reports.

Describe the weakness in internal control and recommend improvements in Alden's procedures for the purchase, receipt, storage, and issuance of raw materials. Organize your answer sheet as follows:

Weakness Recommended Improvements

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