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Arens20 Inventory
Arens20 Inventory
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
20 - 1
Learning Objective 1
Describe the business functions
and the related documents and
records in the inventory
and warehousing cycle.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
20 - 2
Work in Process
Manufacturing
Overhead
Actual Applied
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
20 - 3
Finished Goods
Beginning
inventory Cost of
goods sold
Ending
inventory
Cost of Goods Sold
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
20 - 4
Receive
Receive raw
raw
materials
materials
Store
Store
raw
raw
materials
materials
Process
Process the
the materials
materials
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
20 - 5
Store
Store
finished
finished
goods
goods
Ship
Ship
finished
finished
goods
goods
Perpetual
Perpetual inventory
inventory
master
master file
file
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
20 - 6
Learning Objective 2
Describe how e-commerce
affects inventory management.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
20 - 7
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
20 - 8
Learning Objective 3
Explain the five parts of
the audit of the inventory
and warehouse cycle.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
20 - 9
Audit of Inventory
Part of audit
Acquisition and
payment plus
payroll and personnel
Internally transfer
assets and costs.
Inventory and
warehousing
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 10
Audit of Inventory
Part of audit
Sales and
collection
Physically observe
inventory.
Inventory and
warehousing
Inventory and
warehousing
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 11
Learning Objective 4
Design and perform audit
tests of cost accounting.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 12
Raw materials
WIP
Finished goods
Audit procedures
Sample size
Items to select
Timing
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 15
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 16
Learning Objective 5
Apply analytical procedures to
the accounts in the inventory
and warehousing cycle.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 17
Possible Misstatement
Overstatement or
understatement of
inventory and cost
of goods sold
Compare inventory turnover Obsolete inventory
(cost of goods sold divided Overstatement or
by average inventory) with
understatement of
that of previous years.
inventory
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 18
Possible Misstatement
Overstatement or
understatement of
unit costs
Misstatements in
compilation, unit
costs, or extensions
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 19
Possible Misstatement
Misstatement of unit
costs of inventory,
especially direct
labor and
manufacturing
overhead
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 20
Audit procedures
Sample size
Items to select
Timing
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 23
Learning Objective 6
Design and perform
physical observation
audit tests for inventory.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 24
Controls
Proper instructions for the physical count
Supervision by responsible personnel
Independent interval verification of the counts
Independent reconciliations of the physical
counts with perpetual inventory master files
Adequate control over count sheets or tags
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 25
Audit Decisions
Timing
Sample size
Selection
of items
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 26
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 27
Balance-Related Objectives:
Physical Inventory Observation
Existence
Inventory as
recorded on tags exist.
Completeness
Existing inventory is
counted and tagged.
Accuracy
Inventory is counted
accurately.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 28
Balance-Related Objectives:
Physical Inventory Observation
Classification
Inventory is classified
correctly on the tags.
Cutoff
Realizable
Value
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 29
Balance-Related Objectives:
Physical Inventory Observation
Realizable
Value
Rights
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 30
Learning Objective 7
Design and perform audit
tests of pricing and
compilation for inventory.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 31
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 32
Pricing and
compilation
procedures
Valuation
of inventory
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 33
Balance-Related Objectives:
Inventory
Pricing and Compilation
Detail
tie-in
Existence
Completeness
Accuracy
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 34
Balance-Related Objectives:
Inventory
Pricing and Compilation
Classification
Realizable
value
Rights
Presentation
and disclosure
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 35
Valuation (Pricing)
of Inventory
Pricing Purchased Inventory
Pricing Manufactured Inventory
Cost or Market
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 36
Learning Objective 8
Integrate the various parts of
the audit of the inventory
and warehousing cycle.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 37
Interrelationship of
Various Audit Tests
Tests of acquisition
and payment cycle
Raw materials
Acquisitions of
raw materials
Work in process
Other manufacturing
overhead
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 38
Interrelationship of
Various Audit Tests
Tests of payroll
and personnel cycle
Work in process
Direct labor
Work in process
Indirect labor
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 39
Interrelationship of
Various Audit Tests
Inventory tests
Raw materials
Ending inventory
Work in process
Ending inventory
Finished goods
Ending inventory
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 40
Interrelationship of
Various Audit Tests
Tests of sales and
collection cycle
Finished goods
Cost of goods sold
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 41
End of Chapter 20
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 20 - 43