Kristen B Hathcock

Colorado Technical University

06/11/2023
Potential Misstatement: 82 missing units; based on reports from physical inventories reporting inventory
losses of $300,000. There were 6,000 stock keeping units (SKUs) that totaled $22 M; = $3666.67/unit

Inventory and warehousing cycle

Transaction-Related Audit Key Internal Common Test of Common
Objective Control Control Substantive Test of
(Possible Misstatement) Transactions
Occurrence Segregation of Observe and Counting inventory:
duties evaluate proper employees count
Fictitious inventory segregation of how many items
Inventory duties. they have in the
Inventory recorded but not on transferred to stockroom or the
hand due to theft inventory Review and test sales floor, and they
department using procedures for the update their
‘Confirming that all recorded an approved, transfer of documents if their
inventory transactions actually prenumbered inventory. physical counts
occurred’ receiving report mismatch the
Review and test recorded count
Inventory procedures for
transferred to issuing materials to
manufacturing manufacturing
using prenumbered departments.
materials
requisitions Review and test
entity procedures
Accounting for for accounting for
numerical numerical sequence
sequence of of materials
materials requisitions.
requisitions
Observe the
Physical safeguards physical safeguards
over inventory over inventory
Completeness Accounting for Review the entity’s Monitoring
Inventory received but not numerical procedures for purchases:
recorded sequence of accounting for Trace a sample of
purchase orders, numerical sequence receiving reports to
Consigned goods not properly receiving reports, of purchase orders, the inventory
accounted for and vouchers receiving reports, records (i.e., master
and vouchers; if IT file, status report).
A relevant and required disclosure Receiving reports application, The substantive
is omitted matched to vendor examine application procedure occurs
invoices and controls. when associates
‘completeness assertion are entered in the Trace a sample of compare their
contained within the purchasing purchases journal receiving reports to number of
 process’ their respective purchases with the
Disclosure checklist vendor invoices and number of goods
vouchers. If data are they have yet to
available and sell.
reliable, use audit
data analytics to identify random
trace the population inventory count
of receiving reports tags and verify that
to the related they are included
invoices. on the inventory
listing
Trace a sample of
vouchers to the
purchases journal.

Review financial
statement
disclosure checklist

Authorization Preparation and Review authorized Corroborating

review of production customer orders:
Unauthorized production activity, authorized schedules. Test a sample of
resulting in excess levels of purchase or inventory
inventory production Review and test shipments to
schedules procedures for ensure there are
unauthorized purchase or
developing approved shipping
production activity that may lead
Use of material inventory levels and tickets and
to excess levels of certain types of
requirements procedures used to customer sales
finished goods. If such goods can
planning and/or control them.
quickly become obsolete, ending
just-in-time
inventory may be overstated.
inventory systems

Review of
inventory levels by
the inventory
management
department
Accuracy Periodic or annual Review and test Recompute the
Assertion of Inventory comparison of procedures for mathematical
goods on hand with taking physical accuracy of a
Inventory quantities recorded amounts shown in inventory. sample of inventory
incorrectly perpetual transactions (i.e.,
inventory records Review and test price × quantity); in
accurate processing of inventory procedures used to an IT environment,
purchase transactions involves Standard costs that develop standard use CAATs or audit
applying the correct price to the are reviewed by costs. data analytics to
actual quantity received management recompute accuracy
Review and test cost for the entire
 Inventory obsolescence Review of cost accumulation and population.
accumulation and variance reports.
Inventory transactions not posted variance reports Audit standard
correctly to the perpetual Review and test costs or other
inventory records or the general Inventory procedures for methods used to
ledger management identifying obsolete, price inventory (see
personnel review slow-moving, or discussion in the
inventory for excess quantities. chapter for the
obsolete, slow- audit procedures
moving, or excess Review the used to audit
quantities reconciliation of standard costs).
perpetual inventory
Perpetual inventory to general ledger Trace costs used to
records reconciled control account. price goods in the
to general ledger inventory
control account compilation to
monthly standard costs or
vendors’ invoices.
Cutoff All receiving Review and test Snapshot: no
Inventory transactions recorded reports processed procedures for inventory item can
in the wrong period daily to record the processing leave or enter the
Inventory transactions recorded receipt of inventory inventory included warehouse during
in the improper period could on receiving reports the counting.
affect a few accounts, All shipping into the perpetual Examine the
documents records. purchases and sales
processed daily to of capital assets for
record the Review and test a few days before
shipment of procedures for and after year-end.
finished goods removing inventory
from perpetual
records based on
shipment of goods.
Classification Materials Review the
Inventory transactions not requisitions and procedures and Examine a sample
properly classified among raw production data forms used to of inventory checks
materials, work in process, and forms used to classify inventory. for proper
finished goods process goods classification into
through proper accounts
manufacturing
Presentation Chart of accounts Review inventory
reports, general
Inventory transactions not Proper codes for ledger, and chart of Review disclosure
properly presented and disclosed different types of accounts for proper checklist and
‘accurate processing of inventory inventory aggregation or related disclosures
purchase transactions involves disaggregation. for relevance and
applying the correct price to the Disclosure checklist completeness.
actual quantity received.’ Review procedures
 and forms used to
develop inventory
disclosures; if IT
application, testing
of application
controls for proper
codes.

Review disclosure
checklist and related
disclosures for
relevance and
completeness.

Reference:

Messier Jr., W. (2021). Auditing & Assurance Services: A Systematic Approach. McGraw-Hill Higher
Education (US)