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Chapter 21

This document outlines the learning objectives for auditing the inventory and warehousing cycle. It describes the physical flow of goods and costs in the cycle and how it relates to other accounting cycles. It explains how e-commerce affects inventory management and the risks of inadequate controls over inventory databases. It also details the five parts of auditing the inventory cycle, how to audit cost accounting and controls, and how to apply analytical procedures and perform physical observation, pricing, and compilation audit tests.

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kamau samuel
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35 views3 pages

Chapter 21

This document outlines the learning objectives for auditing the inventory and warehousing cycle. It describes the physical flow of goods and costs in the cycle and how it relates to other accounting cycles. It explains how e-commerce affects inventory management and the risks of inadequate controls over inventory databases. It also details the five parts of auditing the inventory cycle, how to audit cost accounting and controls, and how to apply analytical procedures and perform physical observation, pricing, and compilation audit tests.

Uploaded by

kamau samuel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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CHAPTER 21

Audit of the Inventory and Warehousing Cycle


Dynar Rachmawati / F0313026
Greisiani Nova Karensa / F0313036

Learning Objective 1
Describe the business functions and the related documents and records in the inventory and
warehousing cycle.

Figure 21-1 shows the physical flow of goods and the flow of costs in the inventory
and warehousing cycle for a manufacturing company. Examine the debits to the raw
materials, direct labor, and manufacturing overhead T accounts to see how the inventory
and warehousing cycle ties in to the acquisition and payment cycle and the payroll and
personnel cycle.

Learning Objective 2
Describe how e-commerce affects inventory management
 How E-Commerce Affects Inventory Management?
1. The Internet enables companies to provide complete descriptions of their inventory on
a real-time basis.
2. The use of the Internet and other e-commerce applications may lead to financial
reporting risks if access to inventory databases and systems is not adequately
controlled.

Learning Objective 3
Explain the five parts of the audit of the inventory and warehousing cycle.
The audit of the inventory and warehousing cycle can be divided into five activities
within the cycle:
1. Acquire and record raw materials, labor, and overhead
2. Internally transfer assets and costs
3. Ship goods and record revenue and costs
4. Physically observe inventory
5. Price and compile inventory

Learning Objective 4
Design and perform audit tests of cost accounting.

Audit of cost accounting begins with the internal transfer of


assets from raw materials to work-in-process to finished goods inventory. We also focus
on systems and controls related to the transfer of inventory costs, which are accounted
for in the cost accounting records.

Cost Accounting Controls


1. Physical controls over raw materials, work in process, and finished goods inventory
2. Controls over the related costs

Tests of Cost Accounting


- Physical controls over inventory
- Documents and records for transferring inventory
- Perpetual inventory master files
- Unit cost records
Learning Objective 5
Apply analytical procedures to the accounts in the inventory and warehousing cycle.

Analytical Procedures: Inventory and Warehousing Cycle


Learning Objective 6
Design and perform physical observation audit tests for inventory
Controls Over Perpetual Inventory Master Files
- 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 file
- Adequate control over count sheets or tags

Balance-Related Audit Objectives


Cutoff: Transactions are recorded in the proper period.
Realizable value: Obsolete and unusable inventory items are excluded or noted.
Rights: The client has rights to inventory recorded on tags.

Learning Objective 7
Design and perform audit tests of pricing and compilation for inventory.
 Audit of Pricing and Compilation
Inventory price tests
- Valuation of inventory
- Pricing and compilation procedures
- Pricing and compilation controls

Balance-Related Objectives: Inventory Pricing and Compilation


- Detail tie-inExistence
- Completeness
- Accuracy
- Classification
- Realizable value
- Rights

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