Lesson 9

Question 1

What are the key assertions for inventory?

Answer 1

Existence
Valuation
Completeness
Rights and obligations

Question 2

What are the 11 substantive procedures for inventory?

Answer 2

1. Select a sample from the inventory count sheets and physically inspect warehouse
2. Select sample from warehouse and ensure they are recorded accurately
3. Inspect the inventory being counted for evidence of damage
4. Obtain copies of inventory count sheets and check against final inventory listing
5. Inspect purchase invoices for a sample of items to agree cost
6. Inspect post year-end sales invoices for a sample of inventory items to see if net value is reasonable
7. Inspect inventory items to identify old amounts that require allowance
8. Trace the goods received just before end of year to make sure it matches with year-end payables
9. Trace goods dispatched just before the year end in the nominal ledgers to make sure they’re counted
10. Figure out how long inventory is held and compare it to last year’s to find inventory not selling well
11. Calculate Gross Profit Margin and compare to prior year

Question 3

What are the substantive procedures for payables?

Answer 3

1. Obtain a list of trade payables and agree to the financial statements
2. Reconcile individual payables account with the control account
3. Obtain supplier statements and reconcile to the payables balance
4. Inspect invoices received after the year-end and trace to accruals
5. Enquire management of their process for identifying goods received and ensure it is reasonable
6. Select a sample and follow through to year end payables balance
7. Inspect payables ledger for any debit balances and discuss big amounts with management
8. Compare payables list to prior year and identify omissions (entry not made for a transaction)
9. Calculate payables payment period and compare to prior year