Study unit 16.4 Flashcards
What procedures will be performed for the existence and completeness assertion of Inventory
Existence and completeness
*attendance of inventory count
What is the CAAT’s used for existence and completeness for inventory
Stratify the inventory masterfile in order to identify high value inventory items
Extract a random sample of inventory items from the inventory masterfile and compare to quantities according to inventory count sheets
Generate the following exception reports from inventory masterfile
*duplicate inventory item numbers on inventory masterfile
*blank fields on inventory masterfile
*inventory items with a purchase date after yearend
*inventory items with a negative quantity on hand as well as a negative unit cost price that will result in a positive inventory item value
What is the CAAT’s used for accuracy, valuation and allocation of inventory
Arithmetical accuracy of inventory valuation list
*reperform the extension of all inventory items by multiplying the quantity on hand with the unit cost price
*cast the recalculated extensions and calculate a grand total
*generate an exception report from inventory masterfile for inventory items with negative values
Cost price
*sort inventory items between imports and local purchased items
*select a random sample of inventory items to be tested
NRW
*generate an exception report from inventory masterfile of inventory items with a unit selling price less than unit cost price
*select a random sample of inventory items containing the inventory item number and unit selling price and date of last sale
Allowance for absolute inventory
*management procedures - CAAT’s can be used to reperform management procedures or recalculate the allowance and data fields should be given in the background
*analytical procedures - consider cost effectiveness
*specific procedures - generate exception reports from inventory masterfile of
-inventory items with quantity on hand but date of purchase longer than 9 months ago
-inventory items with quantity on hand but date of last sale longer than 6 months ago
What is the standard procedures used for inventory
Obtain a management representation letter dealing specifically with assertions required
Obtain a detailed inventory schedule from management and agree with TB or FS
Cast the detailed inventory schedule/list
Perform overall analytical procedures by comparing actual values per month to that of previous years - identify trends and exceptions
Discuss with management controls in inventory system - circumstances could impact on assertions
What is the substantive procedures of inventory that relate to rights
Inquire of management whether any consignment stock is held for third parties
Imports - inspect relevant documentation to determine if the rights have been transferred to the client
Determine if inventory has been ceded as security by enquiry from management/inspection of bank confirmation
What is the substantive procedures of inventory that relate to existence/completeness
Attendance of inventory count by auditor
Procedures before inventory count:
*enquire from client - date and time of inventory count; location where inventory is kept; inventory to be excluded
*obtain and evaluate inventory count plan and instructions for counting
*administration planning - allocation of audit staff; determine which inventory counts will be attended
Procedures during the inventory count:
*enquire and observe - inventory count takes place according to written instructions; inventory count teams sign for all count sheets received and inventory count sheets issue number sequence
*perform test counts - list to floor (existence); floor to list (completeness)
*resolve discrepancies in test counts - recount with client and confirm amendments
*observe and enquire - no movement of inventory takes place; all inventory has been counted and no double counting
*observe and inspect and document on WP - any damaged inventory; inventory belonging to third parties
Procedures at the conclusion of the count:
*observe that reconciliation are done between count sheets issued and received
*inspect inventory count sheets - line drawn through blank spaces; alliterations have been signed by count teams; count team sign inventory sheets
*document last document numbers
*conclude - appropriate and sufficient audit evidence obtained
What is the substantive procedures of inventory that relate to accuracy, valuation and allocation
Reperform the calculations of the inventory valuation list/cast of inventory list
Audit procedures with regard to the cost price
*local purchases
*imported inventory
Audit procedures to determine whether inventory is valued at the lower of cost or net realisable value
Audit procedures with regard to the provision for absolute inventory
*enquire/reperform procedures of management
*identify risk inventory
*analytical procedures
*inclusion written representation from management
Reperform reconciliation of inventory list total to balance of inventory control account
What is the key risks with relation to inventory
Fictitious products - Quantity (existence)
incorrect valuation - valuation (accuracy, valuation and allocation)
What is the standard procedures with regard to WIP
Reperform the casting of job card/work in progress schedule to ensure mathematical accuracy
Agree the total of job card/work in progress schedule for the general ledger, trial balances and financial statements
Obtain and inspect a signed management representation letter regarding valuation and allocation of work in progress
By enquiry, obtain an understanding of the costing method used to determine whether it is consistent with prior years and appropriate for business
If standard costing system is used
*by enquiry to management and inspection of budgets, determine appropriateness of standard setting process
*evaluate the treatment of variances at yearend
What is the procedures to use for materials of WIP
Perform the same audit procedures as for cost price of inventory
If material issue notes are used - possible CAAT’s
*exception report - issue notes with negative quantities
*exception report - issue notes with negative cost prices
*exception report - issue notes that are dated in another year
*random sample issue notes - compare descriptions to that of job card
What is the procedures to use for labour of WIP
Agree the labour hours with that of payroll records/clock cards
Agree the pay rates with the authorised rates by inspecting of permanent employee records
Recalculate the labour costs to verify the mathematical accuracy
Assess the reasonableness and consistency of estimates of labour content in work in progress
Obtain reasons for pre-determined labour costs to determine whether it should be capitalized or expensed
What is the procedures to use for overheads of WIP
By enquiry of cost accountant and inspection of supporting documentation
*confirm that only fixed or variable production costs have been included
*that overheads have been based on normal capacity and allocated on a systematic basis which is reasonable
Reperform the calculation of overheads to verify mathematical accuracy
Evaluate reasonableness of allocation with reference to stage of completion
Following costs cannot be included:
*administration cost
*selling expenses
*abnormal amounts of material used, labour or other production costs
*wastages
What is the procedures to use in order to determine lower of cost or net realisable value of WIP
Inspection of fully completed units and comparison of cost to date of percentage completed units, to determine whether the cost has already exceeded the selling price
Agree the selling price within invoice after year-end for item
What procedures will be performed for the rights assertion of inventory
Rights
- consignment stock
- encumberment of inventory
- imported inventory
What procedures will be performed for the accuracy, valuation and allocation assertion of inventory
Accuracy, valuation and allocation
*arithmetical accuracy of inventory valuation list
-inspect for items with negative amounts
-compare quantities to count sheets
-reperform calculations
-reperform cast of valuation list
-agree total of valuation list to general ledger inventory control account
*cost price
-local purchase - inspect supplier’s invoice for the purchase price; enquire from management the valuation method used and determine whether it is acceptable according to IAS2 and reperform the inventory valuation cost formula of management
-imports
+cost price - inspect supplier’s invoice to determine the transaction date and the foreign currency amount; obtain the exchange at transaction date from a reputable financial institution and reperform the calculation to translate to rand to verify mathematical accuracy
+other costs - reperform calculations of schedule of other costs to verify mathematical accuracy; evaluate if other costs were incurred to get inventory in current state and location and agree the costs were incurred to get inventory in current state and location and agree the costs to supporting invoices
*NRW
-identify items where the selling price is lower than the cost price
-agree the selling price per the inventory valuation listing to the authorised sales price listing
-inspect a sales invoice after year-end to determine that selling prices are higher than cost prices
*Allowance for obsolete inventory
-Management procedures - method and procedures based; authorisation of allowances; reasonable/consistent to prior year and reperform management’s procedures
-Analytical procedures - allowance as % of inventory; inventory turnover; allowance to actual write off and inventory age category as % of inventory
-other specific procedures - reperform inventory age analysis; assess indicators (sell by date/technology); enquire management (specific events) and inspect WP of inventory count (damaged goods)
