AUDITOF THE INVENTORY

ANDWAREHOUSINGCYCLE
Maria Lintang / 232017506
Pratita Garnis / 232017507
Mahardika Putri / 232017509
Jeivi Brenda / 232017515
The Inventory and Warehousing
 The inventory and warehousing cycle is unique because
of it’s close relationship to other transaction cycle.
 The audit of inventory, especially tests of the year-end
inventory balance,is often the most complex and time-
comsuming part of the audit.
 And have some factor affecting the complexity of the
audit of inventory.

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BUSINESS FUCTIONS IN THE CYCLE AND RELATED
DOCUMENTS AND RECORDS

 Inventory takes many different forms, depending on

the nature of the business. Many manufacturing
company used inventory and warehousing cycle.

 The inventory and warehousing cycle can be thought

of as comprising two separated but closely related
system, one involving the physical flow of goods and
the other the related costs.

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BUSINESS FUCTIONS IN THE CYCLE AND RELATED DOCUMENTS AND
RECORDS

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 six functions make up the inventory and warehousing cycle. Each of
these is discussed next
 process purchase order
 Receive raw materials
 Store raw materials
 Process the goods
Process cost system. They are
Job cost system. Cost are
accumulated by processes, with
accumulated by individual
unit costs for each process
jobs when material is issued
assigned to the products passing
and labor cost incurred.
through the process.
Cost accounting records consist of master files, spreadsheets, and reports
that accumulate material, labor, and overhead costs by job or process as
those costs are incurred.
 Store finished goods
 Ship finished goods
 Perpetual inventory master files
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PART OF AUDIT OF INVENTORY
The overall objective in the audit of the inventory and
warehousing cycle is to provide assurance that the financial
statements fairly account for raw materials, WIP, finished
goods inventory, and cost of goods sold.

The audit of the inventory and warehousing cycle can be divided into five
activities within the cycle:

 Acquire and record raw materials, labor, and overhead

 Transfer assets and cost
 Ship goods and record revenue and cost
 Physically observe inventory
 Price and compile inventory

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PART OF THE AUDIT OF INVENTORY

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Audit of Cost
accounting
• Internally transfer of asset from raw material to work
in process to finish good inventory.
 Cost Accounting Controls
The process affecting physical
inventory and tracking the
related cost
Raw materials are Completion of the Transfer to the
request manufacturing storage
product

Two broad categories of controls:

1. Physical control over raw material, work-in-process, and finished good

inventory.

2. Controls over the related cost.

TEST OF COST ACCOUNTING

Physical control over inventory

01 Control over raw material, work-in-process, and finished good.

Documents and records for transferring in

inventory
02 Concern the transfer of inventory from one location to another,
all transfer recorded, all transaction exist, quantity and
description are accurate.

Perpetual inventory master files

03 Reliability of perpetual inventory effect timing and extend of the
audit

Unit cost record

04 Accounting for DL, DM, MOH must be accurate for the raw
material, work-in-process, and finished goods.
 Substantive Analytical Procedures
for Inventory and Warehouse Cycle
SUBSTANTIVE ANALYTICAL PROCEDURE POSSIBLE MISSTATEMENT

Compare gross margin percentage with that of previous years Overstatement or understatement of inventory and cost of goods sold

Compare inventory turnover (cost of goods sold divided by Obsolete inventory, Overstatement or understatement of
average inventory) with that of previous year inventory

Overstatement or understatement of unit costs, which affect inventory

Compare unit costs of inventory with those of previous years
and cost of goods sold

Misstatements in compilation, unit costs, or extensions, which affect

Compare extended inventory value with that of previous years
inventory and cost of goods sold

Compare current year manufacturing costs with those of previous Misstatements of unit costs of inventory, especially direct labor and
years (variable costs should be adjusted for changes in volume) manufacturing overhead, which affect inventory and cost of goods sold
 Physical Observation of
Inventory
• Auditor required to perform physical observation tests of
inventory and should evaluate whether risk related to
inventory qualify as significant risk

1. Start by touring of the client’s inventory facilities

2. Assess the client business risk of material misstatement
3. Determine performance materiality and assesses inherent risk
of inventory
4. Greater concerned for misstatement when inventory is stored
in multiple location, the costing method is complex, and the
potential inventory obsolesenses is great.
Inventory Observation
Requirement
Auditing Standard - effectiveness of the client’s
methods of counting inventory and the reliance
they can place on the client’s representations

To meet requirement, auditors must:

• Be present at the time the clients counts its inventory
• Observe the client’s counting procedures
• Make inquiries of client personnel about their
counting procedures
• Make their own independent tests of the physical
count
Control Over Physical Count
• The client must make a periodic physical inventory, but not necessarily
every year.

• Adequate controls over the client’s physical count of inventory include:

- Correct instructions for physical count
- Supervision by responsible personnel
- Internal verification independent of calculations
- Reconciliation does not depend on the physical count with the perpetual
inventory master file
- Adequate control of the number or sheet tag
 Audit Decision

Timing Sample Size Selection of Items

Determination how many

Determination of the timing of samples are Selecting the right samples to
procedures be tested

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PHYSICAL
OBSERVATION
TEST

The most important part of the

observation of inventory is
determining whether the physical
count is being taken in
accordance with the client’s
instructions.
 AUDIT OF PRICING AND COMPILATION
∙ Pricing and Compilation Controls

Standards cost records that indicate variances in material, labor, and overhead costs are helpful to evaluate
the reasonableness of production records

The need of inventory compilation internal controls for clients

The most important internal control for accurate unit costs, extensions, and footings is internal verification
by a competent, independent person who relies on adequate documents and records that were used for
taking the physical counts
 AUDIT OF PRICING AND COMPILATION

∙ Pricing and Compilation Procedures

Auditors can apply the objectives using information obtained from the clients as a frame of reference,
including each inventory item’s description, quantity, unit price, and extended value

∙ Valuation of Inventory

The auditor has three concerns:

1. The method must be in accordance with accounting standards
2. The application of the method should be consistent from year to year
3. Inventory cost versus market value must be consider
 Pricing Purchased Inventory

Steps in verifying the valuation of purchased inventory is as follows:

1. The auditor must determine whether the client uses LIFO, FIFO, weighted average, or some other
valuation method

2. In selecting specific inventory items for pricing, auditors should focus on larger dollar amounts and on
product that are known to have wide fluctuations in price

3. The auditor should list the inventory items to be verified for pricing and request the client to locate the
appropriate vendor’s invoices
 Pricing Manufactured Inventory

Pricing work- Pricing raw

in-process materials in Testing direct
and finished manufactured labor
goods products

Cost or Market In pricing inventory, auditors

must consider whether market value is lower
than historical cost or not
 Balance-Related Audit
Objectives and Tests of Details
of Balances for Inventory Pricing
and Compilation

∙ Detail tie-in

∙ Existence

∙ Completeness

∙ Accuracy

∙ Classification

∙ Realizable Value

∙ Rights
 INTEGRATION OF THE TESTS

Raw Materials

Work-in-process

Finished goods

Inventory Tests