AEB_SM_CH21_1 - Chapter 21 Audit of the Inventory and...

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Chapter 21 Audit of the Inventory and Warehousing Cycle Review Questions 21-1 Inventory is often the most difficult and time consuming part of many audit engagements because: 1. Inventory is generally a major item on the balance sheet and often the largest item making up the accounts included in working capital. 2. The need for organizations to have the inventory in diverse locations makes the physical control and counting of the inventory difficult. 3. Inventory takes many different forms that are difficult for the auditor to fully understand. 4. The consistent application of different valuation methods can be fairly complicated. 5. The valuation of inventory is difficult due to such factors as the large number of different items involved, the need to allocate the manufacturing costs to inventory, and obsolescence. 21-2 The acquisition and payment cycle includes the system for purchasing all goods and services, including raw materials and purchased parts for producing finished goods. Purchase requisitions are used to notify the purchasing depart- ment to place orders for inventory items. When inventory reaches a predetermined level or automatic reorder point, requisitions may be initiated by stockroom personnel or by computer. In other systems, orders may be placed for the materials required to produce a customer order, or orders may be initiated upon periodic evaluation of the situation in light of the prior experience of inventory activity. After receiving the materials ordered, as part of the acquisition and payment cycle, the materials are inspected with a copy of the receiving document used to book perpetual inventory. In a standard cost inventory system, the acquisition and payment cycle computes any inventory purchase variances, which then enter the inventory system. The following audit procedures in the acquisition and payment cycle illustrate the relationship between that cycle and the inventory and warehousing cycle. 1. Compare the inventory cost entered into the inventory system to the supporting invoice to determine that it was properly recorded and the purchase variance (standard cost system), if any, was properly reflected. 2. Test the purchase cutoff at the physical inventory date and year-end to determine whether or not the physical inventory and year-end inventory cutoffs are proper from a purchase standpoint. 21-1
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21-3 Cost accounting records are those which are concerned with the processing and storage of raw materials, work in process, and finished goods, insofar as these activities constitute internal transfers within the inventory and warehousing cycle. These records include computerized files, ledgers, worksheets and reports which accumulate material, labor, and overhead costs by job or process as the costs are incurred.
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