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Chapter 21 Instructor's Guide

Chapter 21 Instructor's Guide - Chapter 21 Audit of the...

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Chapter 21 Audit of the Inventory and Warehousing Cycle We find Chapter 21 difficult for students to understand because of the chapter's emphasis on auditing the inventory of a manufacturing company. It works better to discuss the audit of inventory for a retail or wholesale company. At the end of the chapter, we bring in the complexities caused when inventory is manufactured rather than purchased. The following are topic areas we cover: Chapter opening vignette Differences between inventory and other audit areas How e-commerce affects inventory management Parts of the audit of inventory Physical observation Audit of pricing and compilation Integration of the tests Chapter Opening Vignette – “Phantom Inventory” This vignette revolves around the well-known financial statement fraud at Phar- Mor whereby senior management recorded fictitious inventory and manipulated inventory values to overstate inventory and understate cost of goods sold. We use the vignette to illustrate the challenges associated with auditing clients who have massive amounts of inventory items located in numerous locations. As students visualize the volume of products carried by a retail chain like Phar-Mor, they quickly recognize the opportunities management might have to manipulate inventory values. The vignette also provides a nice opportunity to integrate discussions about sample sizes for tests of details (from Chapter 17). Discussion about the auditor’s decision to only visit four of 300 stores and the auditor’s advance disclosure of the locations to be visited help integrate sampling concepts into this chapter’s focus on audit issues related to inventory. Differences Between Inventory and Other Audit Areas In this section, we briefly ask students to identify the major differences between the audit of inventory and an account such as accounts receivable. How E-Commerce Affects Inventory Management (page 698) We then discuss how companies are using the Internet to provide access to inventory information for management and external parties, including customers and suppliers. Company web sites frequently provide information about product descriptions, quantities, unit prices, and inventory locations. We discuss how this expanded access to inventory management information may increase business risks, if access is not properly controlled and restricted. Review question 21-3 and problem 21-26 provide a useful basis for this discussion.
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