Chap007-Ln

Chap007-Ln - Chapter 07 Auditing the Inventory Business Process CHAPTER 7 Auditing the Inventory Business Process After studying this chapter you

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CHAPTER 7 Auditing the Inventory Business Process After studying this chapter, you should be able to: 1. Describe the inventory business process. 2. Explain the transactions in the inventory process. 3. Understand an applicable financial reporting framework (GAAP) for recording transactions in the inventory business process. 4. Describe misstatements (errors and fraud) that could occur in the inventory process. 5. Explain management's assertions for accounts in the inventory process. 6. Identify relevant assertions for the inventory process. 7. Describe the methods the auditor uses to gather evidence for internal controls in the inventory process. 8. Understand the substantive tests auditors use to gather evidence in the inventory process. 9. Explain the procedures for the physical inventory count. 10. Understand the importance of FIFO and LIFO pricing of inventory and the year-end valuation of inventory. 11. Describe the disclosure requirements for the inventory business process. Chapter 7: Auditing the Inventory Business Process Chapter Highlights This chapter provides a description of the inventory business process first from the accounting perspective and then from the auditing perspective. The accounts and the accounting transactions are reviewed as is the financial accounting framework for inventory under U.S. GAAP and International Financial Reporting Standards (IFRS). Once the accounting for the inventory process is examined, management’s assertions for the financial statements are discussed and the potential misstatements in the inventory process are evaluated. The relevant assertions identified for this process help to establish the tests of controls and substantive tests with special sections focusing on the physical inventory count, FIFO and LIFO inventory pricing and inventory reserves, and lower of cost-or-market adjustments for inventory. The chapter then summarizes how the auditor determines whether the evidence collected is sufficient and appropriate to make an audit conclusion about the inventory process and then presents the disclosures for the financial statements. To better understand the accounting transactions for the inventory process, T-accounts and journal entries are illustrated at the beginning of the chapter. Exhibit 7-4 provides the Financial Information for the continuing BCS Example illustrating tests of controls and substantive tests and Exhibit 7-6 provides a detailed Audit Program for inventory. There are actual financial statement disclosures in Exhibit 7-8. Chapter Outline 1. The Inventory Business Process (Slide #1… see companion slides) In the inventory business process, the auditor gathers evidence related to: Transactions recorded when inventory is counted Transactions recorded when inventory is priced according to LIFO, FIFO, or average cost Transactions recorded to value inventory according to lower of cost or market Transactions to value the inventory balance at year-end
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This note was uploaded on 12/03/2011 for the course HIST 101 taught by Professor M during the Spring '11 term at NJIT.

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Chap007-Ln - Chapter 07 Auditing the Inventory Business Process CHAPTER 7 Auditing the Inventory Business Process After studying this chapter you

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