chap013_internet

chap013_internet - Chapter 13 - Auditing the Inventory...

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Chapter 13 - Auditing the Inventory Management Process CHAPTER 13 AUDITING THE INVENTORY MANAGEMENT PROCESS Answers to Review Questions 13-1 Inventory represents one of the most complex parts of the audit because the assignment of values to inventory quantities is difficult. There are also issues such as obsolescence and lower of cost or market that affect the valuation of inventory. The complexity of auditing inventory may also be affected by the degree of processing required to manufacture products. 13-2 The inventory process is affected by control activities in the revenue, purchasing, and human resource management processes. The purchasing process controls the acquisition and payment of raw materials and overhead costs. The cost of direct and indirect labor assigned to inventory is controlled through the human resource management process. Last, finished goods are sold and accounted for as part of the revenue process. 13-3 A production schedule is used to determine the quantity of goods needed and the time at which they are required to meet the production scheduling. The materials requisition is the document that authorizes the release of raw materials from the raw materials department. The inventory master file contains all the important information related to the entity's inventory, including the perpetual inventory records for raw material, work in process, and finished goods. Production information is reported about the transfer of goods and related cost accumulation at each stage of production. This information is used to update the entity's perpetual inventory system and as input to generate the cost accumulation and variance reports produced by the inventory system. The cost accumulation report summarizes the various costs charged to departments and products and presents the results of inventory processing in terms of actual costs versus standard or budgeted costs. 13-4 The following duties are performed by the inventory management, stores, and cost accounting functions: Inventory management: Maintenance of inventory at appropriate levels; issuance of purchase requisitions to the purchasing department; managing inventory through planning and scheduling manufacturing activities. Raw materials stores: Custody of raw materials and issuance of raw materials to manufacturing departments. Cost accounting: Responsible for ensuring that costs are properly attached to inventory as goods are processed through the manufacturing function. Cost accounting reviews the cost accumulation and 13-1
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Chapter 13 - Auditing the Inventory Management Process variance reports after such data are processed into the accounting records. 13-5 The key segregation of duties in the inventory process and the errors or fraud that they can prevent are: Segregation of Duties Possible Errors or Fraud as a Result of Conflicts in Duties The inventory management function should be segregated from the cost- accounting function. Production and inventory costs can be
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chap013_internet - Chapter 13 - Auditing the Inventory...

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