List the THREE major steps in setting control risk in the inventory management

List the three major steps in setting control risk in

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Question 24. List the THREE major steps in setting control risk in the inventory management process Ans: Step 1. Understand and document the inventory management process based on a reliance strategy In order to set the control risk for the inventory management process, the auditor must understand the internal control components. Two points should be mentioned. First, if the entity uses IT for monitoring both the general IT controls and the inventory application controls. Second, the auditor will need a thorough understanding of the process used by the entity to value inventory Step2. Plan and perform tests of controls on inventory transactions. In performing this step, the auditor again must identify the relevant control activities within the entity’s inventory system that ensure that material misstatements are either prevented or detected and corrected. Audit procedures used to test the entity’s control activities in the inventory management process are discussed in subsequent sections. Step3. Set and document the control risk for the inventory management process. Once the controls in the inventory system have been tested, the auditor sets the level of control risk. The auditor should document the achieved level of control risk using either quantitative amounts or qualitative terms. The documentation supporting the achieved level of control risk for the inventory management process might include a flowchart, the results of the tests of controls, and a memorandum indicating the overall conclusions about control risk.
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Question 25. List the procedure the auditor should perform during the count of the entity’s physical inventory Ans: 1. Ensure that no production is scheduled. If production is scheduled, ensure that proper controls are established for movement between departments in order to prevent double counting. 2. Ensure that there is no movement of goods during the inventory count. If movement is necessary, the auditor and entity personnel must ensure that the goods are not double counted and that all goods are counted. 3. Make sure that the entity’s count teams are following the inventory count instructions. If the count teams are not following the instructions, the auditor should notify the entity representative in charge of the area. 4. Ensure that inventory tags are issued sequentially to individual departments . For many inventory counts, the goods are marked with multicopy inventory tags. The count teams record the type and quantity of inventory on each tag, and one copy of each tag is then used to compile the inventory. If the entity uses another method of counting inventory, such as detailed inventory listings or handheld computers, the auditor should obtain copies of the listings or files prior to the start of the inventory count. 5. Perform test counts and record a sample of counts in the working papers .
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