Brown, CPA, is auditing the financial statements of Big Z Wholesaling, Inc., a c
ID: 2423262 • Letter: B
Question
Brown, CPA, is auditing the financial statements of Big Z Wholesaling, Inc., a continuing audit client, for the year ended January 31, 2013. On January 5, 2013, Brown observed the tagging and counting of Big Z's physical inventory and made appropriate test counts. These test counts have been recorded on a computer file. As in prior years, Big Z gave Brown two computer files. One file represents the perpetual inventory (first- in, first- out) records for the year ended January 31, 2013. The other file represents the January 5 physical inventory count.
Assume:
1- Brown issued an unqualified opinion on the prior year's financial statements.
2- All inventory is purchased for resale and located in a single warehouse.
3- Brown has appropriate computerized audit software.
4- The perpetual inventory file contains the following information in item number sequence:
a) Beginning balances at February 1, 2012: Item number, item description, total quantity, and prices.
b) For each item purchased during the year: Date received, receiving report number, vendor, item number, item description, quantity, and total dollar amount.
c) For each item sold during the year: Date shipped, invoice number, item number, item description, quantity shipped, and dollar amount
d) For each item adjusted for physical inventory count differences: date, item number, item description, quantity, and dollar amount.
5- The physical inventory file contains the following information in item number sequence: tag number, item number, item description, and count quantity.
Required
Describe the substantive auditing procedures Brown may consider performing with computerized audit software using Big Z's two computer files and Brown's computer file of test counts. The substantive auditing procedures described may indicate the reports to be printed out for Brown's follow-up by subsequent application of manual procedures. Do not describe subsequent manual auditing procedures.
Group the procedures by those using (a) the perpetual inventory file and (b) the physical inventory and test count files.
Explanation / Answer
In the inventory area, we use audit software to re-foot the inventory file, re-perform the extension of quantity times cost and compare the result to the client’s calculation. Previously, a few samples would have been tested manually. Now, with the computer, and in significantly less time, 100% can be confirmed. Audit software can also be used to help assess valuation and obsolescence. Common procedures include extracting all inventory items where cost is more than net realizable value, extracting items that have not been sold in the last twelve months, aging the inventory based on the last sales date, and extracting items with negative costs or quantities. All these procedures would be very time-consuming or impractical to perform manually, especially for large inventory files. For clients whose accounting systems are unable to perform these analyses, we use the audit software to generate reports to help value their inventory. We also use audit software to match inventory test counts to the physical inventory file and then to perpetual inventory. At the same time, we can also check for duplicate inventory tickets.
• Physical examination of inventory items.
• Obtaining confirmation of inventories at locations outside the entity.
• Inspection of documents relating to inventory transactions between a physical inventory date and the balance sheet date
• Inspecting perpetual inventory records, production records, and purchasing records for indications of current activity.
• Reconciling items in the inventory listing to a current computer-maintained sales catalog and subsequent sales and delivery reports using computer-assisted audit techniques (CAATs).
• Inquiry of production and sales personnel.
• Using the work of specialists to corroborate the nature of specialized products.
• Examining paid vendors' invoices, consignment agreements, and contracts.
• Obtaining confirmation of inventories at locations outside the entity.
• Observing physical inventory counts.
• Analytically comparing the relationship of inventory balances to recent purchasing, production, and sales activities.
• Inspecting shipping and receiving transactions near year end for recording in the proper period.
• Obtaining confirmation of inventories at locations outside the entity.
• Analytically comparing the relationship of inventory balances to recent purchasing, production, and sales activities.
• Inspecting shipping and receiving transactions near year end for recording in the proper period.
• Examining the inventory listing for inclusion of test counts recorded during the physical inventory observation.
• Reconciliation of all inventory tags and count sheets used in recording the physical inventory counts using CAATs.
• Recalculation of inventory listing for clerical accuracy using CAATs.
• Reconciling physical counts to perpetual records and general ledger balances and investigating significant fluctuations using CAATs.
• Examining paid vendors' invoices and comparing product prices to standard cost build-ups.
• Analytically comparing direct labor rates to production records.
• Recalculation of the computation of standard overhead rates.
• Examining analyses of purchasing and manufacturing standard cost variances.
Existence Susbstantive Procedures Inventories included in the balance sheet physically exist.• Physical examination of inventory items.
• Obtaining confirmation of inventories at locations outside the entity.
• Inspection of documents relating to inventory transactions between a physical inventory date and the balance sheet date
Inventories represent items held for sale or use in the normal course of business.• Inspecting perpetual inventory records, production records, and purchasing records for indications of current activity.
• Reconciling items in the inventory listing to a current computer-maintained sales catalog and subsequent sales and delivery reports using computer-assisted audit techniques (CAATs).
• Inquiry of production and sales personnel.
• Using the work of specialists to corroborate the nature of specialized products.
Rights and oblgations The entity has legal title or similar rights of ownership to the inventories.• Examining paid vendors' invoices, consignment agreements, and contracts.
• Obtaining confirmation of inventories at locations outside the entity.
Completeness Inventory quantities include all products, materials, and supplies on hand.• Observing physical inventory counts.
• Analytically comparing the relationship of inventory balances to recent purchasing, production, and sales activities.
• Inspecting shipping and receiving transactions near year end for recording in the proper period.
Inventory quantities include all products, materials, and supplies owned by the company that are in transit or stored at outside locations.• Obtaining confirmation of inventories at locations outside the entity.
• Analytically comparing the relationship of inventory balances to recent purchasing, production, and sales activities.
Inventory listings are accurately compiled and the totals are properly included in the inventory accounts.• Inspecting shipping and receiving transactions near year end for recording in the proper period.
• Examining the inventory listing for inclusion of test counts recorded during the physical inventory observation.
• Reconciliation of all inventory tags and count sheets used in recording the physical inventory counts using CAATs.
• Recalculation of inventory listing for clerical accuracy using CAATs.
• Reconciling physical counts to perpetual records and general ledger balances and investigating significant fluctuations using CAATs.
Valuation and Allocation Inventories are properly stated at cost (except when market is lower).• Examining paid vendors' invoices and comparing product prices to standard cost build-ups.
• Analytically comparing direct labor rates to production records.
• Recalculation of the computation of standard overhead rates.
• Examining analyses of purchasing and manufacturing standard cost variances.
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