Tracing the Inventory Count. You have been assigned to trace the results of the
ID: 2444796 • Letter: T
Question
Tracing the Inventory Count. You have been assigned to trace the results of the ovservation of Brightware China's physical inventory count to its pricing and compilation. You note the following conditions:
1) The last inventory tag documented by Mark Hulse, the auditor who observed the inventory, was 1732, but you notice a number of items with count ticket numbers higher than 1732. You contact the client's controller, Marcia Vines, who tells you the client found a storage room full of a new product that Brightware had just produced and added it to the inventory.
2) The count ticketes recorded by Hulse agree to the inventory list, but some of the other count tickets you select are substantially different from it. Vines tells you these are input errors and she will have them corrected.
3) Hulse described several boxes of goods as being dusty and even broken. THey are included in the inventory at cost. Vine's explanation is that china never "goes bad" and the goods themselves were not broken.
Required:
(a) Prepare an audit plan for tracing the information from the inventory count to the compilation.
(b) What might ahve caused the conditions you found? WHat effect might they have on the financial statements?
(c) What steps will you take to followup on Vine's explanations?
Explanation / Answer
Answer:(a) 1. Obtain client's inventory counting instructions and review for completeness.
2. Tour facility before count looking for out-of-the-way items, obsolete items, and movement of inventory.
3. Observe client personnel counting inventory for compliance with instructions.
4. Test count a selection of items throughout the facility and record a sample of your test counts. Note description, stage of completion, counting unit, and condition.
5. Inspect tags used and unused and record tag numbers used.
6. Select a sample of used tags and trace each to the items on the floor.
7. Obtain the number of the last five receiving reports and last five shipping documents. Record numbers of the next unused items in sequence.
8. Tour facilities to ensure all items have been counted.
Answer:(b) That the inventory is overstated and financial statement contains material items.
Answer:(c) inventory should be valued at cost or market price whichever is lower.
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