EarthWear Hands-on Mini-case

Chapter 4 - Inventory Testing SOLUTION

© The McGraw-Hill Companies, Inc., 2010

INSTRUCTOR NOTES:
The material below will provide you with additional guidance on using this case in
your class. The tabs that follow contain a completed version of the student case
as a suggested solution and includes instructions and exhibits as presented in the
student version.

Overview:
In this case students review a set of inventory tags to test the completeness and
existence assertions for the inventory account. The embedded documents are also
provided as separate files on the website if students encounter problems.

Estimated Time for Completion

This is a MODERATE case requiring between 20-30 minutes to complete on
average.
Teaching Helps and Notes:
The instructor should emphasize the difference between the test of existence and
completeness. While the work papers provided appear identical, the audit
procedures to test existence (sheet to floor) and completeness (floor to sheet)
provide evidence to support different assertions. This activity will provide an
excellent platform for the instructor to discuss and reinforce the link between
assertions and audit procedures.
 EarthWear Hands-on Mini-case
Chapter 4 - Inventory Testing SOLUTION
© The McGraw-Hill Companies, Inc., 2010

In this mini-case you will test inventory for EarthWear Clothiers.

EarthWear has a calendar year-end and conducted their inventory
observation on January 1, 2011. Inventory was counted at two different
foreign distribution centers (Germany and Japan) where the international
inventory is stored. There was no movement of inventory on January 1st.
A brief description of the Inventory Count process has been provided
below. Additional information regarding inventory counts is available in

Physical Inventory
Count Description

INSTRUCTIONS:

1 To test the completeness of inventory (i.e., "floor to sheet"), enter the

quantity from the Inventory Count Tags on Work Paper 4-1 and then
locate the item on the Inventory Status Report contained in the files
below. Some inventory items selected for review have already been
completed. Enter the amount from the Inventory Status Report on Work
Paper 4-1 and compare to the quantity on the tag. If the count differs for
an inventory item, briefly describe which management assertion(s)
Fields you are to complete on work papers are colored yellow. The color will disappear when the field is completed
You should download the PDF files required to complete this
case from the
EarthWear Mini-Cases section of the Student Online Learning
http://www.mhhe.com/messier7e

2 To test the existence of inventory (i.e., "sheet to floor"), enter the

quantities from the Inventory Status Report contained in the file above
for the items indicated on Work Paper 4-2. Please note that the order of
the Inventory Status Report and Inventory Count Tag columns is the
reverse of Work Paper 4-1 to reflect the change in the order of
observation (i.e., switching from "floor to sheet" to "sheet to floor"). Then
locate the Inventory Tag in the files above to confirm the existence and
accuracy of the inventory item. In an actual inventory observation, the
auditor would make selections from the Inventory Status Report and the
client would take the auditor to the actual inventory item and the
attached count tag. For this exercise, you will vouch the selections from
the Inventory Status Report (i.e., the "sheet") to the tag provided in the
file above (i.e., the "floor"). Some inventory items selected for review
have already been completed. Compare the quantity from the Inventory
Status Report with the quantity on the tag. For inventory items where the
counts differ, briefly describe which management assertion(s)appear to
be violated.
Fields you are to complete on work papers are colored yellow. The color will disappear when the field is completed
Suggested solutions are indicated in red on Work Paper 4-2.

3 When you are finished with steps 1 and 2, enter your initials in the yellow
box in the upper right-hand corner of Work Paper 4-1 and Work Paper 4-2
(box indicates "Initial Here").
4 Please print a hard copy of Work Paper 4-1 and Work Paper 4-2 to submit
unless your instructor requests an electronic submission. The work
papers are formatted to fit on one page.
 INSTRUCTOR SOLUTION
EARTHWEAR CLOTHIERS 4-1
Inventory Floor to Sheet Test Counts SOLUTION
December 31, 2010 4/24/2011

GERMANY Quantity on
Quantity on Inventory
Inventory Status Describe any Violations of Managements
Inventory IDDescription Count Tags Report Difference Assertions
101-2089 Medium T-shirt 32,789 32,789 0
102-5573 M Sweater 84,383 84,383 0
102-8637 XL Sweater 94,202 94,202 0
103-2538 Photo 5 X 7 23,842 23,842 0
103-7994 Photo 11 X 17 9,734 0 9,734 It appears completeness assertion is violated.
104-9326 Duffel Bag 7,560 7,560 0

JAPAN Quantity on
Quantity on Inventory
Inventory Status Describe any Violations of Managements
Inventory IDDescription Count Tags Report Difference Assertions
101-2089 Medium T-shirt 23,324 23,324 0
102-5573 M Sweater 9,687 9,678 9 It appears that the last two digits have been
transposed; therefore, the accuracy assertion is
102-8637 XL Sweater 19,805 19,805 0 violated.
103-2538 Photo 5 X 7 23,901 23,901 0
103-7994 Photo 11 X 17 18,234 18,234 0
104-9326 Duffel Bag 18,345 18,345 0
 INSTRUCTOR SOLUTION
EARTHWEAR CLOTHIERS 4-2
Inventory Sheet to Floor Test Counts SOLUTION
December 31, 2010 4/24/2011

GERMANY Quantity on Quantity on

Inventory Inventory
Status Count Describe any Violations of Managements
Inventory IDDescription Report* Tags* Difference Assertions
100-2545 Fishing Vest 11,894 11,894 0
101-1348 Small T-shirt 8,349 8,349 0
101-3573 Large T-shirt 28,239 28,239 0
103-5037 Photo 8 1/2 X 11 53,838 53,838 0
104-3501 Briefcase 84,900 84,900 0
104-4510 Large suitcase 19,007 19,007 0

JAPAN Quantity on Quantity on

Inventory Inventory
Status Count Describe any Violations of Managements
Inventory IDDescription Report* Tags* Difference Assertions
100-2545 Fishing Vest 9,498 9,498 0
101-1348 Small T-shirt 8,645 8,645 0
101-3573 Large T-shirt 2,342 0 2,342 No inventory count tag was found for this
inventory item, so it appears the existence
103-5037 Photo 8 1/2 X 11 8,907 8,907 0 assertion has been violated.
104-3501 Briefcase 43,487 43,487 0
104-4510 Large suitcase 24,389 24,389 0