DQ4-1

Many auditors consider the substantiation of the figure for inventory to be a more 1 difficult and challenging task than the verification of most other items on the balance sheet. List several specific factors that support this view. - It is often the largest asset account and has an issue in measurement and valuation. - Multiple and often subjective evaluations make inventory a high-risk area often used by management to do manipulations. - Physical Inventory is hard to conduct - Existence of sampling risk. Taking small sample for test counting, missing important information.
2 What should be considered in classifying inventory items? What are those items

that should be accounted for as part of inventory? What role does passage of title play in the recognition of inventories? How should an auditor account for items that are not classified as inventory? -Type of inventory (Work-in-process, raw materials, finished goods) -Part of inventory: 1) Purchased goods and held for resale 2) Finished goods 3) Work-in-process 4) Raw materials and supplies -As a rule, passage of title to the buyer makes the goods included in the buyer's inventory. Ex. goods owned and on-hand, in-transit and sold FOB destination, goods in transit and purchased FOB Shipping point, goods out on consignment, goods in hands of salesmen or agents, goods held by customers on approval or on trial. -Excluded from inventory account.

DQ4-2

Louwers 9.10 What characteristics do auditors consider in reviewing a clients inventorytaking instructions?

Physical inventory observation- it is an observation of the clients physical inventory count taken by the company personnel. In this process, auditors observe the inventory taking and make test counts, but they seldom actually count the entire inventory. Inventory count sheet- An inventory control tool used when taking a physical inventory. The count sheet will generally include a description of the item, including UPC(Universal Product Code) and vendor, location of the item and a column to record the quantity counted. The results are compared to the quantity listed in the computer to determine if inventory adjustments are required.

1. Name of client personnel responsible for the count 2. Dates and times of inventory taking 3. Names of client personnel who will participate in the inventory taking

4. Instructions for recording accurate descriptions of inventory items, for count and double count, and for measuring or translating physical quantities 5. Instructions for making notes of obsolete or worn items 6. Instructions for the use of tags, punched cards, count sheets, computers, or other media devices and for their collection and control 7. Plans for shutting down plant operations or for taking inventory after store closing hours and plans for having goods in proper places. 8. Plans for counting or controlling movement of goods in receiving and shipping areas if those operations are not shut down during the count 9. Instructions for computer compilations of the count media into final inventory lists or summaries 10. Instructions for review and approval of the inventory count; notations of obsolescence or other matters by supervisory personnel 11. Instructions for making changes and corrections to count tickets. Louwers 9.12 Why is it important for auditors to obtain control information over inventory count sheets or tickets? It is important for auditors to obtain the control information over inventory count sheets and tickets because the amounts recorded in such documents become part of the inventory amount. Louwers 9.14 Why is it important to obtain shipping and receiving cutoff information during the inventory observation? When auditors are present to make the physical inventory count of the client, he/she follows the procedures outlined for observation of the physical count. However, with a period intervening between the count date and the year end, additional inventory roll-forward auditing procedures must be performed on transactions during that periodthis is why it is important for the auditor to obtain cutoff information regarding the shipping and receiving of inventory. Louwers 9.17 What analytical procedures might reveal obsolete or slow-moving inventory? Location in an area far from shipping deck Layers of dust Water-damaged containers

Informal discussions with warehouse personnel Old inventory counter tags Rust or other damage P4-1

1.)

EXCLUDED - The merchandise was purchased under FOB Destination terms and was not received until January 5, 2011. EXCLUDED - The purchasing agent does not possess legal title because the merchandise was received on a consignment basis. INCLUDED - Merchandise, except "special orders", should be included in the inventory until shipped. INCLUDED - Because the purchase was made under FOB Shipping Point terms, the merchandise should be included in the inventory on the shipping date. EXCLUDED - A product that is manufactured for a particular customer (special order) is considered sold upon its completion.

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