Auditing: Financial Audit and Inventory Essay

Answers to case study1. What are the attenders primary objectives when he or she observes the clients yearly forcible chronicle? Ans. The Primary Objective of auditor is to make sure the caudex reflected on the balance sheet very exists and that the balance sheet includes all livestock owned by the smart set .This includes all raw material,supplies, record in transit.The company may view as on commission with another business and inventory stored off the premises. Confirming the existence of inventory through observation address the occurrence and completeness assertion as swell up. Auditors job is to wait employees and make sure they following agreed upon procedure of company There are two main objectives of auditing. The primary objective and the secondary or accompanying objective.a. Primary objective as per Section 227 of the Companies Act 1956, the primary duty (objective) of the auditor is to report to the owners whether the balance sheet gives a true and fair en counter of the Companys state of affairs and the profit and loss A/c gives a correct figure of profit of loss for the financial year. b. supplemental objective it is also called the incidental objective as it is incidental to the satisfaction of the main objective. The incidental objective of auditing arei. Detection and saloon of Frauds, andii. Detection and prevention of Errors. Detection of material frauds and errors as an incidental objective of independent financial auditing flows from the main objective of determining whether or not the financial reports give a true and fair view. As the Statement on auditing Practices issued by the Institute of Chartered Accountants of India states, an auditor should bear in mind the possibility of the existence of frauds or errors in the accounts under audit since they may ca call the financial position to be mis-stated.Fraud look ups to intentional misrepresentation of financial information with the intention to deceive. Frauds founda tion take place in the form of manipulation of accounts, misappropriation of cash and misappropriation of goods. It is of great importance for the auditor to detect any frauds, and prevent their recurrence. Errors refer to unintentional mistake in the financial information arising on account of ignorance of accounting principles i.e. principle errors, or error arising out of negligence of accounting lag i.e. Clerical errors.2. Identify the key audit procedures that an auditor would typically perform during and after the clients corporeal inventory. 1. Ans. company records its inventory as an asset, and it undergoes an annual audit, past theauditors result be conducting an audit of your inventory. Cutoff analysis. The auditors will examine your procedures for halting any further receiving into the warehouse or shipments from it at the clipping of the physical inventory count, so that extraneous inventory items are excluded. They typically test the last few receiving and shipping transactions prior to the physical count, as well as transactions immediately following it, to see if you are properly accounting for them. Observe the physical inventory count. The auditors want to be comfortable with the procedures you use to count the inventory.This means that they will discuss the counting procedure with you, observe counts as they are being done, test count some of the inventory themselves and vestige their counts to the joins recorded by the companys counters, and verify that all inventory count tags were accounted for. If you entertain multiple inventory storage locations, they may test the inventory in those locations where there are significant amounts of inventory. They may also ask for confirmations of inventory from the custodian of any public warehouse where the company is storing inventory. Reconcile the inventory count to the general ledger. They will trace the valuation compiled from the physical inventory count to the companys general ledger, to verify that the counted balance was carried forward into the companys accounting records. Test high-value items.If there are items in the inventory that are of unusually high value, the auditors will likely spend extra time counting them in inventory, ensuring that they are valued correctly, and tracing them into the valuation report that carries forward into the inventory balance in the general ledger. Test error-prone items. If the auditors have noticed an error trend in prior years for specific inventory items, they will be more likely to test these items again. Test inventory in transit. There is a risk that you have inventory in transit from one storage location to another at the time of the physical count. Auditors test for this by reviewing your transfer documentation. Test item costs. The auditors need to know where purchased costs in your accounting records come from, so they will compare the amounts in recent supplier invoices to the costs listed in your inventory valuati on. Review freight costs. You can either include freight costs in inventory or charge it to expense in the period incurred, but you need to be consistent in your treatment so the auditors will trace a natural selection of freight invoices through your accounting system to see how they are handled. Test for lower of cost or market.The auditors must follow the lower of cost or market rule, and will do so by comparing a selection of market prices to their recorded costs. Finished goods cost analysis. If a significant coincidence of the inventory valuation is comprised of finished goods, then the auditors will want to review the bill of materials for a selection of finished goods items, and test them to see if they show an absolute compilation of the components in the finished goods items, as well as correct costs. Direct labor analysis. If direct labor is included in the cost of inventory, then the auditors will want to trace the labor charged during production on time cards or lab or routings to the cost of the inventory. They will also go over whether the labor costs listed in the valuation are supported by payroll records.Overhead analysis. If you apply overhead costs to the inventory valuation, then the auditors will verify that you are consistently using the same general ledger accounts as the source for your overhead costs, whether overhead includes any abnormal costs (which should be charged to expense as incurred), and test the validity and consistency of the method you use to apply overhead costs to inventory. Work-in-process testing. If you have a significant amount of work-in-process (WIP) inventory, the auditors will test how you determine a percentage of completion for WIP items. Inventory allowances.The auditors will determine whether the amounts you have recorded as allowances for obsolete inventory or scrap are adequate, based on your procedures for doing so, historical patterns, where used reports, and reports of inventory usage (as well as b y physical observation during the physical count). If you do not have such allowances, they may require you to create them. Inventory ownership. The auditors will review purchase records to ensure that the inventory in your warehouse is in truth owned by the company (as opposed to customer-owned inventory or inventory on consignment from suppliers). Inventory layers. If you are using a FIFO or LIFO inventory valuation system, the auditors will test the inventory layers that you have recorded to verify that they are valid.3.What audit procedure or procedures might have prevented Nashwinter from successfully overstating the 1980 year-end inventory of the Gravins Division? Ans. IN 1980 the audit conducted by goodman and company auditors Wilson and Pollard. During the audit of inventory Nashwinter showed the false inventory recorded by him to auditor but they overlooked the inventory statement.The first time when nashwinter was able to escape in showing the false inventory report. Nashw inter used to inflate the profit every year as he had a good position maintained when he was a salesman and he didnt want to spoil his position.This changes made in the inventory by him were increasing every year . 4. What audit procedure or procedures might have prevented Nashwinter from overstating the divisions 1981 year-end inventory? Ans.In 1981 When the company decided to get the inventory items to be recorded in computer .The audit senior had a check of phsical inventory didnt match with the statement shown by the computer.Then immediately Frank pollard notified wilson about the fictitious inventory recorded in the computer. He also wrote the matter to Nashwinter to get the clarification of inventory inputed in computer doesnt match with the Physical Inventory.