06 Jun WHAT EVIDENCE SHOULD SMITH EXPECT TO
1). Sammy Smith is the partner in charge of the audit of Blue Distributing Corporation, a wholesaler that owns one warehouse containing 80 percent of its inventory. Smith is reviewing the audit documentation that was prepared to support the firm’s opinion on Blue’s financial statements and wants to be certain that essential audit procedures are well documented. Referencing this week’s lecture, respond to the following:
- What evidence should Smith expect to find indicating that the observation of the client’s physical count of inventory was well planned and that assistants were properly supervised?
- What substantive procedures should Smith find in the audit documentation of management’s balance assertions about existence and completeness of inventory quantities at the end of the year? Refer to Appendix 9B for the audit plan’s procedures.
WEEK LECTURE:
We are already into Week 5 and will be studying Chapter 9 Production Cycle and Chapter 10 Finance and Investment Cycle. Chapter 9 is focused on inventory, which, much like last week with accounts receivable and payroll, is a key area that is ripe with fraud. Companies have tried to overstate inventory in an effort to make their assets higher and their balance sheet appear stronger. Our first discussion question this week will require us to examine inventory controls and how an auditor properly tests inventory.
The Public Company Accounting Oversight Board (PCAOB) website lists AU Section 331 which is the official standard for testing inventory,http://pcaobus.org/Standards/Auditing/Pages/AU331.aspx. There are many parts to review for inventory, starting with the procurement or purchase of the inventory. Then, there will be storage and, finally, sales and returns. There are some key internal controls that should be in place and our textbook highlights a few of these. Here is a more complete detailed list of basic controls, http://www.accountingtools.com/inventory-internal-controls. Once an auditor investigates and gains an understanding of the process and controls, the auditor then needs to perform substantive tests to validate the controls. Appendix 9B give examples of audit programs and testing that an auditor would consider. Additionally, here are some more detailed guidelines: http://accounting-financial-tax.com/2011/08/how-to-conduct-inventory-audit-guidelines/.
Chapter 10 Finance and Investment Cycle includes a number of topics including fair market value, lease accounting, related party transactions, and impairments. One of the biggest controversial areas in accounting currently is off balance sheet accounting. Examples of off balance sheet financing include joint ventures, research and development partnerships, and operating leases (rather than purchases of capital equipment). Operating leases are by far the most common among these. The asset itself is kept on the lessor’s balance s
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