FS Audit. Chapter 3
FS Audit. Chapter 3
FS Audit. Chapter 3
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Learning objectives
After studying this chapter, students can:
- Understand the characteristics of inventory and cost of goods sold;
- Determine the objectives of auditing for inventory items and cost of
goods sold;
- Risk analysis and design of internal controls over inventory and cost of
goods sold;
- Carry out procedures for auditing inventory and cost of goods sold
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AUDIT OF INVENTORY AND COST OF GOODS SOLD
3.1
Contents and characteristics of items
3.3
Audit procedures
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Learning Materials
•Textbook:
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Preparatory questions
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AUDIT OF INVENTORY AND COST OF GOODS SOLD
3.1
Contents and characteristics of items
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3.1.1. Contents
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3.1.1. Contents
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3.1.1. Contents
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3.1.2. Item characteristics
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3.1.1. Contents
Inventory often accounts for a large proportion of the total short-term assets;
Inventory is an item that is sensitive to fraud and has a high risk of loss especially if
inventory is of high value and easy to move.
Can be stored in many places making control and management difficult.
The valuation of Inventory contains many subjective factors that lead to the risk that
Inventory can be used to create fraud on financial statements;
Determination of the amount of Inventory usually requires specialized techniques;
Errors in Inventory data directly affect COGS and the net profit of the enterprise;
• Indicators related to Inventory are often widely used by many people inside and
outside enterprises to make decisions.
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3.1.3. Audit objectives
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AUDIT OF INVENTORY AND COST OF GOODS SOLD
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3.2.1. Control objectives
Physical control: The use of separate warehouses and areas to restrict access
to warehouses of raw materials, goods, finished products, unfinished
products is a major and effective control procedure to protect assets.
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3.2.1. Control activities
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AUDIT OF INVENTORY AND COST OF GOODS SOLD
3.3
Audit procedures
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3.3.1. Risk assessment
Control procedure:
High Control R Perform tests of details
Weakness
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3.3.1. Risk assessment
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3.3.1. Risk assessment
- The value of the inventory is different from the value on the invoice
and the costs incurred;
- Not made a summary table of import – export – inventory monthly
and quarterly; a summary table of the quantity of each type of raw materials
in stock to compare with the data on the accounting book;
- Exporting and importing warehouses but not actually exporting or
importing but recording short data;
- The method of calculating the export price, determining the value
of unfinished products is not suitable or inconsistent;
- Allocation of tools and instruments according to inappropriate and
inconsistent standards; there is no spreadsheet allocating instruments for
the period;
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3.3.1. Risk assessment
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3.3.1. Risk assessment
- Reassess
- Understand - Preliminary - Design and
control risks
the internal assessment implement
and perform
control of control tests of
substantive
system; risks; control;
tests.
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INTERNAL CONTROL EVALUATION – INVENTORY
Answer Note
Question
Y N Weakness
Important Not
significant
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INTERNAL CONTROL EVALUATION – INVENTORY
Answer Note
Question
Y N Weakness
Important Not
significant
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3.3.2. Tests of control
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3.3.2. Tests of control
Checking the detailed ledger system: In case the entity applies the
perpetual inventory method, it is necessary to check the inventory
detail ledger system to ensure that the recording is accurate and
complete on these ledgers.
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3.3.3. Substantive tests
Reassess control risk and redesign substantive tests:
identify weaknesses and strengths of the internal control
system and adjust the audit plan accordingly.
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3.3.3. Substantive tests
General procedures
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3.3.3. Substantive tests
General procedures
- Compare the ratio of inventory with total short-term assets this year
compared to the previous year, and assess the reasonableness of the
fluctuations.
- Compare the cost structure (raw materials, labor, general production)
this year with the previous year, and assess the rationality of
fluctuations.
- …
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3.3.3. Substantive tests
Tests of details
Physical observation of the inventory stocktaking at the end of the
accounting period
Identify all warehouses (of enterprises or rented), consignments ..., and
value warehouses and assess the risks of each warehouse to
determine where auditors will participate in witnessing inventory.
Participate in the inventory stocktake under the Inventory Stocktake
Program.
For rented warehouses: Send a confirmation letter asking the
warehouse holder to confirm the number of goods sent (if
material).
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3.3.3. Substantive tests
Tests of details
In case of witnessing inventory stocktake before or after the end of the
accounting period:
Selecting samples to check warehouse entry/export operations
arising after or before the time of inventory, performing
down/reverse reconciliation to the actual inventory balance on the
accounting book/warehouse card at the closing date by adjusting
the corresponding import/exit operations. Find out the cause of the
discrepancy (if any).
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3.3.3. Substantive tests
Tests of details
Check the purchasing transactions in the period:
Select samples of warehousing transactions in the period and
compare the transactions recorded on the Ledger with related
documents.
Check and calculate export prices for raw materials, tools, finished
products, goods, and goods sent for sale:
Check the sample selection to ensure that the enterprise correctly
and consistently implements the selected export price calculation method.
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3.3.3. Substantive tests
Tests of details
Check the balance of goods sent for sale, goods being held by 3rd parties,
purchases are on the way:
Compare or send a confirmation letter to the inventory receiving
party (if necessary) or check shipping documents, contracts, or delivery
minutes after the end of the accounting period to ensure the
reasonableness of the recording.
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QUESTIONS AND EXERCISES
Are the statements below True or False? Explain?
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QUESTIONS AND EXERCISES
You are performing an audit for Hanna Company, which is a unit
specializing in the production of children's toys. This is your company's
multi-year audit client but your first-time client in charge.
The company currently uses the inventory accounting system according to
the perpetual inventory method. In the process of researching, you found in
the audit records of previous years recorded a lot of adjusted entries related
to inventory, especially errors in the division of purchasing operations.
Required:
1. Indicate why year separations are important for inventory audits.
2. When CC uses a perpetual inventory system, indicate the audit
procedures the auditor uses to ensure inventory figures are truthful and
reasonable.
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Requirements
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