Question

7-31 (OBJECTIVE 7-4) The following audit procedures were performed in the audit of inventory to satisfy specific balance-related audit objectives as discussed in Chapter 6. The audit procedures assume that the auditor has obtained the inventory count sheets that list the client’s inventory. The general balance-related audit objectives from Chapter 6 are also included.

Audit Procedures

1. Select a sample of inventory items in the factory warehouse and trace each item to the inventory count sheets to determine whether it has been included and whether the quantity and description are correct.

2. Trace selected quantities from the inventory list to the physical inventory to make sure that it exists and the quantities are the same.

3. Compare the quantities on hand and unit prices on this year’s inventory count sheets with those in the preceding year as a test for large differences.

4. Read the footnote disclosures related to the company’s accounting policies for valuing inventory to make sure the information provided correctly reflects the method used to value inventory.

5. Test the extension of unit prices times quantity on the inventory list for a sample of inventory items, test foot the list, and compare the total to the general ledger.

6. Send letters directly to third parties who hold the client’s inventory, and request that they respond directly to the auditors.

7. Examine sales invoices and contracts with customers to determine whether any goods are out on consignment with customers. Similarly, examine vendors’ invoices and contracts with vendors to determine whether any goods on the inventory listing are owned by vendors.

8. Question operating personnel about the possibility of obsolete or slow-moving inventory. General Balance-Related Audit Objectives Existence Classification Realizable value Completeness Cutoff Rights and obligations Accuracy Detail tie-in Presentation

a. Identify the type of audit evidence used for each audit procedure.

b. Identify the general balance-related audit objective or objectives satisfied by each audit procedure

Answer 1

Answer to the question Part A

Meaning of Inventory :-

Intangible are tangible property held for the sale in the ordinary course of business or in the process of production for such sale, or for the consumption in the production of goods or services for sale, includind maintenance supplies and consumable stores and spare parts meant for replacement in the normal course.Inventories normally comprise raw materials including components, WIP, finished goods including by products, maintenance supplies, stores and spares parts and loose tools.

Following audit procedure performed for inventory Verification :- 1.

1. Examination of records

2. Attendance at stock taking

3. Obtaining Confirmations from third parties

4. Examination of valuation and disclosure

4. Analtytical review proceddures.

Requirements of CARO, 2016

Para 3(ii) of CARO, 2016 reuirement the auditor of a company to report on the following

a. Whether physical verfication of inventory has been conducted at reasonable intervals by the management and

b. Whether any material discepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of accounts.

Dislosure reuirements of schedule III

1. Inventory shall be classified as :

- Raw Material

- work in progress

- Finished goods

- Stock in trade

- Stores and spares

- loose tools

2. Goods in transit to be disclosed under relevant sub head

3. Mode of valuation to be stated

Answer to the quesstion B.

A. The objective of an audit of financial statement, prepare within a framework of recognised accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor to express an opinion on such financial statements.

B. The auditor opinion helps determination of the True & Fair view of the financial position and operating results of ann enterprise.

C. The users, However, Should not assume that the auditor opinion is an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise.

D. Auditor should review and assess the conclusions drawn from the audit evidence obtained and from his knowledge of business of the entity as the basis for the expression of his opinion of the financial information.