You are auditing the financial statements of a cosmetics distributor that sells thousands of individual items. The distributor keeps its inventory in its distribution center and in two public warehouses. At the end of each business day, it updates its inventory file, whose records contain the following data:
Item number | Cost per item |
Item description | Date of last purchase |
Quantity-on-hand | Date of last sale |
Item location | Quantity sold during year |
You will use audit software to examine inventory data as of the date of the distributor’s physical inventory count. You will perform the following audit procedures:
1. Observe the distributor’s physical inventory count at year-end and test a sample for accuracy.
2. Compare the auditor’s test counts with the inventory records.
3. Compare the company’s physical count data with the inventory records.
4. Test the mathematical accuracy of the distributor’s final inventory valuation.
5. Test inventory pricing by obtaining item costs from buyers, vendors, or other sources.
6. Examine inventory purchase and sale transactions on or near the year-end date to verify that all transactions were recorded in the proper accounting period.
7. Ascertain the propriety of inventory items located in public warehouses.
8. Analyze inventory for evidence of possible obsolescence.
9. Analyze inventory for evidence of possible overstocking or slow-moving items. 10. Test the accuracy of individual data items listed in the distributor’s inventory master file.
REQUIRED
Describe how an audit software package and a copy of the inventory file can help you perform each auditing procedure. (AICPA Examination, adapted)
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