The observation of a client’s physical inventory is a mandatory auditing procedure when possible, for the auditors to carry out and when inventories are material.
a. Why is the observation of physical inventory a mandatory auditing procedure? Explain
b. Under what circumstances is observation of physical inventory impossible?
c. Why is the auditors’ review of the client’s control of inventory tags important during the observation of physical inventory? Explain.
Read the case. Then answer the questions based on it.
The control environment reflects the company’s attitude, awareness, and actions of management and the board concerning the importance of control and how it is used. This is very relevant to an auditor’s consideration of inventories and should include: a) commitment to competence and HR policies and practices; b) integrity and ethical values; and c) organizational structure and assignment of authority and responsibility.
Central Park Associates CPAs is conducting an audit of a U.S. manufacturing company. When reviewing the company’s inventory policy and physical inventory policy, the auditors noted the following facts: 1) Physical inventory will be conducted this year by temporary workers, at a wage cheaper for management than the “regular” workers; 2) Approvals for purchase orders with discounts are not required any longer; 3) The shop manager is no longer responsible for the physical inventory, it is now the responsibility of the CFO; 4) The physical inventory will be held four days after year end.
Consider these facts in answering the following questions.
1. What aspect of the control environment is affected by the company’s decision to hire temporary workers?
2. What aspect of the control environment is affected by the company’s decision to no longer require approvals for purchase order discounts?
3. What aspect of the control environment is affected by the company’s decision to no longer have the shop manager in charge of inventory?
4. What aspect of the control environment is affected by the company’s decision to hold the physical inventory four days after year end?
ANSWER – Assume that a continuing audit client has recorded Accounts Receivable and Equipment both in the amount of $1,000,000. In a typical audit, which account would take more time to audit?
ANSWER – List and state the purpose of all audit procedures that might reasonably be applied by the auditors to determine that all property and equipment retirements have been recorded in the accounting records.
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