TESTING THE INVENTORY PROCUREMENT SYSTEM
CASE 6
Recall:
Audit Process
Obtaining
evidence
about
Internal
Control
Operating
Effectiveness
Client
Acceptance
and
Continuance
Decisions
Performing
Risk
Assessment
Obtaining
Substantive
evidence
about
Accounts,
Disclosures
and
Assertions
Completing
the Audit
and Making
Reporting
Decisions
Lakesides Inventory
Procurement System
Generated
by DATA Processing
Systems of Richmond, Virginia
Understand
1. Documents
2. Process
flow
3. Internal
controls
Requisitio
n
Cash
disburseme
nt
Approval
of
payment/
verifying
agreeme
nt
Purchasi
ng
Receipt of,
and
accountin
g of
goods
Documents
Purchase
requisitions - Request for
purchase of goods or services by an
authorized department or function
Vendor
Invoices - the bill that is received by
the purchaser of goods or services from an
outside supplier.
Receiving
Report - an internal document
used to record what materials and inventory
Requisition
Cash
disbursement
Approval of
payment/
verifying
agreement
Purchasing
Receipt of,
and
accounting
of goods
Threats
Event
Affected Accounts
Possible
Manipulations
Return inventory to
supplier
INHERENT RISK
Inventory,
Inventory Accounts
is a complex
Payable
accounting and
auditing area.
It is usually material,
complex,
and subject
Accounts
Payable,
to manipulation
Inventory
Inventory is sold
COGS, Inventory
Record at too law an
amount
Not Record
Inventory becomes
obsolete
Loss on write-down of
inventory, Inventory
Not write-of
Periodic count of
inventory quantities
Inventory shrinkage,
Inventory
Double counting
Purchase inventory
Under-record
inventory
Record in a later
period
Not record
Overstate returns
Record returns in an
earlier period
Other manipulations
(Inventory)
Empty
boxes or hollow squares in
stacked goods
Mislabelled boxes containing scrap,
obsolete items, or lower-value
materials
Consigned inventory, inventory that
is rented, or traded-in items for
which credits have not been issued
Inventory diluted so it is less valuable
Controls (For Purchase)
Approval of a contract with suppliers
Restricted access to the inventory
Monitoring of inventory and purchase levels by
management
To avoid the risk of purchasing agents entering into
kickback arrangements with vendors, controls include:
Requiring competitive bids for large purchases
Rotating purchase agents across product lines
Mandating vacations for employees can be a useful control in
trying to prevent and detect fraud
Controls for Receipt of, and
accounting for, goods and services
Receiving department should make sure that:
Only authorized goods are received
Goods meet order specifications
Accurate count of the goods received is taken
Accountability is established to assure that all
receipts are recorded
THREE-WAY MATCH: CONTROL
FOR PAYMENT APPROVAL
Purchase Order
Receiving Information/ report
Vendor invoice
Process flow chart
Lakesides
Procurement System
Internal Control
Segregation
of Duties
Authorization Functions
Approval of Purchase Requisitions by Rogers
Assigning / Appointing higher officials involve in the
process( Inventory, Treasurer, Controller)
Recordkeeping Functions:
Controller
Custody of Asset Functions:
Inventory Department
PSA 200
Overall Objectives of the Independent
Auditor and the Conduct of an Audit
in Accordance with PSA
Owing to the inherent limitations of an audit,
there is an unavoidable risk that some material
misstatements will not be detected.
The auditor should design audit procedures to
obtain reasonable assurance that
misstatements arising from fraud and error that
are material to the FS taken as a whole are
detected.
Audit programs
Audit program are lists of audit procedures to be
performed by audit staf in order to obtain sufficient
appropriate evidence.
The individual procedures are determined after obtaining
an understanding of the accounting system and
determining the audit strategy to be followed.
The audit program reflect the understanding of the system
and will incorporate a mix of compliance (test of control)
and substantive tests that the auditor intend to perform.
The audit program is an important part of the auditors
working papers and records a significant part of the audit
evidence required to justify the audit opinion.
Purpose of Audit
Programs
A set of instructions to the audit team
Assist with planning and performance of the audit.
A means to control and record the proper execution
of the audit work and also to review the audit work.
A record of the audit procedures to be adopted, the
audit objectives, timing, sample size and basis of
selection of each criteria.
Audit evidence to support the auditor opinion.
Vouching
See pg.
781
(Cabrera
)
Auditors
Concern
Over-statement
and
Understatement
of Accounts
Tracing
Designing Audit
Procedures
Audit terminology for procedure
Client for documents/ roles/
processes
3. Be specific in your description
1.
2.
MOST COMMONLY USED AUDIT
PROCEDURES
AUDIT PROCEDURE
Definition
1. Analyze
To identify and classify items for
further study
2. Compare
To observe similarities and diferences
between related items
3. Confirm
To communicate with outside parties
to authenticate internal evidence
4. Count
To enumerate a characteristic
5. Examine
To review critically
6. Extend
To multiply
7. Foot
To add a column
8. Inspect
To scrutinize or critically examine a
document
MOST COMMONLY USED AUDIT
PROCEDURES
AUDIT PROCEDURE
Definition
9. Interrelate
To show relationship
10. Observe
To watch or test a client
11. Reconcile
To establish agreement between
separate sources of information
12. Test
To sample
13. Trace
To follow a transaction through the
steps of the system
14. Verify
To prove accuracy of numbers or
existence of amount
15. Vouch
To prove accuracy of accounting
entries by tracing to supporting
documents
Designing Audit
Procedures
Audit terminology for procedure
Client for documents/ roles/
processes
3. Be specific in your description
(see Exhibit 6-1)
1.
2.
Audit Documentation
Auditor
need to record (document)
all relevant audit matters from start
till end of audit
Keep PROPER DOCUMENTATION of
ALL MATTERS pertaining to audit and
justification of audit reports
Proper documentation
Working Papers
(WP)
Support audit
conclusion
Support audit
conclusion
Justify audit report
Either: documents,
information workings
obtained from client.
Past Fs, industry data, Trial
balance, loan agreement of
client, etc.
Or: information produced by
auditors
schedules, workings, audit
programs, planning
checklist
Wp: Must be retained by CA for 5 years
Must be kept confidential
Can be hard or soft (electronic media)
Produced by CA must meet standard quality of
good WP
Can be filed in either
-Permanent file
-Current file
Can be used in court in cases of negligence
Justify that a professional and efective audit
carried out
Record all info:
-Client acceptance
-planning
-Audit risks
-Audit programs
-Trial balance
-Audit schedules.......
Content
Each
audit working paper must be headed with the following
information:
The name of the client.
The period covered by the audit.
The subject matter.
The file reference.
The initials (signature) of the member of staf who prepared the
working paper, and the date on which it was prepared.
In
the case of audit papers prepared by client staf, the date
the working papers were received, and the initials of the
audit team member who carried out the audit work.
The initials of the member of staf who reviewed the working
papers and the date which the review was carried out.
Some characteristics of a
good working paper
State a clear audit objective.
State the name of client, subject matter, year/period end.
State the full extent of the test or audit objective.
Reference of linked documents.
How sample size were determined.
Clearly and objectively state the results of the test.
The conclusions reached should be consistent with result of
the test.
Main reference.
Signed and dated by preparer.
Signed and date by reviewer.
objective is
vague
Year is
missing
no
signature
Page
reference
is unclear
number for testing is
unclear
results of the test is
unclear
conclusion is not
consistent with th
results
Conclusion
Working papers provide evidence that an
effective, efficient, effective and economic
audit has been carried out. They should
therefore be prepared with care and skill.
They should be sufficiently detailed and
complete so that an auditor with no previous
experience of that audit can understand the
working papers in terms of the work
completed, the conclusions reached and the
reasoning behind these conclusions.
Heyman (Audit Procedures)
Choose
a date at random and, from
the receiving report file located in
the Inventory Department, select the
next 12 receiving reports.
Review
these documents for
completeness and authorization.
(see Receiving Reports)
Verify that each acquired item was
properly recorded in the inventory
purchases journal.
RCVRPT
vs IPJ
Verify that each acquired item was
properly recorded in the inventory
purchases journal.
RCVRPT
vs IPJ
Verify that each acquired item was
properly recorded in the inventory
purchases journal.
RCVRPT
vs IPJ
For each of these receiving reports, locate the corresponding
vendor invoice and purchase requisition filed in the
Treasurers Office. Verify the agreement of these three
documents as to quantity of goods and description of
acquired merchandise.
RECRPT
vs VI vs PR
For each of these receiving reports, locate the corresponding
vendor invoice and purchase requisition filed in the
Treasurers Office. Verify the agreement of these three
documents as to quantity of goods and description of
acquired merchandise.
RECRPT
vs VI vs PR
Verify that
the
requisitions
have each
been
approved
by the
proper
company
Note the clients
indication that prices
have been checked,
extended, and footed
Reconcile the prices on
the invoice to the master
price list found in the
Controllers Division
Locate the cancelled check for each invoice, matching the dollar amounts
and recomputing any appropriate discount.
Working Paper
-End of
ReportDONT STOP TILL YOU
GET TO THE TOP.
WHEN YOU GET TO
THE TOP, DONT STOP.
