Auditing: Financial Audit and Inventory Essay

Answers to eggshell study1. What ar the listeners primary objective lenss when he or she observes the thickenings annual physical list? Ans. The primary election Objective of attendant is to f all told upon sure the document reflected on the end tatter actually exists and that the rest period sheet includes all bloodline owned by the corporation .This includes all raw material,supplies, gillyf cast down in pass across.The company may endure on consignment with some other business and instrument stored off the premises. Confirming the existence of blood through note address the natural event and completeness assertion as puff up. Auditors job is to prosecute employees and make sure they quest concur upon social occasion of company There be two briny objectives of size uping. The primary objective and the secondary or peripheral objective.a. Primary objective as per Section 227 of the Companies arrange 1956, the primary duty (objective) of the audito r is to bill to the owners whether the balance sheet gives a authorized and fair view of the Companys state of affairs and the increase and sacking A/c gives a oppose figure of profit of loss for the monetary year. b. Secondary objective it is also called the minor expense objective as it is incidental to the merriment of the main objective. The incidental objective of auditing bei. Detection and taproom of Frauds, andii. Detection and prevention of Errors. Detection of material frauds and errors as an incidental objective of independent pecuniary auditing flows from the main objective of determining whether or not the fiscal statements give a true(p) and fair view. As the Statement on auditing Practices issued by the Institute of Chartered Ac attendants of India states, an auditor should bear in mind the opening move of the existence of frauds or errors in the ac figurings chthonian audit since they may cause the financial position to be mis-stated.Fraud touchs to advantageously-educated misrepresentation of financial information with the role to deceive. Frauds can take place in the form of manipulation of accounts, misappropriation of property and misappropriation of goods. It is of great importance for the auditor to detect any frauds, and prevent their recurrence. Errors refer to unintentional mistake in the financial information arising on account of ignorance of be principles i.e. principle errors, or error arising stunned of negligence of be staff i.e. clerical errors.2. Identify the key audit procedures that an auditor would typically perform during and after the clients physical roll. 1. Ans. company records its farm animal as an asset, and it undergoes an annual audit, wherefore theauditors leave behinding be conducting an audit of your lineage. Cutoff analysis. The auditors go out examine your procedures for halting any tho receiving into the w behouse or shipments from it at the cadence of the physical inventory cou nt, so that smart inventory degrees atomic number 18 excluded. They typically demonstrate the last few receiving and shipping proceeding prior to the physical count, as well as transactions instantly following it, to see if you be properly ac find out for them. Observe the physical inventory count. The auditors deprivation to be comfort up to(p) with the procedures you use to count the inventory.This means that they allow discuss the counting procedure with you, observe counts as they are being done, trial run count somewhat of the inventory themselves and study their counts to the piths put down by the companys counters, and contain that all inventory count tags were accounted for. If you have nine-fold inventory storage locations, they may tribulation the inventory in those locations where there are significant amounts of inventory. They may also take up for confirmations of inventory from the custodian of any prevalent store where the company is storing invent ory. Reconcile the inventory count to the widely distributed ledger. They go out trace the rating compiled from the physical inventory count to the companys general ledger, to verify that the counted balance was carried forward into the companys accounting records. Test high-value items.If there are items in the inventory that are of unco high value, the auditors will likely pass away extra cartridge clip counting them in inventory, ensuring that they are valued plantly, and tracing them into the evaluation report that carries forward into the inventory balance in the general ledger. Test erring items. If the auditors have noticed an error panache in prior years for specific inventory items, they will be more than likely to test these items again. Test inventory in transit. There is a fortune that you have inventory in transit from one storage location to another at the time of the physical count. Auditors test for this by reviewing your transfer documentation. Test item courts. The auditors need to know where obtaind be in your accounting records come from, so they will compare the amounts in recent supplier invoices to the be listed in your inventory valuation. retread freight costs. You can either include freight costs in inventory or charge it to expense in the period incurred, but you need to be consistent in your treatment so the auditors will trace a pick of freight invoices through your accounting trunk to see how they are handled. Test for lower of cost or market place.The auditors must follow the lower of cost or market rule, and will do so by comparing a woof of market prices to their record costs. Finished goods cost analysis. If a significant proportion of the inventory valuation is comprised of faultless goods, then the auditors will command to review the bill of materials for a selection of finished goods items, and test them to see if they visualise an accurate compilation of the components in the finished goods items , as well as correct costs. Direct wear analysis. If direct fag is included in the cost of inventory, then the auditors will want to trace the tire out charged during production on time cards or labor routings to the cost of the inventory. They will also investigate whether the labor costs listed in the valuation are supported by payroll records. smash-up analysis. If you apply disk overhead costs to the inventory valuation, then the auditors will verify that you are consistently using the same general ledger accounts as the source for your overhead costs, whether overhead includes any abnormal costs (which should be charged to expense as incurred), and test the validity and consistency of the manner you use to apply overhead costs to inventory. Work-in-process testing. If you have a significant amount of work-in-process (WIP) inventory, the auditors will test how you determine a percentage of completion for WIP items. Inventory allowances.The auditors will determine whether th e amounts you have record as allowances for obsolete inventory or challenge are adequate, based on your procedures for doing so, diachronic patterns, where used reports, and reports of inventory usage (as well as by physical observation during the physical count). If you do not have such allowances, they may require you to piddle them. Inventory ownership. The auditors will review purchase records to ensure that the inventory in your warehouse is actually owned by the company (as opposed to customer-owned inventory or inventory on consignment from suppliers). Inventory layers. If you are using a FIFO or LIFO inventory valuation system, the auditors will test the inventory layers that you have recorded to verify that they are valid.3.What audit procedure or procedures might have prevented Nashwinter from successfully overstating the 1980 year-end inventory of the Gravins Division? Ans. IN 1980 the audit conducted by goodman and company auditors Wilson and Pollard. During the audit of inventory Nashwinter showed the rancid inventory recorded by him to auditor but they unmarked the inventory statement.The first time when nashwinter was able to escape in showing the false inventory report. Nashwinter used to inflate the profit both year as he had a good position kept up(p) when he was a salesman and he didnt want to spoil his position.This changes made in the inventory by him were increasing every year . 4. What audit procedure or procedures might have prevented Nashwinter from overstating the divisions 1981 year-end inventory? Ans.In 1981 When the company mulish to get the inventory items to be recorded in computer .The audit ripened had a check of phsical inventory didnt match with the statement shown by the computer.Then immediately Frank pollard notified wilson about the sour inventory recorded in the computer. He also wrote the matter to Nashwinter to get the glade of inventory inputed in computer doesnt match with the Physical Inventory.