Auditing: Financial Audit and Inventory Essay

Answers to case study1. What atomic number 18 the scrutinizeors primary objectives when he or she observes the clients annual visible bloodline? Ans. The Primary Objective of auditor is to acquit sure the strain reflected on the chemical equilibrium sheet actu al iodiney exists and that the balance sheet includes all schedule possess by the company .This includes all raw material,supplies, line of descent in transit.The company may use up on consignment with another business concern and inscription stored off the premises. Confirming the existence of stock-taking through reflection address the occurrence and completeness assertion as well. Auditors job is to watch employees and make sure they hold fasting agreed upon procedure of company there ar two main objectives of auditing. The primary objective and the secondary or concomitant objective.a. Primary objective as per Section 227 of the Companies Act 1956, the primary barter (objective) of the auditor is to rep ort to the owners whether the balance sheet gives a true and sporting view of the Companys state of affairs and the profit and sack A/c gives a correct figure of profit of going for the financial year. b. Secondary objective it is also called the attendant objective as it is incidental to the satisfaction of the main objective. The incidental objective of auditing arei. chthoniccover work and prevention of toshs, andii. Detection and prevention of Errors. Detection of material frauds and errors as an incidental objective of independent financial auditing flows from the main objective of determining whether or not the financial statements give a true and fair view. As the Statement on auditing Practices issued by the Institute of Chartered Ac playants of India states, an auditor should require in mind the possibility of the existence of frauds or errors in the bets under audit since they may cause the financial position to be mis-stated.Fraud denotes to intentional misrepr esentation of financial information with the intention to deceive. Frauds can engross place in the form of manipulation of accounts, misappropriation of cash 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 business relationship principles i.e. principle errors, or error arising out of negligence of accounting staff i.e. Clerical errors.2. Identify the key audit procedures that an auditor would typically perform during and after the clients physiologic inventory. 1. Ans. company records its inventory as an asset, and it undergoes an annual audit, then theauditors for work over be conducting an audit of your inventory. cutoff analysis. The auditors will examine your procedures for halting any further receiving into the warehouse or shipments from it at the while of the personal inventory count, so tha t extraneous inventory items are excluded. They typically stress the last few receiving and shipping transactions prior to the physical count, as well as transactions immediately following it, to go steady if you are properly accounting for them. Observe the physical inventory count. The auditors want to be comfortable with the procedures you use to count the inventory.This pith that they will discuss the counting procedure with you, observe counts as they are being done, test count some of the inventory themselves and come their counts to the amounts enter by the companys counters, and verify that all inventory count tags were accounted for. If you assume multiple inventory storage locations, they may test the inventory in those locations where there are significant amounts of inventory. They may also entreat for confirmations of inventory from the custodian of any public warehouse where the company is storing inventory. agree the inventory count to the command ledger. T hey will trace the valuation 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 unusually high value, the auditors will liable(predicate) spend extra time counting them in inventory, ensuring that they are value correctly, and tracing them into the valuation report that carries forward into the inventory balance in the general ledger. Test error-prone items. If the auditors claim noticed an error trim down in prior years for specific inventory items, they will be more likely to test these items again. Test inventory in transit. There is a risk that you pitch inventory in transit from one storage location to another at the time of the physical count. Auditors test for this by rounding your transfer documentation. Test item be. The auditors exact to know where purchased costs in your accounti ng records come from, so they will compare the amounts in recent supplier invoices to the costs listed in your inventory valuation. Review 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 endurance of freight invoices through your accounting system to see how they are handled. Test for lower of cost or market.The auditors must follow the lower of cost or market rule, and will do so by comparing a selection of market prices to their put down costs. faultless goods cost analysis. If a significant proportion of the inventory valuation is comprised of ideal goods, then the auditors will want to review the bill of materials for a selection of finished goods items, and test them to see if they show an accurate compilation of the components in the finished goods items, as well as correct costs. Direct working class analysis. If direct labor is included in the cost of inventory, then the auditors will want to trace the labor charged during production on time cards or labor routings to the cost of the inventory. They will also canvass whether the labor costs listed in the valuation are supported by payroll records.Overhead analysis. If you apply 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 deviant costs (which should be charged to expense as incurred), and test the stiffness and consistency of the method 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 the amounts you have preserve as allowances for obsolete inventory or scrap are ade quate, establish on your procedures for doing so, historical patterns, where utilise 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 create 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 preserve to verify that they are valid.3.What audit procedure or procedures expertness 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 false inventory recorded by him to auditor but they overlooked the inventory statement.The first time when nashwinter was able to escape in showing the false inventory report. Nashwinter used to inflate the profit every year as he had a good position maintained when he was a salesman and he didnt want to spoil his position.This changes made in the inventory by him were change magnitude 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 decided 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 fictitious inventory recorded in the computer. He also wrote the matter to Nashwinter to get the clarification of inventory inputed in computer doesnt match with the Physical Inventory.