To Improve Your Grade We Always Ready To Help You

  • 60,000+ Completed Assignments

  • 3000+ PhD Experts

  • 100+ Subjects

Auditing and Assurance Services for Systematic Approach

Question:

Discuss about the Auditing and Assurance Services for Systematic Approach.

Answer:

Introduction:

Best Living Supplies Limited is in the business of selling variety of household products to retail outlets. The inventory is purchased directly from the manufacturer and located in a single warehouse from where it is transported to the required locations. Best Living Supplies Ltd has adopted computerized perpetual inventory records and uses First in First Out inventory method for measurement of inventory. Measurement of inventory is vital for the progress of the organization. The valuation that is use for the measurement is important as it leads to better understating of the system.

Discussion

For the year ending 30 June 2016, the auditor is present to observe the tagging and counting of the stock supplies at Best Living Supplies and appropriate test counts are made. The test counts recorded on a computer file. The auditor has been provided two computer files – the first one containing details of the perpetual inventory records and the second one containing the details of the physical inventory count done on 30 June 2016. The perpetual inventory file contains details of opening balances of all items, quantity purchased, quantity sold, and adjustments made. The physical inventory file contains details such as tag number, item number, item description and quantity counted. The verification of the physical existence of the inventory carried out every year, the appropriateness, and the auditors test reasonableness of this verification (Accounting tools, 2016). The reasonableness of the verification is important since, it lays the foundation for the business.

Substantive Audit Procedures

The substantive audit procedures before the physical counting should be to consider the risk of material misstatements because of the review of the prior year findings and results. The auditor has to test the adequacy of the client count procedures dependent upon the location and complexities of the inventory involved (Kaplan, 2011). The technique of physical counting helps in tracing the forgery and enables to establish a strong policy. It not only helps in tracing forgery but also provides a strong example of the role played by the auditors (Gilbert et. al, 2005).

The sample sizes have to be determined with the selection of the specific inventory items in the counting process.

During the physical verification, test counts such as floor to sheet count have to be performed to ensure the completeness and sheet to floor count has to be performed to prove the existence of the inventory (Parker et. al, 2011). The client’s verification procedures have to be observed to determine the extent of reliance to be placed on the same (Gilbert et. al, 2005). The condition of the damaged and obsolete goods has to be verified and appropriately written off wherever required. Such goods provide no use to the business and hence, it is essential that such is discarded when the audit is done.

Goods in transit and consignment inventory have to be included and supplier consignment stocks to be excluded (Kaplan, 2011). After the inventory verification is completed, the schedules and balances in general ledgers have to be crosschecked and reconciled. Management representation needs approval to prove the valuation, existence, and completeness of the inventory (Johnstone et. al, 2016).

If the subsequent events that have taken place after the closure of the balance sheet date verification are likely to have a significant impact on the valuation of the inventory, then appropriate disclosures should be made as considered reasonable.  The variations in the counts or valuation have to be discussed with the Board of Directors and the response for the same has to be obtained in writing (Gay & Simnet, 2015).

Though there are many of such small areas of verification, the broad areas have been classified under the head assertions and discussed below.

The various areas of assertion, the justification of these assertions and the explanation of the substantive audit procedures are tabulated below:

Sl No.

Assertion

Justification of Assertion

Explanation of Appropriate Substantive Procedure

1

Valuation & Allocation

As Best Supplies Ltd deals with a variety of items, there could be high value items or low value items and these items could be grouped together for appropriate valuation and allocation ((Gay & Simnet, 2015).

The substantive procedures should be to obtain appropriate audit evidence to prove the application of lower of cost or market value concept. Best Supplies Ltd has to obtain and provide market value of the inventory.

Based on the figures provided by Best Supplies Ltd, the auditor has to recalculate the value of inventory under the full absorption costing method. This would serve as an additional verification ((Gay & Simnet, 2015).

The next step would be vouching and testing the inventory pricing and testing the quality of the goods available in the warehouse, whether appropriate care taken by the management to maintain the inventory in good condition (Parker et. al, 2011).

The verification of the propriety of the inventory flow required to be done by the auditor.

Where required, the services of an expert can be used to corroborate the valuation of the inventory.

2

Existence & Occurrence

To ensure that the quantities disclosed by the computer systems are actually available in the warehouse.

In cases where the client has informed goods lost due to theft, fire or any such disaster, the auditor to prove the occurrence of the said calamities should carry out the substantive audit procedures Gay & Simnet, 2015).

The auditor has to be present and observe the physical inventory counting process done by the client.

The auditor has to obtain additional written evidence for the inventory held by other parties on consignment or held in other warehouses or any locations. 

3

Completeness

In a computerized environment, it becomes necessary to verify the formulas and mathematical accuracy as the whole inventory valuation process is dependent on it (Gay & Simnet, 2015).

The auditor has to perform cut off tests and procedures for purchases, sales, purchases returns and sales returns.

The auditor has to perform tests for omitted transactions and invalid transactions in respect of tagged inventory (Gay & Simnet, 2015).

The inventory listings have to be verified for mathematical and clerical accuracy. It is even suggested that the balances shown by the system is checked by alternate verification methods (Hoffelder, 2012)

The physical inventory counts displayed by the second file have to be reconciled with the perpetual records in the first file.

The general ledger totals also have to be verified and reconciled with the physical counts.

4

Rights & Obligations

It is not just sufficient that the inventory is physically located and available in the warehouse. The ownership rights of Best Supplies Ltd over the inventory have to be proved (Gay & Simnet, 2015).

The consignment agreements, collateral agreements and the major purchases and sales agreements, purchase orders received and sent verified by the auditors (Gay & Simnet, 2015).

These commitment agreements help in determining the ownership of the inventory.

The invoices also have to be examined as an evidence of ownership.

The minutes of Board Meetings have to be carefully read and studied to determine terms and conditions of the collaterals or consignments so on and so forth (Johnstone et. al, 2016).

Apart from the assertions and substantive procedures discussed above, there are a few other relevant areas for the auditor to focus on which are as below:

The auditors would use ABC Costing technique to find out the high value items and spend extra time and efforts in ensuring the correct valuations of the same. Where required, a certification from an external analyst or expert is obtaining (Johnstone et. al, 2016).

If auditors have noticed errors in a few specific items during the prior years, then it is likely that the auditors are prone to test these items in more detail. The freight costs can be either added to the cost of the inventory or expensed off to the Profit & Loss Account. There should be consistency in the treatment of the same (Hoffelder, 2012). The auditor will also verify whether the freight costs have been appropriately dealt with in the valuation of the inventory.

As Best Supplies Ltd is not a manufacturing concern, valuation of Work-in-progress, labor and overheads analysis is not required in this case.

In cases where Best Supplies Ltd is providing Inventory Allowances, the audit procedures should be to test the amounts recorded for obsolete inventory or scrap is adequate or not and the procedures adopted for the measurement of the same. The historical pattern and inventory usage reports to be verified to establish the reasonableness of the inventory allowance. This leads to a better course of activity and

Activities and Procedures

Substantive procedures are procedures performed by the auditor to gather evidence about the genuineness of the existing inventory. The satisfactory performance of these procedures leads to forming of audit opinion. Though the nature, extent, and timing of the substantive procedures is a matter of professional judgment, strong internal controls operating in the organization is definitely an added advantage (Messier & Emby, 2005). Based on the internal controls, the auditor might decide to increase or decrease or even omit a few of the audit procedures.

Recommendations

Audit procedures, maintenance of inventory records and verification of the physical inventory are relatively simpler for Best Supplies Ltd as it is not a manufacturing concern. From the details provided, it can be understood that the physical verification is currently being carried out only once in a year at the balance sheet date (Roach, 2010). However, as the size and volume of the business increases, the verification procedures also have to be expanded accordingly. Hence, recommended that the inventory verification be carried out by the management itself but with the presence of the auditor at least four times in a year or quarterly (Gay & Simnet, 2015). The auditor can also carry out surprise checks of inventory once or twice in a year to ensure if the systems, records, and physical stock updated for all details. The surprise checks both by the management and the auditor helps a lot in the discovery of manipulations and frauds that might be taking place (IFAC, 2015).

Conclusion

The proportion of inventory in the balance sheet will determine the size of audit procedures. Though the management has set proper internal controls, there could be ways by which ether the employees or other parties can find loopholes in the same and use it to their advantage (Cappelleto, 2010). As it is impossible for an auditor to carry out 100% verification of the inventory on the balance sheet date. These analytical and substantive procedures serve as a yardstick in determining the existence, valuation, and completeness of the entire inventory. For this reason, the verification has to be carried out with due care and in light of the volume of the inventory. If inventory is out on consignment or in transit, should be appropriately verified by the supporting documents, and disclose in the financial statements as Goods in Transit (Cappelleto, 2010). The terms of the major purchase commitments to be verified to get an idea about the timely movement of the inventory and find out any variations in the same. The closing inventory disclosed in the balance sheet should be the same as the closing inventory indicated in the cost of goods sold section. Therefore, the above reports signify that the inventory valuation plays an important role and the auditors need to provide a balanced support to the organization. The inventory projection and allowance leads to a better course of activity.

References

Accounting tools 2016, Inventory Audit Procedures, viewed 19 September 2016, http://www.accountingtools.com/inventory-audit-procedures

Baldwin, S 2010, Doing a content audit or inventory, Pearson Press.

Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ, Melbourne

Gilbert, W. Joseph J & Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol.3, pp. 66-92

Gay, G & Simnet, R 2015, Auditing and Assurance Services, McGraw Hill

Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press

Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press.

IFAC 2015, Strengthening organizations, Advancing Economies, viewed 23 March 2016, https://www.ifac.org/auditing-assurance/clarity-center/clarified-standards.

Johnstone, K.M, Gramling, A.A & Rittenberg, L.E   2016, A risk-based approach to conducting a quality audit, viewed 19 September 2016, http://www.mccc.edu/~horowitk/documents/Johnstone_9e_Auditing_Chapter11_PPtFINAL.pdf

Kaplan, R.S. 2011, Accounting scholarship that advances professional knowledge and practice, The Accounting Review, vol. 86, no. 2, pp.  367–383.

Messier, W & Emby, C 2005, Auditing & Assurance Services: A systematic approach, McGraw-Hill.

Parker, L, Guthrie, J & Linacre, S 2011, The relationship between academic accounting research and professional practice, Accounting, Auditing & Accountability Journal, vol. 24, no. 1, pp. 5-14.

Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson.

One of the finest academic solution providers in the UK, MyAssignmentHelp.co.uk, has introduced custom homework writing services that are specially designed to serve the specific requirements of various students. The experts at MyAssignmentHelp.co.uk are capable of handling all kinds of homework and provide the necessary homework help, no matter how complicated the topic is. We also guarantee on-time delivery of the order.

Place Your Order

Get help to our Experts
- +

Why Student Prefer Us ?

Top quality papers

We do not compromise when it comes to maintaining high quality that our customers expect from us. Our quality assurance team keeps an eye on this matter.

100% affordable

We are the only company in UK which offers qualitative and custom assignment writing services at low prices. Our charges will not burn your pocket.

Timely delivery

We never delay to deliver the assignments. We are very particular about this. We assure that you will receive your paper on the promised date.

Round the clock support

We assure 24/7 live support. Our customer care executives remain always online. You can call us anytime. We will resolve your issues as early as possible.

Privacy guaranteed

We assure 100% confidentiality of all your personal details. We will not share your information. You can visit our privacy policy page for more details.

Upload your Assignment and improve Your Grade

Order Now