Internal Control and Audit Software - Inventory Essay Example
A - Internal Control and Audit Software introduction. )Identify any weaknesses in the internal controls described. Discuss the implications of each weakness you identify. – The computer automatically generates the purchase of the raw material when raw material falls below 70% of previous month’s usage. Someone one should physically double check the raw materials quantity before ordering as there could be some human error involved in putting the data in. Also the assumption here is that last month’s sale would be similar to the current month other factors should be involved when ordering. Store staff has the password access for the raw materials ordered as well as finished goods. There should be a segregation of departments/authority for ordered and receiving finished good as this could lead to fraudulent scenarios. -Production Controller can make changes to the master file for both the raw materials inventory and finished goods inventory. There should be a segregation of duties as the production controller can to fraudulent activity. B. )Assume your computer information system audit division is to perform testings of controls for the inventory systems described.
Identify the key controls that you would recommend for testing. Substantive tests are the procedures by which auditors gather this evidential matter . the nature, extent, and timing of substantive tests is a matter of professional judgment, effective client internal control is a positive influence. Accordingly, the auditor may decide to decrease the amount of substantive testing, omit certain procedures, and/or schedule interim testing. Test for these Control are designed to provide evidence about the operating effectiveness of various aspect of internal control.
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More Inventory Essay Topics.
Tests of control provide evidence to support control risk assessment below the maximum. The existence of inventory, the nature of auditor’s evidence would include significant test of controls (testing of effectiveness of the client’s perpetual inventory system) as well as some limited substantive test (direct observation of inventory). For assertion 2, the valuation of inventory, auditor would perform few test of controls because controls are not expected to be effective.
However, the auditor would plan to obtain significant evidence by testing the pricing of inventory to underlying vendor’s invoices (substantive test of balances). In addition, the auditor would obtain evidence about sales price after years-end to support a conclusion about the lower of cost of market objective (substantive test of an accounting estimate). I would recommend the Data and procedural controls to be checked as it would review the frames work for controlling daily computer operations.
Also check the access controls to make sure that there aren’t any unauthorised changes made within the system. I would also review the organisational controls to make sure that inventories are looked after by the authorised personals. C. ) Assume the use of generalised audit software, list procedures/reports you would ask the computer information system auditors to run to help you test valuation of inventory. Generalized Audit Software enables Auditors to have direct access to computerized records and to deal effectively with large quantities of data.
In order to valuate inventory the following procedure is used initially determine whether the valuation method is appropriate for the client. Inquire of production and warehouse personnel about the existence of the obsolete inventory. Note potentially obsolete inventory while observing the physical inventory counts. Trace the potentially obsolete items. Then test inventory cost by taking a sample of recorded inventory and trace to source documents including tracing raw material purchases to vendor invoices, testing standard costs as built up through the standard cost system.
Test for the possibility of obsolete inventory that should be written down to market value; Review trade journals for changes in product technology, follow up potentially obsolete item noted during observation of teh client’s physical inventory counts, use generalized audit software to read the inventory file and age the inventory items and compute inventory turnover, investigate product with usually low turnover or item that have not been used or sold for an extended period of time.
Then inquire if the client about sales adjustments that have been offer to sell products, verify sales price by reviewing recent invoice t o determine whether the sakes price is the same as included n the computer file. Use generalized audit software to compute net realizable value for inventory items and prepare an inventory printout for all items where net realizable value is less than costs. Then analyse sales by product line, noting any significant decreases in product line sales.
Review purchases commitments for potential loss exposure. Detemine whether contingent losses are properly disclosed or recorded. Later use audit software to test extensions and prepare a printout of the differences and to foot the inventory compilation to trace the total to the trial balance. The following would be asked to ask the valuation of inventory: * Total Sale * Starting inventory * Purchases * Cost of goods sold * Accounts Receivable * Accounts Payable * Ending inventories