Chapter 12 - Inventories and cost of goods sold. This chapter described details of the controls over inventories and cost of goods sold, the auditors' consideration of these controls, and substantive tests of inventories and cost of goods sold. | Inventories and Cost of Goods Sold Chapter 12 1 The Special Significance of Audit of Inventories The valuation of goods on hand and in process often presents complex and difficult issues Determining the quantities of inventories may require specialized techniques Inventories often represent the largest current asset of a company Misstatements of inventories directly affect cost of goods sold and, therefore, net income Management fraud has often involved the fraudulent overstatement of inventories 12- 2 4 Controls Over the Conversion Cycle Segregation of duties over purchases and custody of inventory Use of pre-numbered requisitions, purchase orders, and receiving reports Procedures for authorizing purchase transactions and verifying them for payment General ledger control of inventories and reconciliation to production records Cost accounting controls Analysis of variances from standard costs Use of perpetual records for inventories Use of appropriate procedures for taking . | Inventories and Cost of Goods Sold Chapter 12 1 The Special Significance of Audit of Inventories The valuation of goods on hand and in process often presents complex and difficult issues Determining the quantities of inventories may require specialized techniques Inventories often represent the largest current asset of a company Misstatements of inventories directly affect cost of goods sold and, therefore, net income Management fraud has often involved the fraudulent overstatement of inventories 12- 2 4 Controls Over the Conversion Cycle Segregation of duties over purchases and custody of inventory Use of pre-numbered requisitions, purchase orders, and receiving reports Procedures for authorizing purchase transactions and verifying them for payment General ledger control of inventories and reconciliation to production records Cost accounting controls Analysis of variances from standard costs Use of perpetual records for inventories Use of appropriate procedures for taking inventory Appropriate physical controls over inventories 12- 3 1 Objectives for the Audit of Inventories and Cost of Goods Sold Determine the existence of inventories Establish the completeness of inventories Establish that the client has rights to the recorded inventories Determine that the valuation of inventories and cost of goods sold is in accordance with GAAP Determine that the presentation and disclosure of inventories and cost of goods sold are appropriate 12- 5 3 12- 12- Substantive Tests for the Inventories and Cost of Goods Sold 12- 6 5 Considerations in Planning a Physical Inventory Selecting of the appropriate date Suspending production Segregating obsolete and defective goods Establishing control over the counting process Achieving proper cutoff of sales and purchases Arranging for the services of specialists 12- 7 6 12-
