List and explain the substantive tets of Cash and Inventory.
Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Chapter11: Auditing Inventory, Goods And Services, And Accounts Payable: The Acquisition And Payment Cycle
Section: Chapter Questions
Problem 31CYBK
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Question
List and explain the substantive tets of Cash and Inventory.
![Substantive test of auditing inventory
1. Analytical procedure
Make comparison between current inventory balance with inventory balance of
previous year => check the change/fluctuation of inventory => Possibly
overstate/understate inventory balance.
Compare the current inventory turnovers with the last year's ones
Compare the profit margin of current year with last year.
Make analysis of the change/fluctuation in purchase within the a year
Compare purchase transactions of current year with last year
Suppose the company is a manufacturer, we have to compare the ratio of direct
materials, direct labour and production overhead of current year with last year.
2. Test of details
Witness of inventory
+ Make the plan for witness of inventory
+ Implement the witness of inventory: observation of witness, observe
the status of inventory,
+ Do post-witness procedure
Compare beginning balance of inventory
Revaluate the value of COGS, ending inventory
Cut-off
Check the allowance for declining in inventory
Presentation and disclosure: Costing method, reason of allowance for
declining in inventory](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5b476393-1d0f-4e3b-ac62-f7050dcdfb0c%2Fafb9d0dd-e0b8-4f62-b0e8-6d23551619f4%2Fgk37ryq_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Substantive test of auditing inventory
1. Analytical procedure
Make comparison between current inventory balance with inventory balance of
previous year => check the change/fluctuation of inventory => Possibly
overstate/understate inventory balance.
Compare the current inventory turnovers with the last year's ones
Compare the profit margin of current year with last year.
Make analysis of the change/fluctuation in purchase within the a year
Compare purchase transactions of current year with last year
Suppose the company is a manufacturer, we have to compare the ratio of direct
materials, direct labour and production overhead of current year with last year.
2. Test of details
Witness of inventory
+ Make the plan for witness of inventory
+ Implement the witness of inventory: observation of witness, observe
the status of inventory,
+ Do post-witness procedure
Compare beginning balance of inventory
Revaluate the value of COGS, ending inventory
Cut-off
Check the allowance for declining in inventory
Presentation and disclosure: Costing method, reason of allowance for
declining in inventory
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