Chapter 21, Problem 1RQ

To determine

Determine the relation of the acquisition and payment cycle and the inventory and warehousing cycle in the audit of the manufacturing company. And enlist the several audit procedures in the acquisition and payment cycle to support the explanation.

Explanation of Solution

The inventory and warehousing cycle has a unique relation with the acquisition and payment cycle in the audit of manufacturing company. In manufacturing firm, the raw materials enter the inventory and warehousing cycle after going through the acquisition and payment cycle.

The auditing of the inventory and warehousing cycle is divided into five parts:

1. 1. Acquisition and recording of raw material, labor and overheads.
2. 2. Transfer of costs and assets internally.
3. 3. Shipment of goods and recording of costs and revenue.
4. 4. Physical verification of inventory.
5. 5. Pricing and compiling of inventories.

The first three parts of audit function includes processing of purchase order, receiving raw materials and warehousing them which is a part of the acquisition and payment cycle. Thus in the audit of the manufacturing concern both inventory and warehousing and acquisition and payment cycle are inter-related.

The list audit procedure in the acquisition and payment cycle:

• Obtaining evidence regarding the accuracy of raw materials and all the manufacturing overhead cost.
• Verification of the inventory acquired and its acquisition cost.
• In case of perpetual inventory master file, auditor performs test of control and substantive tests of transaction procedure.
• In case the manufacturing costs are assigned to individual process of job, then these are test as part of the acquisition and payment cycle.