Week 6 discussion and participation - Essay Example

The auditor must accurately access whether the inventory counting process the company is using is adequate. The most important and valuable account in the balance sheets of companies is the cash account. A company can have millions of dollars in assets, but if the firm runs out of cash they run a high risk of going out of business. An important aspect of the cash in the bank and transaction cycles is to have clear separation of duties. Tests of controls and substantive tests of transactions are required to have an effective audit of the cash balance of a company.

Cash is an account that is included in several cycles with the exception of inventory and warehousing. Cash is also one of the last cycles audited because the evidence accumulated of cash balances is dependent on the other cycles. Some of the cycles that are correlated to the activities of the cash cycle are: I agree with you that the most important phase for designing tests of inventory balances is the actual observation of the inventory count. A lot of theft and fraud often occurs in this cycle because companies have inventory balances worth millions of dollars.

A simple way in which a company can cheat an audit is by including in its inventory goods that have become obsolete. This often occurs in technological industries such as the computer industry. As you mentioned in your response it is important for auditors to pay close attention to the internal controls that were established by the management of the company. If a company has weak internal controls the auditors have to pay closer attention to the inventory cycle to rule out the potential of fraudulent activity.

In my response to this question I also argued that designing tests of inventory balance was the most crucial phase of the audit inventory cycle. I did not know about the existence of SAS 1. It makes a lot of sense to me that auditors should be present during the physical inventory