Inventory, Warehousing & Cash Cycle Apollo Shoes - Case Study Example

Inventory, Warehousing & Cash Cycle Apollo Shoes Case Tests of controls, Substantive Tests of Transactions and Analytical Procedures Introduction In order to finalize audit program of Apollo Shoes, it is necessary to design test of controls, substantive test of transactions and analytical procedures for the Inventory and Warehousing Cycle, and the Cash Cycle. Inventory and Warehousing Cycle: The audit of inventory and warehousing cycle will be conducted to ensure that all the raw material, work in process and finished goods including closing stock is in accordance with the generally accepted accounting principles. This objective will be achieved by using test of controls, substantive tests of transactions and analytical procedures. The audit of this cycle consists of purchasing, recording, transferring, shipping, physical maintenance and pricing of raw materials, work in progress and finished goods. Following Test of controls are designed for the Inventory and Warehousing Cycle: Examining the storage area of raw material to ensure its protection from theft. Checking the sequence of purchase requisition of raw materials, its approval and accounting. Comparing the date, quantity and description of inventory on transfer memos with the inventory master file. Corroborate the production record with the inventory master file to ensure physical transfer of goods from production to store room. Ensure that shipping documents are recorded and processed daily to ensure receiving of purchases. Review approved schedules of standard cost and quantity produced. Review controls devised to check inventory levels like planning, monitoring and transferring. Review management’s controls to physical compared inventory on hand with the inventory master file to ensure accuracy of inventory master file. Reconcile or review reconciliation of inventory with general ledger account. The above test of controls will ensure the effectiveness of controls on inventory and warehousing cycle. However, substantive tests of transactions are also necessary to ensure that all audit objectives have been achieved. Make a sample of tag number and match it with inventory to ensure that there is not any non-existing or fictitious inventory. Record last number of shipping used at year end for follow up in next year and ensure that it is not included in the physical count. Review inventory recorded as shipped but not shipped at the year end. Record last number of receiving report used at year end for follow up in next year and ensure that it is included in the physical count. Review inventory recorded as received and its inclusion in the physical count. Review the inventory placed in warehouse but already recorded as sold to ensure the title of ownership of inventory in hands. Review inventory count done by management and ensure its accuracy by comparing it with inventory master file. Inquire about obsolete inventory, and examine its ways of disposal, and accounting treatment. Examine inventory tags and its classification in accordance with the inventory records. Analytical procedures for Inventory and warehousing cycle are as follows: Comparing gross profit margin with previous year’s margin. Comparing inventory turnover with previous year’s turnover. Comparing unit costs of inventory with previous year’s unit costs. Comparing total inventory value with previous year’s inventory value. Comparing manufacturing costs with previous year’s manufacturing costs. Cash Cycle: The audit of cash cycle is already completed in part during the audit of other cycles. It is customary to conduct audit of cash cycle at the end because the evidence required for cash audit is collected by the audit of other cycles. Cash receipts are already audited with the revenue cycle. Similarly, most of the cash is disbursed to pay for accounts payable and payroll. The audit of cash cycle will be conducted to ensure that there is no misstatement in the balance disclosed at the year end and the disclosure is made in accordance with the generally accepted accounting principles. Internal controls consist of two parts i.e., controls over transaction balance and bank reconciliations with all type of bank accounts. Following tests of controls should be performed for controls over transaction balances: Ensure that all checks are signed by approved person only. Examine that all the checks are pre-numbered and properly referred with the vouchers. Inquire about the management’s policy over blank, and void checks, and discrepancies found, if any. Examine the controls over electronic transfers and the authority to approve it. Following tests of controls should be performed for controls over transaction balances: Examine management’s policy for cancelled checks showing in reconciliations. Examine all reconciling items carefully and ensure that there are no stale checks on either debit or credit side of reconciliation. Ensure the correctness of sequence of check numbers and there are no missing or unaccounted checks. Ensure that total debit side of bank balance reconciled with the total cash payments in the cash book. Ensure that total credit side of the bank balance reconciled with the total cash collections in the cash book. Substantive tests of transactions are already conducted during substantive testing of other cycles. However, a bank confirmation is usually obtained for every bank account Apollo shoes have. The bank conformations will include: Amount of deposits Amount of loan obtained, if any, including due date and unpaid liability. Nature and detail of mortgages obtained, if any. Nature and detail of any collateral. Analytical procedures are important to ensure that cash account balance is free of misstatements. Following analytical procedures can be done in this regard: Comparing year- end balance with the previous year balance, and reason out the major acquisitions and disposals. Compare the month-end balance with the balances of other months to find out any significant movement and its reason. Examine cash flow statement and ensure the accuracy of all items reported in operating, investing and financing activities. Ensure that adjustments in the net profit, in cash flow statement, do not include any cash items in it. In case of any risk of fraud in the Apollo shoes, a proof of cash may also be obtained. Proof of cash consists of four types of reconciliations: Reconciliation of the year-start balance between bank and cash books. Reconciliation of cash receipts in bank statements, during audit period, with the receipts recorded in cash book. Reconciliation of cash disbursed with the cash paid as per the bank statement. Conclusion: The tests of controls, substantive tests of transactions and analytical procedures on inventory and warehousing cycle, and the cash cycle, are designed to ensure that the balances affected by these cycles are stated in accordance with generally accepted accounting principles in the financial statements. In the inventory and warehousing cycle, the audit is focused on acquisition, transferring, shipping and physical existence of inventory. In the cash cycle, the major focus of audit is on the bank account reconciliations. References: Arens, A. A., Elder, R. J., & Beasley, M. S. (2006).   Auditing and assurance services: An integrated approach (11th Ed.).   New York, NV: Pearson. Retrieved from http:// University of Phoenix eBook Collection Database. Louwers, T. J., & Reynolds, J. K. (2002). Apollo Shoes casebook. New York, NY: McGraw-Hill Retrieved from http:// University of Phoenix eBook Collection Database. Read More