Audit and Inventory Control - Coursework Example

Running head: AUDIT AND INVENTORY CONTROL Audit and Inventory Control s Introduction: The discussion about auditing gap is based on the hypothesis that it was not the failure of auditing mechanisms or the expectation gap, which lead, to the collapse of different organisations such as Enron but the perversion of the governance model, which caused the disaster. Essentially, the basic issue was not fraud detection by the auditors but the alleged act of in concealment which done the damage. Nevertheless, there is still no conclusive empirical evidence in the literature about whether and how auditing mechanisms influence the performance and the value of the firms; and, about how these mechanisms interact (in a complementary or substitute way) (Bohern and Odegaard, 2003). There are no hard and fast rules for auditing, which can be prescribed for all the countries. These rules can be different for different countries according to their needs and cultural settings. According to ICAEW (2002) with all the contrasts present in the rules and regulations of different countries emphasis is given to generic auditing principles of responsibility, accountability, transparency and fairness. Inventory valuation poses some important challenges to the auditor as it is an important position determiner of the company. "Inventory controls are designed to ensure the safe custody. Such controls include restriction of access documentation and authorisation of movements regular Independent inventory counting and review of Inventory condition." (BPP, 2008) 1. Required Control Procedures: The control procedures which would be needed to identify in order to accept the book inventory as the basis for determining the quantity of inventory on hand at the year end are as follows: Recording of Inventory: In order to effectively control the Inventory on the basis of book inventory it is important to segregate the duties of custody and recording of inventory. It is important to check if the pair of shoes are checked and recorded at their reception. Inventory issues are supported by appropriate documentation. It is also important to maintain Inventory records such as Inventory ledger, Bin cards and Transfer records. The physical counts of the inventory should be recon ciliated with the computed amounts. The transactions having high values should be analyzed. The inventory items should be divided into different divisions according to group, location, type, etc. The inventory age should be calculated by the date of receipt. Sales System Control: The sales transactions should be checked according to the prices, quantities, extension and totals in the sales register. There is not any evidence of issuing the invoices to the customers. The sales transactions should also be checked according to the sequential numbers of blank invoices and regular sequential checks. 2. Test of Control for Sales System: The sample of the inventory movement records should be taken and cross checked with the goods received and dispatched according to the records. The movement of the inventory should be authorised by the management of the outlet. Goods received and goods dispatched note should be randomly selected and cross checked with the movement of goods. Although there is not any evidence of sales invoice being issued to the customers, there must be check on the prices, quantities, extensions and totals on invoices and credit notes. The sequence of inventory records should also be checked. Inventory counts should be tested and checked out from time to time during the period and confirm. All discrepancies between the computer records and actual figures should be fully investigated. All the discrepancies should be signed off by the senior manager of the outlet. Obsolete damaged and slow moving goods should be marked accordingly. The security arrangements for the inventory should be observed in order to checkout the gaps in the security procedure. The inventory which is held should be reviewed properly. 3a. Substantive Procedures to check the completeness and existence of inventory: The company previously relied on the inventory count at the end of the year hence providing the auditor a chance to adopt substantive approach to audit. Now that the company has decided to switch to the perpetual inventory, there will not be any need to undertake annual year-end count. In order to ensure the effectiveness of perpetual inventory recording it is necessary to ensure that the controls over the system are strong and operating effectively. It will be necessary to check that all inventory lines at all the stores are counted for at least once in a year. It should also be checked that the adequate records of inventory are kept up to date. The movement of inventory should also be compared with the sales and purchase transactions taking place in all the stores. On the other hand the tests on inventory should be taken place according to the different categories and classifications. The procedure of the inventory counts and test counting should be satisfactory. Perpetual inventory counts and tests should be undertaken according to the instructions regarding the year end inventory counts. Care should be taken regarding the cut-off that there are no inventory movements while the count of is being undertaken. The inventory record should be updated till the end of inventory count. Any shortage in the inventory should be investigated and the material differences should be corrected. If there will be any difference in the material its reasons should be recorded and corrective measures should be undertaken. The movement of the inventory should be undertaken with the consent of manager. These steps need to be taken to save the movement of inventory to hide the shortage in the inventory. 3b. Systems development controls to the re-writing of the inventory control system: One thing which is lacking in the current inventory system is the absence of the cross check for the returned sales and the returned purchases at the outlets which are not counted in the present inventory system. This can lead to the wrong valuation of the inventory. There are also chances of the theft of the items being returned by the customers. On the other hand purchases returned can also lead to miscalculation of the inventory. There is also no evidence of the implementation of the cut off procedure being implemented by the organization. The procedure to ensure the movement into, with in and out of inventories are not properly identified and implemented. The inventory should be valued by using AVCO method as FIFO can be implemented at the ware house rather than the Blessmore Plc. The new audit system should generate report in order to analyze the profitability of product. The clerical accuracy of the sums and calculations should be tested. The percentage of sales price and levels of cost should be determined by the product/vendor. The financial viability of AVCO versus FIFO valuation should be undertaken. References BOhren, O. and B. Odegaard (2003) “Governance and Performance Revisited”, ECGI Working Paper Series in Finance nº28/2003. BPP Learning, (2008). Audit and Assurance (F8),ACCA Course Book. ICAEW, (2002). What is Corporate Governance? Institute of Chartered Accountants in England and Wales, Retrieved 03/04/08 from Read More