Explain the relationship between the acquisition and payment cycle and the inventory and warehousing cycle in the audit of a manufacturing company. List several audit procedures in the acquisition and payment cycle that support your explanation.
21-2 (OBJECTIVE 21-3) Many auditors assert that certain audit tests can be significantly reduced for clients with adequate perpetual records that include both unit and cost data.
What are the most important tests of the perpetual records that the auditor must make before reducing assessed control risk? Assuming the perpetuals are determined to be accurate, which tests can be reduced?
21-3 (OBJECTIVE 21-4) List the major substantive analytical procedures for testing the overall reasonableness of inventory. For each test, explain the type of misstatement that could be identified.
21-4 (OBJECTIVES 21-4, 21-5, 21-6) In the verification of the amount of inventory, one of the auditor’s concerns is that slow-moving and obsolete items be identified. List the auditing procedures that can be used to determine whether slow-moving or obsolete items have been included in inventory.
21-5 (OBJECTIVE 21-5) Before the physical examination, the auditor obtains a copy of the client’s inventory instructions and reviews them with the controller. In obtaining an understanding of inventory procedures for a small manufacturing company, these deficiencies are identified: Shipping operations will not be completely halted during the physical examination, and there will be no independent verification of the original inventory count by a second counting team. Evaluate the importance of each of these deficiencies and state its effect on the auditor’s observation of inventory.
