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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 30
TESTING OTHER SYSTEMS
The type and range of other systems that the auditor may encounter will depend upon the nature of the
business but, as a general rule, most other systems you may encounter will be concerned with the safe custody
of an asset of the business.
Thus there will be a system for inventory in a manufacturing company and a system for non current assets in
many businesses. Some businesses may have significant investments and thus will have a system to maintain
control of this type of asset.
In this section, we will consider control systems: for inventory and non current assets.
Inventory
You will be aware that there is a close link between inventory on the one hand and sales and purchases on the
other hand. In the light of this, you will not be surprised that many of the points in this section have already
been dealt with in covering sales and purchases above - they are repeated here briefly to give you the overall
picture.
CONTROL OBJECTIVES
Although inventory records may vary considerably from client to client, the controls are the same in all cases,
namely:
(i)
Authorization and purchase procedures
(ii)
Control over goods inwards
(iii)
inventory records supported by physical inventory counts
(iv)
Control over dispatches and goods outwards
(v)
Adequate steps should be taken to identify all inventory for which provisions may be
required on the grounds that their net realizable value is below cost
(vi)
Inventory levels should be controlled so that materials are available when required but
that inventory is not unnecessarily large
Control Procedures over Inventory
(i)
Approval and Control of Documents
a) Issues from inventories should be made only on properly authorized requisitions.
b) Reviews of damaged, obsolete and slow moving inventor/ should be carried out. Any write-offs
should be authorized.
(ii)  Arithmetical Accuracy
a) All receipts and issues should be recorded on inventory cards, cross-referenced to the appropriate
GRN or requisition document.
b) The costing department should allocate direct and overhead costs to the value of work-in-
progress according to the stage of completion reached.
c) To do this standard costs are normally used. Such standards must be regularly reviewed to ensure
that they relate to actual costs being incurred.
d) If the value of work-in-progress is directly comparable with the number of units produced,
checks should periodically be made of actual units against work-in-progress records.
(iii)  Control Accounts
a) Total inventory records may be maintained and integrated with the main accounting system; if so
they should be reconciled to detailed inventory records and discrepancies investigated.
(iv)  Comparison of Assets to Records
a) Inventory levels should be periodically checked against the records by a person independent of
the stores personnel, and material differences investigated.
b) Where perpetual inventory records are not kept adequately a full inventory count should be held
at least once a year.
c) Maximum and minimum inventory levels should be pre-determined and regularly reviewed for
adequacy.
d) Re-order quantities should be pre-determined and regularly reviewed for adequacy.
101
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Fundamentals of Auditing ­ACC 311
VU
(v)
Access to Assets and Records
a) Separate centers should be identified at which goods are held.
b) Deliveries of goods from suppliers should pass through a goods inwards section to the stores. All
goods should pass through stores and hence be recorded and checked as received.
c) Inventories should be held in their locations so that they are safe from damage or theft.
d) All inventory lines should be identified and held together e.g. in bins which are marked with all
relevant information as to size, grade, origin, title for identification.
e) Access to the stores should be restricted.
Tests of Controls
a) Observe physical security of inventories and environment in which they are held.
b) Test procedures for recording of inventory movements in and out of inventory.
c) Test authorization for adjustments to inventory records.
d) Test authorization for write-off or scrapping of inventories.
e) Test controls over recording of inventory movements belonging to third parties.
f)  Test procedures for authorization for inventory movements i.e. the use made of authorized goods
received and dispatch notes.
g) Inspect reconciliations of inventory counts to inventory records (this gives overall comfort on the
adequacy of controls over the recording of inventory).
h) Check sequences of dispatch and goods received notes for completeness.
i)  Assess adequacy of inventory counting procedures and attend count to ensure they are carried out.
102
Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT