Presented by:

Diana Tai

Ivan Chen

Ronnie Lee

Wilson Wong

Chapter 11 DQ 35CAAT

Background

Client:

• Wholesale cosmetics distributor with an inventory of thousands of individual items

• Keep inventory in its own distribution centre and 2 public warehouses

• Inventory computer file is maintained on a computer disk

Background

Auditor:

• A computer cartridge of the data on the inventory file on the date of the physical count

• A general-purpose computer software package

Scope of Audit Work

Audit Procedure:• Planning/Compliance test/Substantive

testing/Reporting

Assumption:• Planning and Compliance test have performed and

obtain satisfactory result• Focus will be on substantive testing on balance

and transaction only

Assumption

• Collection of data is performed by auditor

• Client maintain a sound and effective control on the accounting system after evaluation

• Client maintain all record in computer format

• Auditor is competence with CAAT

Objective of substantive testing

1. Existence

2. Completeness

3. Ownership

4. Valuation

5. Accuracy

6. Identifying Unusual Items

Basic inventory auditing procedure

How general purpose computer software package and type of the inventory file data might be helpful

Stock count: select sample and then test count to see the existence

Use computer to select sample randomly, orbased on some selection criteria

1. Existence

Send confirmation to confirm the inventories hold by third parties

Select sample by computer randomly or based on selection criteriaPrint confirmation by computer

1. Existence

Basic inventory auditing procedure

How general purpose computer software package and type of the inventory file data might be helpful

Omission of invoice no: Scanning & Cut off

Audit software can detect the gap of invoice no.

2. Completeness

Trace the inventory to documents e.g. invoice, receiving reports and purchase order

Request clients for receiving reports and compare with inventory report with software

Analytical procedure by human calculation (reasonableness)

Compare the inventory records of this year and past years

2. Completeness

Basic inventory auditing procedure

How general purpose computer software package and type of the inventory file data might be helpful

Check company’s policy of recognition criteria Manual records

Check company’s policy of recognition criteria Computerized records

3. Ownership

Check manual records of consignment sales

Check computerized records of consignment sales

Goods held for consignmentGood shipped out for consignment

Goods held for consignmentGood shipped out for consignment

3. Ownership

Check manual records of

purchase order;receiving reports; and vendor’s invoice

Join computerized records of

Receiving report; andOrdering report

Use generated report of unmatched itemsTo check reasonableness

3. Ownership

Prepare manual management representation letter

Print computerized management representation letter Take the letter to client to sign

3. Ownership

4. Valuation

Basic inventory auditing procedure

How general purpose computer software package and type of the inventory file data might be helpful

Check physical condition of inventories during stock-taking

eg: slow-moving and obsolete items

Analyze the inventory balance into age categories, by identifying the date of last purchase or last saleSelect the slow-moving itemsPhysical inspection

Trace unit cost of inventory to supporting documents such as vendor’s invoice

Request for vendor’s invoice file(last year) Join with inventory file and matched by item no. Extract the ‘amount deviated ’ from the ‘cost per item’ by applying equation(COST1<>COST)

4. Valuation

4. Valuation

Trace to subsequent sales invoices and compare the selling price to the cost Consider appropriate write-down to net realizable value(NRV)

Request for sales invoice file(current year)Join with inventory file and matched by item no. Consider ‘write-down to NRV’ by applying equation(COST>INV_AMT)

Perform an analytical review of the overall reasonableness of the inventory valuation

Generate reports showing the total amount of each category of inventories with prior year and budget

5. Accuracy

Basic inventory auditing procedure

How general purpose computer software package and type of the inventory file data might be helpful

Recalculate to check for arithmetical accuracy

Test the accuracy of the client’s computation

– Check the extensions and footings

Check the correctness of discount received

Request for payment record (last year)Join with inventory file and matched by item no. Check ‘incorrect discount’ by applying equation (Discount percent >0 AND Payment period>30)

5. Accuracy

6. Unusual items

Basic inventory auditing procedure

How general purpose computer software package and type of the inventory file data might be helpful

Check the transaction with zero or negative amount

–eg. Purchase return

Request for purchase return record (last year)Join with inventory file and matched by item no.

Check the transaction with cents and odd dollars

Extract purchases with cents in the inventory file by applying equation

(COST-@int(COST)<>0)Extract purchases with odd dollars in the inventory file by applying equation

(COST- @int(COST/10)*10<>0)

6. Unusual items

Conclusion

Advantage of CAAT:

• Time saving

• Accurate result is obtain

• Objectivity in random sampling

• Audit work done can easily transfer internationally to other branches when necessary

Conclusion

Limitation of CAAT:• Program compatibility of document format• Competence of Auditors

Common concern of traditional and CAAT audit:• Evaluation of True and Fairness of inventory

account is base on auditors’ professional judgment