MAJAN UNIVERSITY COLLEGE
Accredited to the University of Bedfordshire, United Kingdom
Purchase System and Inventory Count Audit.
Done By: Salim Humaid Al Hatmi
Student ID: 15901343
1
Table of Content
Title
Page Number
2
Table of Content
Introduction
3-4
The audit procedure that auditor carry out on the purchase system
5-6
Audit procedure should be perform before attending the inventory count
6
The aim of test of control and substantive audit procedure.
7
Weakness in counting inventory
8
Benefits and Purpose of an Audited Account
9-10
Limitations of Audit Report
10
Conclusion and Recommendation
11-12
Reference
13
2
Introduction
Magdalene Ang (2003) explained that difficulties faced by the specialists when they audit the
store inventory and why that area in financial statement is hard to be audit . As he stated that the
inventories have high risk account balance due to the direct effect on the profit. For those
companies whose the major activities are import or export of products as well as trading, this will
led to movements of inventory because of high volume which creates misstatement of this account
balance. Also, Magdalene Ang discussed in his research the common audit issues when audit
inventory that to test the unit cost is devising audit procedures. Where to avoid this issue the auditor
first has to know the costing method used by the company either FIFO or LIFO or Weighted
average method. At the end he clarified the problem between practitioners, as not only to give a
qualified audit opinion when they don't agree with management view.1
M. Johnstone & A. ramling & E. Rittenberg ( 2014) are debated that the identification of
important accounts, disclosure and purchase and payment cycle. Also, they discuss the assessment
of control risk of material misstatement in the cycle of acquisition and payment. How to use
primary analytical procedure to identify possible material misstatement in acquisition system and
disclosure. At final they stated the application of frameworks for qualified decision making and
ethical decision making to problem of conducting audit of assertions, purchase and payment cycle
account, and disclosures.
2
Each company record its inventory as an asset which is subject for an annual audit. That is mean
conduct the audit for the inventory. Because of some companies have a huge amount of inventory
that will cause a large number of inventory audit procedures. For example, cutoff analysis, observe
the physical inventory count and too many other. Audit of inventory can be complicated by
different factors:
1. Diversity of items
2. Activity with high volume
1
Magdalene Ang (2003) . AUDIT OF INVENTORIES HIGHLIGHTS OF TECHNICAL CLINIC, Retrieved from
isca.org.sg/media/3696/dec-36-39-audit-of-inventories.pdf
2M.
Johnstone & A. Gramling & E. Rittenberg. AUDITING INVENTORY, GOODS AND SERVICES, AND ACCOUNTS
PAYABLE: THE ACQUISITION AND PAYMENT CYCLE; 9 ed. South-Western: Cengage Learning (2014)
3
3. Different valuation
4. Difficult to identify obsolete or faulty inventory
5. Involvement of many frauds in inventory account
6. Easily transportable making it subject to double counting
Some inventory's internal control well-designed insures :
1. Authorization of all purchases
2. Timely, accurate, and complete recording ensured by accounting system
3. Properly accounted for receipt of inventory
4. Inventory tested for quality when received/manufactured
5. Costs properly identified and assigned to products
6. Customer returns of inventory examined for defects
4
Procurement and Purchase System:
The audit procedure that auditor carry out on the purchase system:
There are audit procedure that the auditor should carry out on the purchase system while making
audit to ensure that all the work are done clearly and completely. Before start the audit work the
auditor should understand the purchase system in the Muscat Company to have good idea about
the system after that they can start the audit be following certain audit procedures.
We as the audit team perform the following audit procedure:
1- Select sample of e mail from store manager computer and compare the details with the order
database to confirm that all the order are recorded are matched with the order database.
2- To confirm that all the orders were received by Muscat Company and recorded completely
and actually in the inventory database, we took samples of order from order files, and order
details to follow with delivery note file in the goods inward department and should be matched
with the inventory file.
3- Select some paper of delivery note and agree to the order database and inventory database to
check that inventory was recorded in the accounting system and ensure that liabilities are not
reduced.
4 To conformed that recording of inventory liabilities are made completely and correctly in the
payable files and checked that all the goods received have been recorded as payable liability, the
sample we obtain form the order files should be only those orders have been received and the
invoice number in the order files is match with payable ledger in the purchase files.
5- From the purchase files we selected sample of invoice recorded in purchase day book with the
details of price and supplier to the purchase invoice record in the database, to ensure that the
details purchase invoice have been recorded in the purchase database correctly and properly.
6- Carried sample of purchase invoice in the purchase day book with the details of the delivery
note for the items on that invoice to guarantee that the purchase liability has been recorded only
for goods which is actually received, and obtain the some invoice with the details related to the
individual payables to ensure the correct recorded of the liabilities in the accounting payable.
5
7- We took sample of supplier invoice, and the cross cast invoice price and quantities
conforming price to the original order to ensure the company charge correct price for the goods
received.
8-We selected sample of invoice with high value from purchase day book to ensure that goods
have been ordered.
Audit procedure should be perform before attending the inventory count:
Attend the physical inventory count is now become a compulsory audit procedure .The following
are the certain tasks should be carried out before attending the inventor count.
1-Review and analyze last year working papers: will help the audit team to get a good
background and understand the nature, estimated volume, place and position, count procedures
that followed by the company, and problems experienced. Also, help the audit team to decide the
size of audit procedure that audit have obtain For example: If the controls system are weak, a
larger sample size will have to be obtain for physical count.
2– Counting Instruction: To discussed the counting instructions with the client and if found it
need any improvement , will improve it before starting the inventory count to get more
accurate counting at the end of the year.
3– Determine if it is proved that any inventory hold by third parties: The order confirmation
from the third party of the stocks held by parties depending on the relative. Auditors should also
consider the integrity and independence of the third party, and whether it is necessary to arrange
for other auditors to observe the count or whether it was enough to get the latest auditor's report
on the adequacy of the third party or just the relevant inspection to be held in the customer's
place of documentation systems.
4– Arrange audit plan for the inventory count: This will help the audit to done the work in
the effective manner.
5– Book audit staff to attend the inventory counts
6– Obtain copy of inventory count instructions from client
6
The aim of test of control and substantive audit procedure.
To check the effectiveness of the internal control of the Muscat company .There are certain
techniques’ and procedure need to follow in order to evaluate the effectiveness of internal control
system. These techniques and procedure are: test of control and substantive audit procedures.
The purpose of test of control is to check and evaluate that the internal control of the audit clients
are operating effectively.
And the purpose of substantive audit procedure is to conform that there are no material
misstatement in the client’s financial statement at the assertion level.
Regarding the inventory count the purpose of follow these procedures are:
Test of control observe that the count team are ensuring and conforming as their counting are
done by follow the client inventory count instructions
Substantive audit procedure record the condition of item of inventory to ensure that the valuation
of these item is correct on the final inventory summaries.
7
Weakness in counting inventory:
On the day of attending the Muscat inventory we observe certain weakness in the control system
for counting inventory:
Weakness
Reasons
How overcome the weakness
Inventory sheet showed
Count teams will emphasis on finding that number of
The count sheet should only include
the number of item
item making undercounting of inventory more likely
the correct number of item
expected to be found in the and when the correct number of item found the team
store
stop counting.
Count staff will all drawn
Count staff of inventory are responsible. They could
Count sheet should include other
from the inventory.
be temptation to hide the missing inventory of error
staff who are not responsible for
which they removed from inventory illegally.
inventory to provide independency
in the count
Counting team allowed to
This is a risk because the teams will either ignore
Each team should be given a
decide which area in the
inventory from the count or even count the inventory
specific area of the store to count
store to count.
double due to lack of particular instruction on where
to count
Recording the information
Recording information in pencil means that the
The information should be recorded
on the count sheet in
inventory balance will be incorrectly record because
in the Ink.
pencil
the change could be made during the count and after
the count take please.
Count sheet for inventory
It is possible that the additional inventory sheet could
All inventory sheet, Including those
not on the per-numbered
be lose as there is no overall control of the sheet
for extra inventory, should be pre-
count sheets were only
actually being used. The sheet may not be numbered
number.
number when used.
be the teams, again giving rise to the possibility of
the loss
The staff carrying out the
Absence of staff signature make it difficult to ask
All the count sheet should be signed
count were not singed the
question related item count because it is difficult to
to know who actual carried out the
count sheet and the
know the actual staff carrying out the count . In
count of the individual item and to
inventory not marked to
addition it is big mistake because the inventory will
avoid the error the inventory should
the indicate it has been
either missed or count twice
be make in particular technique to
count
show that it has been counted
8
Benefits and Purpose of an Audited Account
Audited account have numerous benefits and purposes. Audited Account help the manager as
well as the supplier , investors , shareholder and the bankers to have better and clear
understanding about the company performance and the financial system .Audited Account can
also define the area that need Improvement in the company structure , and how to implement the
proper changes and adjustments. Having an audited Account also reduce the risk as well as the
cost of capital. There are many reasons why the audited account become a compulsory and
essential task in every business organization:
Purpose of the having audited account:
1-Help to deduct the error and fraud:
The main duty of the auditors is to deduct the error and fraud and stop such errors and take cares
to avoid such errors that may affect the effectiveness of the company.
2-Help the related parties to take the decision:
When the company have audited account this help the Investors, lenders, creditors, customer,
and the supplier to make the decision.
3-Audited Account help the company to get lone
Some financial institution especial banks provide lone base on audited financial statement.
Companies may obtain loan considering the audited statement of last five years. So, it is necessary
for the company to make audited financial statement to obtain lone.
4- Audit Provides Information about Profit or Loss
Every businessman needs to know the accurate amount of profit or loss of his business at the end
of the year. So, after auditing the book of account the owner can get accurate and truth information
about the profit or loss.
9
5- Prepare future plan
All the audited statements remain true and correct. Such true and correct account helps to prepare
for the future plans.
The benefit of having audited account
•
Evaluate and realize the company’s financial record
•
Identify the area that need for improvement in the company.
•
Measure risks, economy, efficiency and quality.
•
Evaluate new technology that can be used to improve the company
•
Uncover fraudulent or other illegal activities within the company.
•
Strengthen internal control.
Limitations which the audit report is subject to when audit is carried.
1-Difficult to deduct same fraud:
It is difficult to the auditor to deduct some deeply laid fraud which involved acts designed to
conceal them.
2-All transaction can to be checked by the auditor:
It is not possible for the auditor to check every transaction, he has to check them on sample basis.
3-Auditors apply sample techniques:
Auditors apply sample techniques and chose only limited number of transactions, so the results
selected may not represent the entire population.
10
Conclusion
The procedures used by the store staffs to order purchases for the company are controlling risks,
fraud preventing, ensure maximum savings and maintain regulatory requirements. An audit helps
to improve efficiencies for markets, shipping times, vendors and sales shift by determined where
they should make adjustments to the process.
So, auditors carry out different procedures which are test of control and substantive procedure. As
test of control used by auditors to test the control’s effectiveness used by a customer entity to stop
or detect material misstatements and substantive test insures existence, rights, completeness, and
disclosure. Size of sampling will expand and conduct further testing, if auditor makes faults in a
test of control. If it is not enough, then the auditors must increase the substantive test. For instance,
the auditors will work more in the receivables figure in Balance sheet, if the client does little to
evaluate customers’ credit worthiness to ensure, as far as possible, that recoverable of debts to
satisfaction of amount valued are true and fair.
For counting inventory; after every count it is necessary to evaluate this procedure, to see if change
in the process should be there to reimburse for counting matters experienced.
11
Recommendation
1. Each company must design a team contain of professional manager and his
subordinates for efficient check of the inventory store.
2. Each company has to save inventory order in hard disk batter than email because
of hacking practices
3. The auditor should adopt the different audit procedures to done the work in
perfect manner and at target time.
4. The stakeholder should see the audit report at the end of year specifically the
inventory section to know the company performance as well as the company
position.
5. The students must be aware about the audit work to be ready for enter into audit
practice in future.
12
References
R LAWRENCE & M COM (1905). A PRACTICAL MANUAL FOR AUDITOR. STORES AND
STOCK ACCOUNTS. Pg 68 -69.
https://www.questia.com/library/journal/1G1-8145043/the-impact-of-just-in-time-on-the-auditof-purchasing.
http://accounting-simplified.com/audit/introduction/purpose-of-audit.html.
http://www.accountingtools.com/inventory-audit-procedures.
http://www4.semo.edu/gjohnson/notes/auditing%20procedures%20-%20inventory.htm.
http://www.accountingtools.com/questions-and-answers/what-are-substantive-procedures.html.
http://purebusinessschool.blogspot.com/2013/05/advantages-disadvantages-and.html.
http://www.auditing.arollo.com/benefits.html.
http://accountlearning.blogspot.com/2012/02/advantages-of-audit.html.
13
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Finance
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7
Introduction
Leraler Renne
Imantony mong
for Audily, hare &
Magdalene Ang (2003) explained that difficulties faced by the specialists when they audit the
store inventory and why that area in financial statement is hard to be audit. As he stated that the
inventories have high risk account balance due to the direct effect on the profit. For those
companies whose the major activities are import or export of products as well as trading, this
will led to movements of inventory because of high volume which creates misstatement of this
account balance. Also, Magdalene Ang discussed in his research the common audit issues when
audit inventory that to test the unit cost is devising audit procedures. Where to avoid this issue
the auditor first has to know the costing method used by the company either FIFO or LIFO or
Weighted average method. At the end he clarified the problem between practitioners, as not only
to give a qualified audit opinion when they don't agree with management view
M. Johnstone & A. ramling & E. Rittenberg (2014) are debated that the identification of
important accounts, disclosure and purchase and payment cycle. Also, they discuss the
assessment of control risk of material misstatement in the cycle of acquisition and payment. How
to use primary analytical procedure to identity possible material misstatement in acquisition
system and disclosure. At final they stated the application of frameworks for qualified decision
making and ethical decision making to problem of conducting audit of assertions, purchase and
payment cycle account, and disclosures.
Each company record its inventory as an asset which is subject for an annual audit. That is mean
conduct the audit for the inventory. Because of some companies have a huge amount of
inventory that will cause a large number of inventory audit procedures. For example, cutoff
analysis, observe the physical inventory count and too many other. Audit of inventory can be
complicated by different factors:
1. Diversity of items
2. Activity with high volume
3. Different valuation
Magdalene Ang (2003). AUDIT OF INVENTORIES HIGHLIGHTS OF TECHNICAL CLINIC, Retrieved from
isa ose/media/3696/dec-36-39-audit-of-inventories pdf
*M. Johnstone & A Grunting & E. Kittenberg AUDITING INVENTORY, GOODS AND SERVICES AND ACCOUNTS
PAYABLE THE ACQUISITION AND PAYMENT CYCLE: Wed South Western Cenage Learning (2014)
leghe
Corporate Finance
Turst general ponts
Weakness in counting inventory:
then care
seases
On the day of attending the Muscat inventory we observe certain weakness in the control system
for counting inventory
Weakness
Reasons
Inventory slicet showed Count teams will emphasis on finding that number of
the number of item item making undercounting of inventory more likely
expected to be found in the and when the correct number of item found the team
Store
stop counting
How overcome the weakness
The count sheet should only include
the correct number of item
Count staff will all drawn
from the inventory
Count staff of inventory are responsible. They could
be temptation to hide the missing inventory of error
which they removed from inventory illegally
Count sheet should include other
Counting team allowed to
decide which area in the
staff who are not responsible for
inventory to provide independency
store to count
This is a risk because the teams will either ignore Each team should be given a
inventory from the count or even count the inventory specific area of the store to count
double due to lack of particular instruction on where
in the count
pencil
to count
Recording the information Recording information in pencil means that the The information should be recorded
on the count slicet in inventory balance will be incorrectly record because
in the Ink
the change could be made during the count and after
the count take please
Count sheet for inventory It is possible that the additional inventory sheet could All inventory sheet, including those
not on the per-numbered be lose as there is no overall control of the sheet for extra inventory, should be pre-
count sheets were only actually being used. The sheet may not be numbered number
number when used
be the teams, again giving rise to the possibility of
the loss
The staff carrying out the
count were not singed the
count sheet and the
inventory not marked to
the indicate it has been
Absence of stall signature make it difficult to ask
question related item count because it is difficult to
know the actual staff carrying out the cost in
addition it is big mistake because the inventory will
either missed or count twice
All the count sheet should be signed
to know who actual carried out the
count of the individual item and to
avoid the error the inventory should
be make in particular technique to
show that it has been counted
LABO-28
A1-13
B
rate Finance
1. She
mes
Find write general,
pants than case
pourts
specefie
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system
The sudit procedure that andito carry out on the purchase system:
There are audit procedure that the wuditor should carry out on the purchase system while making
audit to ensure that all the work are done clearly and completely. Before start the audit work the
auditor should understand the purchase system in the Muscat Company to have good idea about
the system after that they can start the audit be following certain audit procedures
We as the audit team perform the following audit procedure
1- Select sample of mail from store manager computer and compare the details with the order
database to confirm that all the order are recorded are matched with the order database
End
2. To confirm that all the orders were received by Muscat Company and recorded completely
and actually in the inventory database, we took samples of order from under files, and order
details to follow with delivery note file in the goods inward department and should be matched
with the inventory file
3. Select some paper of delivery note and agree to the order database and inventory database to
check that inventory was recorded in the accounting system and ensure that liabilities are not
reduced
4 To conformed that recording of inventory liabilities are made completely and correctly in the
payable files and checked that all the goods received have been recorded as payable lisbility, the
sample we obtain form the order files should be only those onders have been received and the
invoice number in the order files is match with payable ledger in the purchase files
5- From the purchase files we selected sample of invoice recorded in purchase day book with the
details of price and supplier to the purchase invoice record in the database, to ensure that the
details purchase invoice have been recorded in the purchase database correctly and properly
6- Carried sample of purchase invoice in the purchase day book with the details of the delivery
note for the items on that invoice to guarantee that the purchase liability has been recorded only
for goods which is actually received, and obtain the some invoice with the details related to the
individual payables to ensure the correct recorded of the liabilities in the accounting payable.
Pinan
sh
R LAWRENCE & M COM (1905). A PRACTICAL MANUAL FOR AUDITOR. STORES AND
STOCK ACCOUNTS. Pg 68-69
https://www.questia.com/library/journal/1G1-8145043/the-impact-of-just-in-time-on-the-audit-
of-purchasing.
http://accounting-simplified.com/audit/introduction purpose-of-audit.html.
http://www.accountingtools.com/inventory-audit-procedures.
http://www4.semo.edu/gjohnson/notes/auditing%20procedures%20-%20inventory.htm.
http://www.accountingtools.com/questions-and-answers/what-are-substantive-procedures.html
http://purebusinessschool.blogspot.com/2013/05/advantages-disadvantages-and.html
http://www.auditing.arollo.com/benefits.html.
http://accountlearning.blogspot.com/2012/02/advantages-of-audit.html
Suproper refering
Refanie
ple do as per Hanard
chech word count !
13
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