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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 purchasing system 5-6 Audit procedure should be performed before attending the inventory 6 count The aim of a 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 Literature Review Introduction Magdalene Ang (2003) explained that difficulties faced by the specialists when they audit the store inventory and why that area in the financial statement is hard to be audited. This is in the regards to the inventories having a high-risk account balance. This is 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 lead 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. In 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 the 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 the problem of conducting an audit of assertions, purchase and payment cycle account, and disclosures. 2 Each company records its inventory as an asset which is subject to an annual audit. That is mean conduct the audit for the inventory. Because of some companies have a huge amount of 1 Magdalene Ang (2003) . AUDIT OF INVENTORIES HIGHLIGHTS OF TECHNICAL CLINIC, Retrieved from 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 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 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 purchasing system: There are audit procedures that the auditor should carry out on the purchasing system while making audit to ensure that all the work are done clearly and completely. Before the start, the audit work the auditor should understand the purchasing system in the Muscat Company to have a 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 a 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 confirmed that recording of inventory liabilities are made completely and correctly in the payable files and checked that all the goods received had been recorded as payable liability, the sample we obtain from the order files should be only those orders have been received and the invoice number in the order files is matched 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. 5 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 are actually received, and obtain some invoice with the details related to the individual payables to ensure the correct recorded of the liabilities in the accounting payable. 7- We took a 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 the invoice with high value from purchase day book to ensure that goods have been ordered. Audit procedure should be performed before attending the inventory count: Attend the physical inventory count now becomes a compulsory audit procedure .The following are the certain tasks should be carried out before attending the inventory 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 obtained For example: If the controls system is weak, a larger sample size will have to be obtained for the 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 held 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. 6 4– Arrange audit plan for the inventory count:This will help the audit to done the work in an effective manner. 5– Book audit staff to attend the inventory counts 6– Obtain copy of inventory count instructions from client The aim of test controls and substantive audit procedure. To check the effectiveness of the internal control of the Muscat company .There is certain techniques’ and procedure need to follow in order to evaluate the effectiveness of internal control system. These techniques and procedure are tests of control and substantive audit procedures. The purpose of a test of control is to check and evaluate that the internal control of the audit clients is operating effectively. And the purpose of substantive audit procedure is to confirm that there is no material misstatement in the client’s financial statement at the assertion level. Regarding the inventory count the purpose of following these procedures are: Test of control observes that the count team is ensuring and confirming their counting are done by following the client inventory count instructions Substantive audit procedure records the condition of the item of inventory to ensure that the valuation of this 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 have an emphasis on finding that The count sheet should only include the number of items number of item making undercounting of inventory the correct number of item expected to be found in the more likely and when the correct number of the item store found the team stop counting. Count staff will all drawn Count staff of inventory is responsible. They could Count sheet should include other from the inventory. be a temptation to hide the missing inventory of error staff who are not responsible for which they removed from inventory illegally. inventory to provide independence in the count Counting team allowed This is a risk because the teams will either ignore Each team should be given a deciding 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 recorded in the Ink. pencil because the change could be made during the count and after the count takes, 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 lost as there is no overall control of the sheet for extra inventory, should be pre- count sheets was the 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 The absence of staff signature makes it difficult to 8 All the count sheet should be signed count were not signed the ask question-related item count because it is difficult to know whom actually carried out count sheet and the to know the actual staff carrying out the count . In the count of the individual item and inventory not marked to addition, it is big mistake because the inventory will to avoid the error the inventory the indicate it has been either miss or count twice should be made in particular count technique to show that it has been counted Benefits and Purpose of an Audited Account The audited account has numerous benefits and purposes. Audited Account helps the manager as well as the supplier , investors , shareholder and the bankers to have better and clear understanding of the company performance and the financial system .Audited Account can also define the area that needs 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 has audited account, this helps the Investors, lenders, creditors, customer, and the supplier to make the decision. 3-Audited Account helps the company to get a loan Some financial institution especial banks provide a loan base on the audited financial statement. Companies may obtain loan considering the audited statement of last five years. So, it is necessary for the company to make an audited financial statement to obtain a loan. 9 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. 5- Prepare future plan All the audited statements remain true and correct. Such true and correct account help to prepare for the future plans. The benefit of having audited account  Evaluate and realize the company’s financial record  Identify the area that needs improvement in the company.  Measure risks, economy, efficiency, and quality.  Evaluate new technology that can be used to improve the company  Uncover fraudulently or other illegal activities within the company.  Strengthen internal control. Limitations which the audit report is subject to when the 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 be checked by the auditor: It is not possible for the auditor to check every transaction, he has to check them on a sample basis. 3-Auditors apply simple techniques: 10 Auditors applied sample techniques and chose only limited number of transactions, so the results selected may not represent the entire population. 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 a test of control and substantive procedure. The asset of control used by auditors to test the control’s effectiveness used by a customer entity to stop or detects material misstatements and substantive test ensures existence, rights, completeness, and disclosure. The 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’ creditworthiness to ensure, as far as possible, that recoverable of debts to the satisfaction of amount valued are true and fair. For counting inventory; after every count, it is necessary to evaluate this procedure, to see if a change in the process should be there to reimburse for counting matters experienced. 11 Recommendation 1. Each company must design a team contains professional manager and his subordinates for an 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 the perfect manner and at the 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 of the audit work to be ready for entering into audit practice in future. 12 References Advantages, Disadvantages and Limitations of Audit. (2013). Pure Business School. [online] Available at: Anon, (2016). South Eastern Missouri University. [online] Available at: Benefits of an Audit. (2016). explore Auditing. [online] Available at: Elaine, W. and Daniel M, N. (2016). The Impact of Just-in-Time on the Audit of Purchasing. Journal of Purchasing & Materials Management, [online] Volume 25(No. 3). Available at: Inventory Audit Procedures. (2016). [online] Available at: Lawrence, J., Stephenson, G. and Lampkin, W. (1961). A Stock Control Policy for Important Spares in a Two Level Stores System. OR, 12(4), p.261.What are substantive procedures?. (2016). [online] Available at: Purpose & Objectives of Auditing Financial Statements. (2013). [online] Available at: 13

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