Financial statement audits.
Part 1 All financial statement audits will include an audit of the inventory cycle. You should plan for the audit by setting the audit objectives. For this assignment, write and submit 300 words that set specific internal controls that should be included to meet the following management assertions: • Existence • Completeness • Accuracy or valuation • Rights and obligations • Presentation and disclosure Part ll Now that you have identified the revenue-related internal control that relates to the five assertions (existence, completeness, accuracy or valuation, rights and obligations, and presentation and disclosure), the test of controls will need to be identified for each assertion and internal control. For this assignment, you will write and submit 400 words that set specific tests of internal controls for the 5 internal controls related to management assertions that you identified for the Unit 4 IP. Financial statement audits.
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Part I: Internal Control Procedures for Inventory Cycle Records to Meet Five Management Assertions
For this assertion, the audit will seek to ascertain whether the inventory recognized in the balance sheet and other actually exits at the time of reporting. The specific internal control that an audit entity should implement to meet this management assertion is physical counts, audit, tracking, and periodic stock taking. Use of bar codes or RFID tags to create an electronic inventory control will provide an effective internal control procedure for inventory cycles (Bodnar & Hopwood, 2016). The physical location of the inventory should be numbered to create an inventory tracking system. In addition, the entity may put in place measures that will ensure that the personnel are properly counting and recording the yearly physical inventory. This will involve the setting up of appropriate accounting control systems that will be easy to use, secure, and reliable. Additionally, the entity will ensure that the accounting personnel are competent enough. Financial statement audits.
For this management assertion, the audit will seek to ascertain whether the entity has recorded all the transactions relating to the asset. All incoming inventory should be counted, inspected and organized so that they can be traced to their location. Proper documentation of the inventory movement right from receipt to the time it leaves the company premise is also another internal control procedure that would ensure completeness of inventory record (Gao & Jia, 2016). Other auditing procedures such as the sales manager reviewing the sales activity summary for each region covered by the business entity will also ensure this assertion is met. Other strategies will include matching billing documents with their corresponding shipping documents (Arens, Elder, & Mark, 2015). Audit results that exist in electronic form shall have to be verified to ensure completeness. Financial statement audits.
Accuracy or Valuation
For this management assertion, the audit will seek to ascertain whether the all the amounts relating to the inventory cycle have been properly recorded. An effective internal control procedure that will ensure this management assertion is in place is a periodic internal audit to ensure that bills of material, negative balances, and nay misallocation are eliminated (Arens, Elder & Mark, 2015). For electronically generated reports, proper security measures will be initiated which will guide the processes of initiation and alteration of data. In the second approach, a non-electronic form of the audit reports shall be required which shall ensure validation and evidential control. Financial statement audits.
Rights and obligations
For this management assertion, the audit will seek to ascertain whether the organization has the rights to own the inventory and has control over it. The internal control procedure that would ensure that this management assertion is met is to ensure that all inventory have company codes, name tags and have been properly registered in the company’s name (Arens, Elder & Mark, 2015). The inventory tag should contain quantity, part number, unit measure, description, and quantity. Alternatively, the organization will ensure that the rights to assets and liabilities are the entity’s obligations and that they are held. This will outline the regularity of the audit, the persons responsible for the auditing, and the verification process. Financial statement audits.
Presentation and Disclosure
This management asserts the audit seeks to ascertain whether the information relating to the inventory cycle has been presented and disclosed in an appropriate way that users of the financial statement can easily understand (Gao & Jia, 2016). It is also important to standardize the inventory picking and record keeping for the movement of inventory in the organization. In addition, the company should segregate duties to different employees to ensure that all relevant information relating to the inventory is disclosed. Financial statement audits.
Part II: The Test of Controls for Each Assertion and Internal Control.
The existence of an inventory recorded in the financial statement implies that the inventory is physically present at the time of the recorded transaction. The existence assertion will require physical verification of the inventory focusing on bank letters and payables. The rights and obligations assertion implies that the particular entity possesses the legal title and has control over rights to an inventory (Bodnar & Hopwood, 2016). Alternatively, it could imply having the obligation to repay a liability. As such, the most relevant tests will include the review of title deeds for physical property and cost confirmation through purchase invoices. In the case of long-term inventory, the audit will review the existence of relevant agreements. Financial statement audits.
Completeness involves the confirmation that no omissions exist in the captured transactions. For every asset and liability which deserves to be disclosed is appropriately disclosed. Strategies must be out in place to prevent understatement (Gao & Jia, 2016). The relevant tests, in this case, involve the reviewing of records in the expenditure and repairs account. In addition, the audit may undertake tests relating to reconciliation of the figures in the accounts payables, suppliers statements, and ledger balances. This way, items which should have been omitted are identified especially in the non-current affairs segment. Financial statement audits.
Accuracy refers to the appropriateness of asset, liability, and equity valuation amounts. It focuses on their recording and disclosure. Allocation references encompass the inclusion of important overhead amounts. Relevant tests include vouching of the asset costs to acquire invoices and reviewing depreciation calculations and the accompanying rates (Arens, Elder & Mark, 2015). Presentation implies relevance of disclosures and ease of understanding of asset and liability descriptions. Relevant tests include the use of disclosure checklists by auditors to confirm the compliance of financial statements to accounting standards. Financial statement audits.