Answer and Explanation:

1. The auditors are obligated to ensure that the company's management adopts the correct method of valuation for
inventory valuation.

2. The auditors must conduct the physical count of inventory to get the surety that inventory recorded on the
financials matches the actual inventory.

3. The auditors should reconcile the inventories by considering the inventory in transit to find an accurate picture of
inventories.

Business Functions in the Cycle and Related Documents and Records

There are six functions that make up the inventory and warehousing cycle:

Process purchase orders

Receive raw materials

Store raw materials

Process the goods

Store finished goods

Ship finished good

A perpetual inventory master file is a type of record used for inventory which typically includes information about
the units of inventory acquired, sold, and on hand

Separate computerized perpetual records are likely to be kept for raw materials, work-in-process, and finished goods

Figure 21.1 Flow of Inventory and Costs

 Explain the five parts of the audit of the inventory and warehousing cycle

Parts of the Audit of Inventory

• The audit of the inventory and

warehousing cycle can be divided into
five activities within the cycle:
– Acquire and record raw materials,
labor, and overhead
– Internally transfer assets and costs
– Ship goods and record revenue
and costs
 – Physically observe inventory
– Price and compile inventory

Functions in the Inventory and Warehousing Cycle

*Inventory counts are taken and compared with perpetual and book amounts at any
stage of the cycle. The auditor compares the documentation related to the receipt,
movement, and sale of inventory with the physical location of the items to ensure proper
cut off and classification of inventory as raw material, work in process, or finished
goods. A count must ordinarily be taken once a year. If the perpetual inventory system is
operating well, this can be done on a cycle basis throughout the year.

†Includes cost information for materials, direct labor, and overhead.

 Wokite University
College of Business and Economics
Department of Accounting and Finance
Auditing Principles and Practice II (Individual Assignment)
Submission Date = May 11/2023
1. What must auditors do to meet their obligations under professional auditing standards related to the
observation of inventory? Explain
2. Identify and discuss analytical procedures commonly used when auditing accounts in the inventory and
warehousing cycle.
3. The design of tests of details of balances for inventory is affected by audit results from multiple cycles.
Identify the cycles, other than the inventory and warehousing cycle that affect the audit of inventory.
4. Explain why the audit of work-in-process and finished goods inventory is generally more complex than the
audit of purchased inventory.
5. Auditing cash tends to be straightforward. We usually just obtain the bank reconciliations and test them.
We send confirmations and vouch the outstanding reconciling items to the subsequent month’s bank
statement. But are such procedures always adequate? Yes/No. Explain it based on your answer(Yes/No)