AUE3702 EXAM PACK SOLUTIONS AND EXPLAINED NOTES

Question 1 Substantive procedures to audit the value of finished goods Reference: Principle and practice of Auditing 1/24 Costing 1. Discuss the blueprints with Evans to obtain a general understanding of the diagram ...

Question 1 Substantive procedures to audit the value of finished goods Reference: Principle and practice of Auditing 1/24 Costing 1. Discuss the blueprints with Evans to obtain a general understanding of the diagram and the costing 2. Observe the manufacturing process and establish the reasonableness of the components, measurements and quantities as reflected the blueprints 3. Compare the blueprints (components, quantities and measurements) with previous years working papers to establish consistency in the costing and obtain explanations for any variances 4. On a sample basis agree the number of the units on the final stock count sheets to the number of units on the stock count sheets obtained during the inventory count 5. Scrutinize the final stock count sheets for any unusual items not reflected on the count sheets obtained during the inventory count. 6. On the blueprints perform the following tests to cost the trailers: a. Raw material component: Agree the component codes and unit costs price used in the blueprints with those reflected in the stock count sheets for the respective raw materials Trace the unit prices of components to the relevant suppliers invoice to establish whether the correct prices have been used in terms of FIFO b. Labour component: Examine the labour hours used to manufacture a trailer model and compare the number of hours with the previous year’s costing Agree the hourly rate used in the blue print with the hourly wage rate in the wage records c. Overheads Enquire from the cost accountant and Evans regarding the basis of allocation of the overheads and the reasonableness thereof. Recalculate the allocated manufacturing overheads with reference to the approved allocation basis and the use of accurate information pertaining to normal operating capacity 7. Cast the costing in the blueprints and agree the total of the unit price of a trailer model with unit price reflected in the stock count sheets 8. Cast (adding) and cross cast the stock sheets for finished goods (quantity x unit price) 9. Trace the value of finished goods per stock count sheets and agree it to the inventory control account in the general ledger balance and trial balance 10. Agree the amount in the trail balance to the amount of finished goods disclosed in the notes to the financial statements 11. Perform analytical tests (inventory, turnover: gross profit percentage etc) and trend analysis of component costing. Compare with corresponding figures of prior years. Obtain acceptable explanations for deviations identified 12. Compare the selling price on the approved price list/invoices around year end with cost price on the inventory list to ensure that it is higher than the cost price 13. Determine through enquiries from management and the sales staff, as well as by inspection of the minutes and correspondence files, whether any of the inventory items are subject to special sales conditions/offers 14. Where selling prices are lower than cost prices, request management to make the required adjustment to net realisable value 15. Inspect the stock count sheets for finished goods identified during the count as damaged and/or obsolete. Discuss with management and write off where appropriate and trace the journal entries to the general ledger. 16. Inspect the financial statements for the accounting policy with regard to inventory and ensure that it is appropriate and applied consistently 17. Inspect financial statements presentation and disclosure that it is consistent with the evidence collected and that the information is appropriately disclosed 18. Obtained a management representation letter with regards to the inventory value as at year end