You are assigned to the December 31, 2011, audit of Al Ammon mobiles, Inc. You a

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You are assigned to the December 31, 2011, audit of Al Ammon mobiles, Inc.
You are assigned to the December 31, 2011, audit of Al Ammon mobiles, Inc.

20-33 (Objective 20-6) You are assigned to the December 31, 2011, audit of Al Ammon CASE mobiles, Inc. The company designs and manufactures automobile structures and engine components. You observed the physical inventory at December 31 and are satisfied that it was properly taken. As part of the inventory price testing, you have requested vendor invoices for all of the selected samples. Sample Selected for Testing MATERIALS COST PER CLIENT RECORDS FOR FINISHED GOODS: Sample No. Description Quantity Valuation per Books Struts Tires Fastners Molded bumpers 4,000 units 4,000 units 10,000 units $145,000 100,000 21,400 210,000 ,000 units Below are the vendor invoices related to the samples selected for testing. Your client was not sure which invoices to provide, so they provided all invoices from October through December of 2011 for the appropriate vendors. VENDOR INVOICES: Vendor Name Invoice No. Invoice Date Description of Items Samhani Struts 1023 Tblisi Tires Fastners To G5-111508 Samhani Struts 1032 Fastners To Go113008 Bumpers R Us 2309 Fastners To Go 45-121508 Fastners To Go45-123108 Bumpers R Us 10/01/11 11 45873342-a 11/15/11 Struts; 3,000 units; $35.00 per unit Tires; 4,000 units; $25.00 per unit /15/ Fastners, 4,000 units; $2.00 per unit 000 units; $40.00 per unit 12/20/11 11/30/11 Struts; 2, Fastners; 4,000 units; $2.10 per unit 12/21/11 Molded bumpers; 500 units; $200.00 per unit Fastners; 4,000 units; $2.50 per unit Fastners; 4,000 units;$2.60 per unit 12/31/11Molded bumpers; 500 units; $210.00 per unit 12/15/11 12/31/11 2315 Al Ammon Automobiles uses a periodic inventory system and values its inventory at the lower of FIFO cost or market. a. What is the audit assertion and the audit purpose of inventory price testing? b. What is your assessment of the valuation of the materials as provided by the client? Require Prepare an audit schedule to summarize your findings. Use the computer to prepare the schedule (instructor's option) c. Assume tolerable misstatement for this testing is $30,000. How would you proceed from this point with respect to audit testing? INTERNET PRORLFM 20-

Explanation / Answer

The auditor is expected is form opinion on the financial statement. The auditors objective is that the financial statements under audit is shows true and fair view of the profit for the period and state of affairs as on that date. In order to form the opinion auditor need to ascertain that among other items of balance sheet, the value of inventory as stated in the balance sheet is proper & there is no material misstatement with regard to the valuation as per balance sheet. This is the purpose of inventory audit.

Inventory Value as per balance sheet is the product of the Quantity of the inventory & its price.

While verification of physical count procedures, provides reasonable assurance with regard to the completeness of the inventory (that no material item of inventory is omitted to include in the books or, no fictitious item is included), the auditor also needs to ensure that the other component of the value ie., price of the inventory is correctly applied in arriving at the value of the inventory. For this purpose, it is imperative for him to verify the supplier’s invoices and check the prices applied. This is the purpose of inventory price testing.

c)

The total misstatement of the sample is $73200, which exceeds the tolerable limit. Hence, auditor would conclude that the operation of internal control in inventory is weak and would decide not to rely on the management assertion of the inventory value.

Hence, the auditor would increase his substantive procedures to cover larger portion of the inventory value, to keep the audit risk of misstatement in inventory to a lower level.

Let us arrive at the value of inventory: As FIFO method is followed, the closing inventory would reflect the latest prices sample no Description Book Qty (units) Book value $ Quantity from invoice (starting from latest) (a) Rate per unit as per invoice (b) Inv ref no Value $= (a)*(b) Sum of value per item $ Excess/(short) Absolute value of misstatement $ 1 Struts 4000                   145,000 2000 40 Samhani -1032            80,000 1000 35 Samhani -1032            35,000 subtotal         115,000                 30,000                    30,000 (book value-value determined) 2 Tires 4000                   100,000 4000 25 Tbilisi-45873342-a          100,000         135,000               (35,000)                    35,000 3 Fastners 10000                     21,400 4000 2.6 45-123108            10,400 4000 2.5 45-121508            10,000 2000 2.1 45-113008              4,200 subtotal           24,600                 (3,200)                      3,200 4 Molded bumpers 1000                   210,000 500 210 2315          105,000 500 200 2309          100,000 subtotal         205,000                   5,000                      5,000 Total                 (3,200)                    73,200

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