Consider what you have learned about audit procedures related to the acquisition

Question

Consider what you have learned about audit procedures related to the acquisition and payment cycle as you respond to the following questions. Please respond to all of the following prompts in one combined main response:

The audit of inventory can be difficult for a number of reasons: inventory is easily moved and can be stored at multiple locations, plus it can be difficult to value. What steps can an external auditor take to increase confidence in the results of the inventory audit?

There have been several instances in the past of fraud based on inventory. What are some of the ways in which a fraud involving inventory can be perpetrated? How can the auditor discover those frauds?

An auditor focusing on inventory isn’t interested in purchasing or accounts payable, because “that’s just matching purchase order numbers to invoices and checks.” Do you agree? Why or why not?

Explanation / Answer

Inventory is the key factor of the organization which covers the 70 % of the value of the organization. Companies explore various ways for ensuring the inventory accuracy, as it directly linked with high value. Audit is one of the best ways for ensuring inventory accuracy.

External auditor can take following steps to increase the confidence in the result of inventory audit are as below

1.     External auditor can cross check the total inventory and their usage value wise. Like the total inventory purchases value should be equal to the inventory used plus inventory left in the organization. Used inventories value should be matched with sales and accounts receipts.

2.     Physical sampling check for the high value items.

3.     Bill of material audit can help of understanding the one of key source of inventory fraud. The Bill of material change management process will give the confidence on the audit results.

4.     Customer complaints/ plant complaint/accounts complaints on inventory related issues of the organization helps to get the confidence on the audit results.

5.     Review of other audits & their finding related to inventory can help to get the confidence on the audit results.

6.     Auditor can get confidence from plant’s history on inventory, old audit findings, organizational issues related to inventory etc.

7.     Auditor can have multiple sampling from all ranges of inventory items , so that he can get the full visibility of all item’s inventory.

Fraud Inventory – Fraud inventory are being explored by companies and is a serious issue for the organizations. Following are the ways with which inventory fraud can be done.

·       Receipts of less quantity against the purchased value – Auditor can check with matching the payable account with receipt quantity report.

·       Mismatch physical vs stock quantities - Auditor can have sampling checks for high value items

·       High consumption of quantity with Bill of Material errors – Auditor can review/check the bill of material errors ensuring process or audit of bill of material errors.

·       Miscellaneous exist of inventory – Audit of miscellaneous exist of stock and their reasons.

·       Scrap of inventory under slow moving/ obsolete inventory – Audit for scraping of inventory under slow moving/obsolete inventory.

No disagree, the auditor focusing on inventory does not interested in purchasing or accounts payable, as this just matches the purchased quantity with their total cost of payment to the vendors.

This is one the key checks for the inventory fraud. It is the first step to ensure that whatever the company has purchased quantity it matches with the total purchased value as well. There may be cases where purchased value is higher than the purchased quantity. So to avoid such type of cases, the purchased quantity needs to be match with the purchased value.

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