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 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