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Lesson#30
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TESTING OTHER SYSTEMS
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TESTING OTHER SYSTEMS
The type and range of other systems that the auditor may
encounter will depend upon the nature of the
business but, as a general rule, most other systems you may
encounter will be concerned with the safe custody
of an asset of the business.
Thus there will be a system for inventory in a manufacturing
company and a system for non current assets in
many businesses. Some businesses may have significant
investments and thus will have a system to maintain
control of this type of asset.
In this section, we will consider control systems: for inventory
and non current assets.
Inventory
You will be aware that there is a close link between inventory
on the one hand and sales and purchases on the
other hand. In the light of this, you will not be surprised that
many of the points in this section have already
been dealt with in covering sales and purchases above - they are
repeated here briefly to give you the overall
picture.
CONTROL OBJECTIVES
Although inventory records may vary considerably from client to
client, the controls are the same in all cases,
namely:
(i) Authorization and purchase procedures
(ii) Control over goods inwards
(iii) inventory records supported by physical inventory counts
(iv) Control
over dispatches and goods outwards
(v) Adequate steps should be taken to identify all inventory for
which provisions may be
required on the grounds that their net realizable value is below
cost
(vi) Inventory levels should be controlled so that materials are
available when required but
that inventory is not unnecessarily large
Control Procedures over Inventory
(i) Approval and
Control of Documents
a) Issues from inventories should be made only on properly
authorized requisitions.
b) Reviews of damaged, obsolete and slow moving inventor/ should
be carried out. Any write-offs
should be authorized.
(ii) Arithmetical
Accuracy
a) All receipts and issues should be recorded on inventory
cards, cross-referenced to the appropriate
GRN or requisition document.
b) The costing department should allocate direct and overhead
costs to the value of work-inprogress
according to the stage of completion reached.
c) To do this standard costs are normally used. Such standards
must be regularly reviewed to ensure
that they relate to actual costs being incurred.
d) If the value of work-in-progress is directly comparable with
the number of units produced,
checks should periodically be made of actual units against
work-in-progress records.
(iii) Control
Accounts
a) Total inventory records may be maintained and integrated with
the main accounting system; if so
they should be reconciled to detailed inventory records and
discrepancies investigated.
(iv) Comparison of
Assets to Records
a) Inventory levels should be periodically checked against the
records by a person independent of
the stores personnel, and material differences investigated.
b) Where perpetual inventory records are not kept adequately a
full inventory count should be held
at least once a year.
c) Maximum and minimum inventory levels should be pre-determined
and regularly reviewed for
adequacy.
d) Re-order quantities should be pre-determined and regularly
reviewed for adequacy.
page
102
(v) Access to
Assets and Records
a) Separate centers should be identified at which goods are
held.
b) Deliveries of goods from suppliers should pass through a
goods inwards section to the stores. All
goods should pass through stores and hence be recorded and
checked as received.
c) Inventories should be held in their locations so that they
are safe from damage or theft.
d) All inventory lines should be identified and held together
e.g. in bins which are marked with all
relevant information as to size, grade, origin, title for
identification.
e) Access to the stores should be restricted.
Tests of Controls
a) Observe physical security of inventories and environment in
which they are held.
b) Test procedures for recording of inventory movements in and
out of inventory.
c) Test authorization for adjustments to inventory records.
d) Test authorization for write-off or scrapping of inventories.
e) Test controls over recording of inventory movements belonging
to third parties.
f) Test procedures for authorization for inventory movements
i.e. the use made of authorized goods
received and dispatch notes.
g) Inspect reconciliations of inventory counts to inventory
records (this gives overall comfort on the
adequacy of controls over the recording of inventory).
h) Check sequences of dispatch and goods received notes for
completeness.
i) Assess adequacy of inventory counting procedures and attend
count to ensure they are carried out.
page
103
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