Table of Contents

Chapter 1 - Auditing Inventory. 1

The Nature of Inventory. 1

Auditor Objectives. 1

Auditing Characteristics of Inventory. 2

Inventory Process Flow.. 3

Inventory Costing. 4

Inventory Fraud. 5

Incorrect Receipt Fraud. 5

Product Replacement Fraud. 5

Diversion of Scrap Payments. 5

Inventory Falsification. 5

Accidental Errors. 6

Inherent Risk Assessment 7

Material Misstatement Assessment 7

Substantive Procedures. 8

Evaluate the Count Plan. 9

Verify the Cutoff 9

Observe the Physical Count 10

Test the Count 11

Evaluate the Costing Methodology. 12

Test Inventory Costing. 12

Reconcile Inventory to General Ledger. 13

Investigate Legal Encumbrances. 13

Investigate Possible Impairments. 13

Conduct Analytical Procedures. 13

Gross Profit Method. 14

Review Presentation. 15

Auditing a Periodic Inventory System.. 15

Auditing a Perpetual Inventory System.. 15

Mixed Systems. 16

Internal Controls Used by the Client 16

Activities for an Initial Audit 20

Review Questions. 22

Chapter 2 - The Physical Inventory Count 23

The Physical Inventory Count 23

Review Questions. 26

Chapter 3 - The Lower of Cost or Market Rule. 27

Lower of Cost or Market Rule. 27

Inventory Translation Adjustment 29

Review Questions. 31

Chapter 4 - Inventory Cost Layering. 32

Inventory Costing. 32

The First in, First Out Method. 33

The Last in, First Out Method. 34

The Weighted Average Method. 35

Review Questions. 38

Answers to Chapter Questions. 39

Glossary. 44

Index. 46

Final Examination…………………………………………………………………………………………….48