AWP 7

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Completeness Case Example: Inventory Transactions

Context

ABC Manufacturing Company has a complex supply chain and inventory management system for its electronic components production. Given the high volume of transactions and the variety of inventory types (raw materials, work-in-progress, and finished goods), ensuring the completeness of inventory transactions is crucial for accurate financial reporting.

Audit Objective

To verify that all inventory transactions during the fiscal year are accurately recorded in ABC Manufacturing Company’s financial statements.

Types of Audit Evidence and Documentation for Completeness

1. Cutoff Tests

• Case: Perform cutoff tests to ensure transactions near the year-end are recorded in the correct accounting period.

• Documentation: Document the selection criteria, list of transactions reviewed, and the assessment of whether they were recorded in the correct period. Include any identified discrepancies and adjustments made.

2. Reconciliation of Inventory Records to General Ledger

• Case: Reconcile detailed inventory records (e.g., inventory sub-ledgers) to the general ledger and other financial records.

• Documentation: Prepare reconciliation statements, highlighting any reconciling items or unrecorded transactions. Document follow-up actions taken to resolve discrepancies.

3. Physical Inventory Count Observation

• Case: Observe the year-end physical inventory count to verify the existence and condition of inventory and to ensure that all inventory items are included in the count.

• Documentation: Prepare an observation report detailing the count procedures, any deviations observed, and how discrepancies were resolved to ensure completeness.

4. Review of Inventory Purchases and Sales

• Case: Review a selection of inventory purchase and sales transactions throughout the year for evidence that all transactions have been recorded.

• Documentation: Document the sampling method, transactions reviewed, and any findings related to unrecorded or improperly recorded transactions. Include follow-up actions and adjustments.

5. Inquiries and Confirmations

• Case: Inquire of management about the procedures for identifying and recording all inventory transactions. Confirm inventory quantities and transactions with third parties, such as suppliers or customers, where applicable.

• Documentation: Summarize inquiries and responses, including any representations from management. Document the confirmation process, responses received, and any follow-up actions taken.

6. Flow of Transactions Testing

• Case: Test the flow of transactions through the inventory system from initiation to inclusion in the financial statements.

• Documentation: Document the testing procedures, including transaction paths followed, controls tested, and the effectiveness of controls in ensuring transaction completeness.

7. Management Representations

• Case: Obtain written representations from management that all inventory transactions have been completely recorded in the financial statements.

• Documentation: Include a copy of the representation letter, specifically noting sections related to the completeness of inventory transactions.

Conclusion

For completeness, particularly regarding inventory transactions, auditors compile a variety of evidence to ensure that all relevant transactions are accurately captured in the financial statements. This evidence supports the auditors’ assessment of the completeness assertion, confirming that ABC Manufacturing Company’s financial statements provide a true and fair view of its inventory activities and overall financial position. Through detailed documentation, auditors substantiate their findings and conclusions, reinforcing the reliability of the audited financial statements.