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    Kamran Noor
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    The document discusses auditing, what an auditor is, the relationship between inventories and cost of goods sold, the importance of inventories to auditors, internal controls over inventories, and substantive tests of inventories and cost of goods sold transactions. It defines auditing as the verification of accounting data and statements. An auditor checks the accuracy of business records, and can be independent or a captive auditor. Inventories are assets not yet sold, while cost of goods sold is the cost of materials and production for goods that were sold. Auditors must verify inventories due to their size and effect on income.

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    The document discusses auditing, what an auditor is, the relationship between inventories and cost of goods sold, the importance of inventories to auditors, internal controls over inventories, and substantive tests of inventories and cost of goods sold transactions. It defines auditing as the verification of accounting data and statements. An auditor checks the accuracy of business records, and can be independent or a captive auditor. Inventories are assets not yet sold, while cost of goods sold is the cost of materials and production for goods that were sold. Auditors must verify inventories due to their size and effect on income.

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    20 views12 pages

    Auditing Inventories & COGS

    Uploaded by

    Kamran Noor
    The document discusses auditing, what an auditor is, the relationship between inventories and cost of goods sold, the importance of inventories to auditors, internal controls over inventories, and substantive tests of inventories and cost of goods sold transactions. It defines auditing as the verification of accounting data and statements. An auditor checks the accuracy of business records, and can be independent or a captive auditor. Inventories are assets not yet sold, while cost of goods sold is the cost of materials and production for goods that were sold. Auditors must verify inventories due to their size and effect on income.

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    of 12

    GROUP NO.

    13
    Zainab Raza Awan Asad Ahmed

    S.M Irtaza Zaidi


    Neelam Abdul Khaliq

    What is Auditing?
    Auditing is concerned with the verification of accounting data, with determining the accuracy and reliability of accounting statements and reports.

    Who is Auditor?
    An official whose job it is to carefully check the accuracy of business records. An auditor can be either an independent auditor unaffiliated with the company being audited or a captive auditor, and some are elected public officials. Auditors are used to ensure that organizations are maintaining accurate and honest financial records and statements.

    Relationship between Inventories and COGS:

    Inventory: A companys merchandise, raw material, finished and unfinished products which have not yet been sold. These are considered liquid assets, since they can be converted into cash quite easily.

    Cost Of Goods Sold


    An income statement figure which reflects the cost of obtaining raw materials and producing finished goods that are sold to the consumers.

    Beginning Inventory + Purchases = Goods Available for Sale

    Goods Available for Sale - Ending Inventory = Cost of Goods Sold

    Critical importance of Inventories to the Auditors:


    Largest current asset. Alternative methods for valuation of inventories. Directly affects the cost of goods sold and net income. Verification of inventory.

    Functions of Internal control and Inventories:


    The Purchasing functions.
    The Receiving Functions.

    The Storing Functions.


    The Issuing Functions.

    The Production Function.


    The Shipping Function .

    Study And Evaluation


    Obtain description of internal control for inventories and cost of goods sold and conduct a walk-through of the system. Perform compliance test of a sample of purchase transactions. Test the cost accounting system. Evaluate internal control for inventories and cost of goods sold.

    Obtain description of internal control for inventories and cost of goods sold and conduct a walk-through of the system.

    Internal Control.
    Promote operational efficiency and effectiveness. Provide reliable financial information Safeguard assets and records. Encourage adherence to prescribed policies Comply with regulatory agencies.

    Perform compliance test of a sample of purchase transactions.

    Taking a sample.
    Verification.

    Test the cost accounting system


    FIFO

    or W.A.

    Company using the same system. Accuracy.

    Evaluate internal control for inventories and cost of goods sold.

    Evidence.
    Weaknesses and strengths of the system.

    Appraise the weaknesses and strengths.


    Design the reminder of their audit program for substantive test.

    Substantive Tests of Inventories And Cost of Goods Sold Transaction


    Advance Planning of Physical Inventory. Observations of Physical Inventory and test counts. Verifications. Review Quality and Conditions. Checking of Inventories Method. Test the Pricing of Inventory. Year end cut off. Investigation of beginning inventory.

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