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This audit report assignment help is a detailed study of various aspects which are included in the process of auditing of financial accounts of a company. This report is about discussing various audit procedures for effective and substantial management of audit of inventory of organisation which can be perpetual and physical inventory management. Best Living Supplies Ltd (Best Living Supplies) is given in the scenario which is involved in the supply of wide variety of house hold products to retail outlets and purchasing its inventory from the suppliers and manufacturers directly and located in the single warehouse. There are provided financial statements of the company for the audit purpose in which perpetual inventory of the company is computerised adopting the First-in-First-out (FIFO) inventory method. The inventory for the year ending 30th June 2016 going to be audited and different substantive audit proceduresare evaluated with their justification of assertion and among them the most appropriate assertion is analysed in the report.
Justification of assertion
Explanation of appropriate substantive audit procedure
This procedure of auditing provides access to identification of any halting in the recording of inventory by perpetual and physical inventory method.
Cutoff analysis is defined as one of the audit procedures for effective control over the record and maintenance of inventory of the company. Best Living Supplies Ltd is a company trading in the household item and purchasing its inventory from directly from manufacturers and suppliers and locating them in single warehouse(Clikeman, 2012). The company is recording its inventory by using computerised methods in two methods which is perpetual and physical inventories. Company is maintaining two files of inventory one is containing perpetual inventory and second file is containing clients physical inventory data as on 30 June 2016. Being the auditor of the company we will use cutoff analysesaudit procedure method for the auditing of financial statements of the company. Auditors examine the inventory records of the company for identifying any halting and faulting in the process of recording of inventory which can be perpetual or physical inventory. For a company it can be complex to maintain appropriate records of the inventories and all the transactions which took place related to the inventory in the company. For a company like Best Living Supplies Ltd which is purchasing household items on huge level directly from suppliers and manufacturers and collecting them into single warehouse there increases chances of any kind ofdefault in the recording of the transaction and their values. In this audit process auditor provides the chances to examine and evaluate the inventory count recorded in the files and can ask questions about transactions which are missed and are wrongly recorded. Shipping transactions are also tested by the auditors with the physical inventory. In case there is no default then auditor can declare that the company is adopted effective cutoff analysis procedure in the company(Clikeman, 2012).
2. Observation of Physical inventory count
This Audit procedure provides effective way to identify any default and errors in the process of physical inventory calculation.
This procedure of audit is effective and useful for the auditor in analysing and evaluating the physical inventory of the company and its clients.This process defines the various methods which are involved in the process of recording the inventory of the company and testing its efficiency and appropriateness. The main aim of the auditor of using this audit procedure to trace any kind of default and errors in their counting and placing in the company. In this audit procedure auditor understands and evaluates the prepared physical inventory file of the company which is covering all the transaction within the company and defines the count of assets and goods exist with the company.This analysis help the auditor to understand the pattern and method which is using by the company to maintain its physical inventory and this lead auditor to effectively analysing the lacks and misrepresentations in their records of inventory and also defines the suitability of the method selected by the company to manage and record its physical inventory(Brown, et. Al 2014).Best Living Supplies Ltd has adopted in which it prepares its inventory in two files one is perpetual inventory and another is physical inventory. Under physical inventory of the company there are included the following information.
The above information is involved in physical inventory and auditor can evaluate its effectiveness of this method on the basis of the appropriateness and transparency provided in the file of this inventory record. Auditor can check and verify the effectiveness of the inventory by doing its own independent calculations of a part of inventory and can implement these calculations on the overall inventory for calculation of appropriateness and any errors.
3. Evaluation of inventory valuation method
It is effective way to evaluate the valuation method using by the company for effective record keeping.
Companies use different valuation methods to maintain its inventory which is effective way to manage the transaction of inventory in the company. There are two methods of maintaining the inventory in the company which are first- in- first- out (FIFO) and last- in- last- out (LIFO). Weighted average can also be taken for the calculation of the inventory in the company(Bagshaw, et. Al 2014). The effectiveness and appropriateness of the valuation method is evaluated in this method of audit. Auditor can effectively analyse the situation of valuation of inventory as in impact of the adopted method can be analysed by this audit procedure.The auditor can evaluate these methods by comparingdifferent methods of inventory and its impact on the financial statement of company.Best Living Supplies Ltd is using FIFO method of valuation for maintain its inventory and the procedure is computerised. This audit process will help in making the inventory process more effective by analysing all the aspects related to this technique which can make impact on making the decision of the company more effective to choose the right valuation method.This audit process also provides opportunity to evaluate the cost involved in the valuation method using by the company.Auditor can verify the cost associated with the valuation method of the company.The accuracy which must be generated by using this valuation method can be evaluated by this audit procedure as in the auditor verify it by checking it by comparing the inventory transactions with the supplierinvoices and receipts with the accounting information and this can also define the level of effective results making by the valuation method in the effective inventory management and control(Bagshaw, et. Al 2014).
4. Evaluation of perpetual inventory
Perpetual inventory is important for the auditing purpose as in it is based on the computerised system and this audit procedure helps in ensuring the effectiveness of this inventory system.
Perpetual inventory is a method of accounting for inventory of the company which records the sale and purchase of inventory of the company at that time immediately by using computerised point of sales method and using other software.Best Living Supplies Ltd is using this computerised point of sale method for managing its inventory and there are executed one computer file including this perpetual inventory of the company(Glover, et. Al 2014).Auditors can use this audit procedure for effective evaluation of the perpetual inventory of the company which makes impact on the physical inventory of the companyhence should be appropriately integrated with it.This procedure helps in effective management of the various aspects of perpetual inventory as in which manner the company is carrying its inventory in this method. Auditor can understand about the company’s method to maintain perpetual inventory by the following points.
Auditor can use this audit procedure to effectively evaluate the perpetual inventory of the company which is also making impact on the physical inventory of the company.The cost which is arising due to adoption of this valuation method can be verified effectively by this audit procedure. This is one of the substantial audit procedures which should be adopted in the process of auditing if financial statements of the company(Glover, et. Al 2014).
5.Evaluation of Risk assessment process
This is Audit procedure helps in the effective management of the company’s risk factors which are indulge in theinventory management in the financial statement of the company.
Risk can be defined as uncertainty in the company and is involved in the different activities of the company. This audit procedure is important and is effective for the purpose of the substantiveaudit procedure. It is liability of auditor to effectively analyse different situations and then assess and measure the risk factor involved in the company’s activities which are related to the inventory management. There are defined various aspects which can be treated as risk factors and can make impact and influence the process of inventory management and control in an organisation. Best Living Supplies Ltd is maintain its inventory with the help of computerisedpoint of sale method in which there are chances or any misrepresentation and risk associated with them which can be harmful for the company. Risk should be assessed effectively for efficiently management of that risk in the company. This audit process is beneficial for the company and gives effectiveness to the audit process of the company and makes the auditor to fulfil his liability to effective assessment of the risk and increase the stability in organisational activities(Quick, 2012).
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In this report we have evaluated various aspects which are required in making the audit process more effective of any organisation. Auditor of the company should adopt substantive audit procedures in its activities which can help him to enhance the effectiveness of the company’s financial statements of the company. We have analysed the case study of Best Living Supplies Ltd which is the supplier of the household items to the retailers and maintaining its inventory by using computerised point of sale method in two files perpetual inventory and clients’ physical inventory.Being the auditor of the company we will analyse various substantive audit procedures which can be used in the audit procedure of the company to provide effective results and appropriate disclosure of financial position(Spires, 2012).
There are analysed five substantive audit procedures which can be used by the auditor to provide appropriate and effective auditing to the company. Cutoff analyses and observation of physical inventory count are substantive audit procedures which can make impact on the effectiveness of the auditing process. This helps in identifying and tracing any defaults and misrepresentation in the maintenance of inventory of the company. Auditor can take help of these procedures to increase its quality of auditing.Evaluation of inventory valuation method and perpetual inventory helps in identifying and analysing their accuracy and to interrogate the application of these various methods which can make impact on the activities which are indulge in taking benefits of loopholes of various methods and techniques in the financial aspects. Risk assessment is one of the liabilitiesof auditor and should be fulfilled by effectively analysing various aspects of the company. All these substantive audit procedures should be adopted by the auditor of the company in the process of audit which can result in positive(Maqellari, et. Al 2016).
Best Living Supplies Ltdis managing its inventory in computerised point of sale method which is done by making two files one is perpetual inventory and second is physical inventory.To make the inventory management more effective for audit purpose client should adopt the separate record of inventories with locating them separately and this can help in effective assertion of substantive audit procedures in the audit procedure of the company to make the financial statements of the company more effective and absolute(Leung, et. Al 2015).
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Glover, S.M., Prawitt, D.F. & Drake, M.S. 2014;2015;, "Between a Rock and a Hard Place: A Path Forward for Using Substantive Analytical Procedures in Auditing Large P&L Accounts Commentary and Analysis", AUDITING: A Journal of Practice & Theory, vol. 34, no. 3, pp. 161.
Leung, P., Coram, P., Cooper, B.J. & Richardson, P. 2015, Modern auditing & assurance services, 6th edn, John Wiley and Sons Australia, Milton, Qld.
Maqellari, M. & Dika, I. 2016, "Materiality And Risk Essential Pillars Of The Auditor's Work",European Scientific Journal, .
Quick, R. 2012, "EC Green Paper Proposals and Audit Quality", Accounting in Europe, vol. 9, no. 1, pp. 17.
Spires, E.E. 2012, "Trade-offs in audit testing", Journal of Accounting Education, vol. 30, no. 2, pp. 220-232.