 In this presentation we will discuss the auditing of inventory. So we're going through the auditing process. We are looking specifically to the inventory management process at this time. When we consider the inventory management process we want to think about the idea of where inventory management lies with regards to other types of processes. So you'll note that inventory management obviously is closely related to the purchasing process. Therefore when we audit the purchasing process we have done some auditing with relation to the inventory management process. When we audit the inventory management process we're doing some auditing of the purchases process when we're considering certain components of it. As we build the audit plan we want to keep this in consideration so we could consider when we audit something like purchasing how much of the inventory management process will be audited. How much of that bucket of information of evidence can we fill up with regards to inventory management as we audit the purchasing process as we do the inverse as well. When we go to the inventory management process how much can we then apply out to the purchasing process so we can efficiently plan this information. Now we'll consider documentation with relation to inventory management started with the production schedule. So the production schedule note of course would be involved if we're in the production of the inventory. So we're considering production process there if we're in the purchasing and selling of inventory then we wouldn't have the production type components depending on the type of industry that we are in. We want to build an expected demand for the business's products if we can if we have a normal expected demand as we'll see when we think about the risks involved with the inventory section. If we have a normal demand then we can have more assurance about the inventory process and the production schedule. If the demand is a lot more volatile then we have some more risk involved in terms of the production schedule. And then we have the receiving report records the receipt of goods from the vendor. So the receiving report is going to be what is recording the goods that we're going to receive from the vendor. We discussed this in the purchasing process because of course the purchase of inventory is one of the things that we may purchase through the purchasing process the receiving report we could think about basically on the warehouse if we're in the warehouse we're receiving the goods. If we purchased it say from like China we're here in the US we purchased something from China it comes to us then we're imagining ourselves in the warehouse and we have then that's the point we put together the receiving report. Then we have the materials requests requisition that is materials requisition tracks material during the production process. So the material requisition is going to be an internal form internal to the organization and that's going to be tracking the materials and we could think of it if you think of like a job cost system and we're making the inventory then the materials requisition form may be the form that is used to move the materials say for making guitars we're moving the wood from the the inventory the raw goods to the work in process that's going to be an internal type of documentation transferring possibly from one account to another one inventory account to another raw materials possibly to work in process which will finally be produced into the format of finished goods finished inventory and then we have the inventory master file has information related to the business's inventory including the perpetual inventory records. This is going to give us that the perpetual inventory records kind of like the subsidiary type led ledger that we might think of with regards to accounts receivable and accounts payable given us basically that detail that will be involved that we're going to need with regards to inventory documents continued production data information has information about the transfer of goods and related cost incurred at each stage of production. So as again we're thinking about as producing inventory in this case production data has information about the transfer of goods and related cost incurred at each stage of that production level. Cost variance report so now we have the variance report material labor and overhead costs will be charged to inventory during the manufacturing process. So when we make the goods if we're making the inventory we've got material labor and overhead those are the three components that we're going to have to consider in inventory if we produce the inventory. This is going to compare the actual cost to the standard or budgeted cost. So when we think about this we're going to have a budget to the production process often using something like standard costs which are kind of like budgeted costs and then we can take a look at the variance report the difference report between what was budgeted for these components and of course what actually happened and then we have the inventory status report has it's going to include or has the type and amount of products on hand. So the inventory status report the types and the type and amount of products on hand and then the shipping order the shipping and order used to remove goods from the perpetual inventory records. So when we think about the shipping order we're thinking about the orders that are basically going out. So we have the shipping order and that means if it's going out possibly we sold it and therefore it's no longer something that should be on our books therefore this is this this is going to be the form that triggers the transaction that's going to be removing it from typically the inventory on the business's books. Now we're going to take a look at the primary functions related to inventory. First we have the inventory management so inventory management primary function authorization of production activity and maintenance of inventory at appropriate levels issuance of purchase requisitions to the purchasing department. So then we have the primary function of raw materials stores that involves the custody of the raw materials issuance of raw materials to the manufacturing department. Of course as we go through these functions we want to consider these functions and you're considering what will be the risks involved in these functions the inherent risk what internal controls might be put in place for them how can we test for the internal controls as the auditor and then of course the test of internal controls that we will do with regards to the auditing of them and then the substantive procedures that we can test related to these as well. Then we have the manufacturing the primary function of manufacturing that's going to be the production of goods then we have the finished goods storage so the storage of the finished goods which of course involves the custody of finished goods issuance of goods to the shipping department then we have the cost accounting cost accounting team is the maintenance of the cost of manufacturing so we have to account for the maintenance of the cost of manufacturing inventory and cost records we want to make sure the inventories and the cost records then we have the general ledger the general ledger is of course the accumulation classification summarization of inventory and related costs in the general ledger now we'll think of the segregation of duties with relation to inventory so remember this is going to be one of the major internal controls when we think about internal controls we have the segregation or separation of duties that meaning that the key components we're going to separate and therefore if there's going to be something like theft or fraud that's going to take place it would have to involve something called collusion where multiple people would have to get involved and plan in order to basically commit fraud so this is going to be one of the major internal controls separation segregation of duties that should come to mind any time we think of internal controls with basically any type of system also note of course as we consider these internal controls as always we're going to have more separation of duties more segregation of duties that can be done as companies are larger if you go to a smaller type of companies the question is what type of separation or segregation of duties