Items 1 through 8 are selected questions typically found in questionnaires used by auditors to obtain an understanding of internal control in the inventory and warehousing cycle.

In using the questionnaire for a client, a yes response to a question indicates a possible internal control, whereas a no indicates a potential deficiency.

1. Does the receiving department prepare prenumbered receiving reports and account for the numbers periodically for all inventory received, showing the description and quantity of materials?

2. Is a detailed perpetual inventory master file maintained for raw materials inventory?

3. Are all shipments to customers authorized by prenumbered shipping documents?

4. Is all inventory stored under the control of an inventory custodian in areas where access is limited?

5. Are standard cost records used for raw materials, direct labour, and manufacturing overhead?

6. Is there a stated policy with specific criteria for writing off obsolete or slow-moving goods?

7. Are physical inventory counts made by someone other than storekeepers and those responsible for maintaining the perpetual inventory master file?

8. Is the clerical accuracy of the final inventory compilation checked by a person independent of those responsible for preparing it?

Requirements:

a. For each of the preceding questions, state the purpose (control objectives) of the internal control (8 marks).

b. For each internal control, list a test of control to test its effectiveness (8 marks).

c. For each of the preceding questions, identify the nature of the potential financial misstatement(s) if the control is not in effect (8 marks).

d. For each of the potential misstatements in part c., list a substantive audit procedure to determine whether a material misstatement exists (8 marks).

Organize your answer to this case problem by using the following report format:

a.

PURPOSE OF INTERNAL CONTROL

b.

TEST OF CONTROL

c.

POTENTIAL FINANCIAL MISSTATEMENT

d.

SUBSTANTIVE AUDIT PROCEDURE