Items 1 through 8 are selected questions typically found in questionnaires used by auditors to obtain an understanding of internal controls in the inventory and distribution cycle. In using the questionnaire for a particular client, a "yes" response to a question indicates a possible internal control, whereas a "no" indicates a potential weakness.
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 all inventory stored under the control of a custodian in areas where access is limited?
3. Are all shipments to customers authorized by prenumbered shipping documents?
4. Is a detailed perpetual inventory master file maintained for raw materials inventory?
5. Are physical inventory counts made by someone other than storekeepers and those responsible for maintaining the perpetual inventory master file?
6. Are standard cost records used for raw materials, direct labour, and manufacturing overhead?
7. Is there a stated policy with specific criteria for writing off obsolete or slow-moving goods?
8. Is the clerical accuracy of the final inventory compilation checked by a person independent of those responsible for preparing it?
REQUIRED
a. For each of the preceding questions, state the purpose of the internal control.
b. For each internal control, list a test of controls to test its effectiveness.
c. For each of the preceding questions, identify the nature of the potential financial misstatement(s) if the control is not in effect.
d. For each of the potential misstatements in part (c), list a substantive audit procedure to determine whether a material misstatement exists.