16-6

(Computer-assisted substantive tests for inventory) An auditor is conducting an audit of the financial statements of a wholesale cosmetics distributor with an inventory consisting of thousands of individual items. The distributor keeps its inventory in its own distribution center and two public warehouses. An inventory computer file is maintained on a computer disk and at the end of each day the file is updated. Each record of the inventory file contains the following data:

Item number

Location of item

Description of item

Quantity on hand

Cost per item

Date of last purchase

Date of last sale

Quantity sold during year

The auditor is planning to observe the distributor's physical count of inventories as of a given date. The auditor will have available a computer tape of the data on the inventory file on the date of the physical count and a general-purpose computer software package.

Required

The auditor is planning to perform inventory substantive tests. Identify the inventory tests and describe how use of the general-purpose software package and the tape of the inventory file data might be helpful to the auditor in performing such tests. (Hint: You may wish to refer to Chapter 12 as well as this chapter in answering this question.) Organize your answer as follows:

Inventory Substantive Test	How Generalized Audit Software Might Be Helpful for Substantive Tests
Observe the physical count, making and recording test counts when applicable.	Determine which items are to be test counted by selecting a random sample of a representative number of items from the inventory file as of the date of the physical count.

16-7

(Computer-assisted substantive tests for inventory) Brown, CPA, is auditing the financial statements of Big Z Wholesaling, Inc., a continuing audit client, for the year ended January 31, 20X2. On January 5, 20X2, Brown observed the tagging and counting of Big Z's physical inventory and made appropriate test counts. These test counts have been recorded on a computer file. As in prior years, Big Z gave Brown two computer files. One file represents the perpetual inventory (FIFO) records for the year ended January 31, 20X2. The other file represents the January 5 physical inventory count. Assume:

Brown issued an unqualified opinion on the prior year's financial statements.

All inventory is purchased for resale and located in a single warehouse.

Brown has appropriate computerized audit software.

The perpetual inventory file contains the following information in item number sequence:

Beginning balances at February 1, 20X1: Item number, item description, total quantity, and prices.

For each item purchased during the year: Date received, receiving report number, vendor, item number, item description, quantity, and total dollar amount.

For each item sold during the year: Date shipped, invoice number, item number, item description, quantity shipped, and dollar amount of the cost removed from inventory.

For each item adjusted for physical inventory count differences: date, item number, item description, quantity, and dollar amount.

The physical inventory file contains the following information in item number sequence: tag number, item number, item description, and count quantity.

Required

Describe the substantive auditing procedures Brown may consider performing with computerized audit software using Big Z's two computer files and Brown's computer file of test counts. The substantive auditing procedures described may indicate the reports to be printed out for Brown's follow-up by subsequent application of manual procedures. Do not describe subsequent manual auditing procedures.

Group the procedures by those using (a) the perpetual inventory file and (b) the physical inventory and test count files. (Hint: You may wish to refer to Chapter 12 as well as this chapter in answering this question.)