Reference no: EM132319234

Question

The audit client uses a perpetual inventory system. The accounting department is separate from other operating departments. Only the accounting staff has access to the accounting system. The CEO does not have direct access to the accounting records. The CEO needs to consult with the chief accountant about any proposed changes to the accounting records. If the chief accountant agrees that an adjustment is appropriate, the chief accountant would then make the change in the computer system.

In addition, access to different systems is restricted to authorised staff via individual passwords so that only sales staff has access to the sales computer system, and only accounting staff has access to the accounting system, etc. Authorisation of transactions is also performed via individual passwords.

The accounting staff checks all related documents before recording journal entries in the computer system, e.g., customer orders, duplicate sales invoices and delivery documents.

The accounting computer system is integrated with the inventory information system so that when a sale is made, the inventory computer system automatically calculates cost of goods sold (COGS) after sales staff inputs the inventory product code and the quantity of products sold. When accounting staff records the sale and inputs the sales invoice number into the accounting system, a COGS journal entry is automatically prepared based on the amount of COGS calculated in the inventory system.

However, accounting staff can reject the proposed COGS journal entry or change the COGS amount if two employees in the accounting department provide authorisation via passwords.

Monthly inventory reports are prepared by the inventory management computer system. These reports list different types of inventories by the date the last sale was made for a particular type of inventory. That is, these "last sales" reports help show inventory categories that have not had a sale for some time.

The total value of each inventory category is also shown in the report. A copy of the report is distributed to the sales manager, purchase manager, chief accountant and the CEO. These reports are often used for reference when senior accounting staff hold meetings to discuss major accounting issues such as inventory write-downs.

The audit client's draft financial statements for 2018 do not include an inventory write-down expense or an allowance for inventory obsolescence account. Inquiries of the accounting staff reveal that the chief accountant said there is no need to recognise unrealised inventory losses 2019-1 Auditing Case Study, p.3 because the amount of the loss is uncertain so the information would be misleading to financial report users. The chief accountant told the staff that inventory write-down expense will be recorded only when inventory items are actually sold.

Question:

Assess control risk for each of the general audit objectives of the accounts given above. In your answer, identify existing internal controls that are relevant to the specified general audit objectives and briefly explain how each internal control can prevent/detect misstatements for the specified general audit objectives for COGS and inventory.