Substantive Analytical Procedures for Inventory, Warehousing Cycle|Auditing and Attestation|CPA Exam

Substantive analytical procedures are important in auditing inventory and warehousing, as they are in all other cycles.Shows several common analytical procedures and possible misstatements that may be indicated when fluctuations occur. We’ve discussed several of those analytical procedures, such as gross margin percentage, in relation to other cycles.
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Compare gross margin percentage with that of previous years. Overstatement or understatement of inventory and cost of goods sold.
ompare inventory turnover (cost of goods sold divided by average inventory) with that of previous years.
Obsolete inventory, which affects inventory and cost of goods sold.

Overstatement or understatement of inventory.
Compare unit costs of inventory with those of previous years. Overstatement or understatement of unit costs, which affect inventory and cost of goods sold.
Compare extended inventory value with that of previous years. Misstatements in compilation, unit costs, or extensions, which affect inventory and cost of goods sold.
Compare current year manufacturing costs with those of previous years (variable costs should be adjusted for changes in volume). Misstatements of unit costs of inventory, especially direct labor and manufacturing overhead, which affect inventory and cost of goods sold.
In addition to performing substantive analytical procedures that examine the relationship of inventory account balances with other financial statement accounts.Aauditors often use nonfinancial information to assess the reasonableness of inventory-related balances. For example, auditors may need knowledge about the size and weight of inventory products, their methods of storage (stacks, tanks, etc.), and the capacity of storage facilities (available square footage) to determine whether recorded inventory is consistent with available inventory storage. After performing the appropriate tests of the cost accounting records and substantive analytical procedures, auditors have a basis for designing and performing tests of details of the ending inventory balance.