Auditing Case Study
1. Auditor's Objectives: According to an essay published online by the United States General Accounting Office, managers and other decision-makers need to know how much inventory there is and where it is located in order to make effective budgeting, operating, and financial decisions and to create accurate financial reports. Physical inventory involves counting the individual items in stock at a particular date and time to ensure accuracy of inventory quantities and values as reported on the organization's Balance Sheet. Proper inventory accountability requires that detailed records of produced or acquired inventory be maintained, and that this inventory be properly reported in the organization's financial reports. Physical controls and accountability reduce the risk of (1) undetected theft and loss, (2) unexpected shortages, and (3) unnecessary purchases of items already on hand. There are many factors that can cause the record of on-hand inventory to differ from the physical quantity counted including omission of items from the count, incorrect counts, and improper recording or reconciliation of count results. These problems must be addressed by the auditor. Accurate inventory records are key to management's confidence in
Adequate supervision by the auditor increases the likelihood of accurate and consistent counts and reduces the overall risk of incorrect or unreliable physical inventory counts resulting in inaccurate financial reports being created (2002). If conducted, this recount would have shown a significant discrepancy between the actual physical count and division's records. This includes planning, conducting the inventory count, as well as reconciling variances. Instead, employees and auditors involved in the inventory count would be given only the part number, description, location, and other information necessary to perform the count but not the item quantity information. These variances indicated that something is wrong with the inventory system or the warehouse operations that affect inventory balances. It might have become readily apparent to the company's outside auditors that there was a serious accounting problem at Gravins Division. Wells explains that the more yes answers to the questions below, the more likely it will be auditors will find motivations exist for fraud:Is management compensation tied closely to company value? Is management dominated by a single person or a small group?Does management display a significant disregard for regulations or controls?Has management restricted the auditor's access to documents or personnel?Has senior management set unrealistic financial goals?Does management have any past history of illegal conduct?According to Wells, The body of research into why"good" employees turn to fraud can be distilled into at least two important concepts. Wells and published on the AICPA website, SAS #82, Consideration of Fraud in a Financial Statement Audit, certain fact patterns influence employees to commit financial statement frauds and asset misappropriations. Pressure: Nashwinter explained his decision to commit accounting fraud as being prompted by the pressure he was under to generate the financial results expected by his superiors. If this fact were known to the auditors, it would have provided an added incentive for them to scrutinize the financial results being reported by this division. In 1980, auditors should have paid closer attention to variances between the count and Gravins' records of inventory on hand. Variances between the physical count and the on-hand balances recorded were never reconciled. Workplace conditions are therefore a major risk factor in predicting fraud. The auditor must also ensure that all inventory items are counted including items on the receiving dock, in the warehouse, in the shipping area, and at outside locations.
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Acceptance Essays
