Auditing Inventories; Cost of Goods Sold; And Property, Plant, and Equipment

Name: Auditing Inventories; Cost of Goods Sold; And Property, Plant, and Equipment
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Author: Michael Davis

This document covers auditing procedures for key assets.

Michael Davis

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Running head: AUDITING INVENTORIES; COST OF GOODS SOLD; AND 1
Auditing Inventories; Cost of Goods Sold; And Property, Plant, and
Equipment
Name:
AC410
Unit 6
Date:
In your audit of Nolan Manufacturing Company, Happy Chicken, Inc., and internal control
procedures for plant and equipment, you have identified several weaknesses and potential risks.
Based on your analysis, explain how auditors can enhance the internal control over inventory and
property, plant, and equipment, and how they can mitigate the risks of financial misstatements.
Discuss your approach to auditing impairments, fair value estimates, and weaknesses in internal
control, including any necessary substantive procedures. Additionally, consider the role of
valuation specialists and the importance of effective reconciliation in plant and equipment
controls.
Word Count Requirement: 1000-1200 words

AUDITING INVENTORIES; COST OF GOODS SOLD; AND 2
Auditing Inventories; Cost of Goods Sold; And Property, Plant, and Equipment
12–21. Nolan Manufacturing Company retains you on April 1 to perform an audit for the
fiscal year ending June 30. During the month of May, you make extensive studies of internal
control over inventories.
All goods purchased pass through a receiving department under the direction of the chief
purchasing agent. The duties of the receiving department are to unpack, count, and inspect the
goods. The quantity received is compared with the quantity shown on the receiving department’s
copy of the purchase order. If there is no discrepancy, the purchase order is stamped “OK—
Receiving Dept.” and forwarded to the accounts payable section of the accounting department.
Any discrepancies in quantity or variations from specifications are called to the attention of the
buyer by returning the purchase order to him with an explanation of the circumstances. No
records are maintained in the receiving department, and no reports originate there.
As soon as goods have been inspected and counted in the receiving department, they are
sent to the factory production area and stored alongside the machines in which they are to be
processed. Finished goods are moved from the assembly line to a storeroom in the custody of a
stock clerk, who maintains a perpetual inventory record in terms of physical units, but not in
dollars.
What weaknesses, if any, do you see in the internal control over inventories?
1. Aweaknesses of Nolan Manufacturing Company is that the configuration of control
of the inventories is lacking structure because of the fact the same purchasing agent is
in charge of the receiving department. Typical duties should be segregated and

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Auditing

Auditing Inventories; Cost of Goods Sold; And Property, Plant, and Equipment

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