Metrics (Inventory) and the Risk Assessment Suite, Part 2 (#27)
/In this episode, we delve further into the risk assessment suite, and also describe the most useful metrics for inventory. Key points discussed relating to the risk assessment suite are:
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It was created in response to high-profile audit failures.
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It requires a more robust understanding of the client, its risk management practices, operating environment, strategy, and competitive factors.
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The client will likely be required to complete a questionnaire pertaining to the preceding items.
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There is a new focus on auditing the financial statement presentation and disclosures.
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The auditor will need to ask more questions about a client’s internal controls.
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It requires consideration of a client’s internal controls as part of an audit.
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More attention must be paid to the risks of material misstatement of financial statements.
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Link the audit program to an increased need to address the risks of material misstatement.
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Work by the client to assist the auditor can reduce fees; it may also be possible to reschedule the audit to assist the auditor.
Key points discussed related to metrics for inventory are:
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Inventory turnover is useful for seeing how much inventory is needed to support sales.
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The proportion of old inventory on hand is needed to call attention to the need to eliminate inventory. The percentage of returnable inventory is a more specific variation.
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Inventory accuracy is needed by the purchasing and picking staffs, and reflects inventory record accuracy.
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Inventory availability is needed to see if there is a problem with delivering to customers on time.
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The percentage of warehouse utilization is needed to plan for additional investments in warehouse space.
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The cubic volume of warehouse space used is useful for adjusting the warehouse racking systems to accommodate more inventory.