Apollo Shoe Case - Inventory Cycle

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Inventory and Warehousing Cycle Due to the size of the balances and the complexity of the transactions involved in the inventory cycle, this is one of the most difficult and time-consuming parts of the audit process. Factors which contribute to the difficulty of this cycle include: different locations, diversity of items, estimation of inventory value, and estimation of obsolescence [ (Arens, Elder, & Beasley, 2006, p. 682) ]. “The inventory and warehousing cycles can be thought of as comprising two separate but closely related systems, one involving the physical flow of goods and the other the related costs” [ (Arens, Elder, & Beasley, 2006, pp. 682-683) ]. There are four types of transactions involved in the inventory and warehousing cycle of Apollo Shoes, Inc., ordering of goods for sale, receipt of the ordered goods, storage of the merchandise, and the shipping of goods to customers. Each of these processes requires that the auditor verify that adequate controls are maintained and that the proper documents are in place for each portion of the process. Therefore, the audit will involve analytical procedures, test of controls and substantive tests on each part of the cycle. Analytical procedure Given the fact that the inventory process will vary between companies, Anderson Olds and Watershed will obtain a thorough understanding of the entire flow of goods from purchase to shipment within the Apollo Shoes organization. Analytical procedures “examine the relationship of inventory account balances with other financial statement accounts” [ (Arens, Elder, & Beasley, 2006, p. 689) ] and are used to “assess the reasonableness of inventory-related balances” [ (Arens, Elder, & Beasley, 2006, p. 689) ]. Analytical procedures will be performed to compare the pre-audited balances as of December 31, 2007 to the prior comparable period in

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