Testing inventory and cash cycle controls at Apollo Shoes

Apollo Audit

Auditing Apollo Shoes

Inventory and Warehousing: Test of Controls

Testing the controls that exist in the inventorying and warehousing processes at Apollo Shoes consists of the auditor ensuring that the existing controls actually measure what they set out to measure, and that these measurements reflect that actual movement of goods and materials through the various parts of the business (Arens et al. 2008). Certain processes, such as the means by which inventory is checked in and out of various stations in the business, must also be examined (Arens et al. 2008). Ensuring that these practices are able to influence physical movements of materials and goods is key to the audit process.

Inventory and Warehousing: Test of Transaction

In order to test the transaction that exist in Apollo Shoe's inventory and warehousing processes, the specific physical and record-keeping details of the company must be determined by the auditor. A typical flow of inventory through purchasing, warehousing, and distribution includes raw materials purchasing, manufacturing through labor and other processes, storage, and shipment, and all of these steps apply to Apollo Shoes (Arens et al. 2008). An audit that tests the existing controls on these procedures must be able to compare record-keeping details to actual inventories at each step in the process/transfer of materials or goods, and for Apollo Shoes this means checking invoices of incoming raw materials against the physical shipments, tracking any waste of materials through the manufacturing process, ensuring that the right number of finished goods per unit of material are produced, and that all of these goods are accounted for in the warehouse and on documents pertaining to their shipment/existence.

Cash Cycle: Tests of Controls

System, personnel, and direct accounting controls should all be in place at Apollo Shoes in order to ensure that cash is not being mishandled, misappropriated, or inadequately tracked (Coyle 2000). The auditor should ensure that appropriate background and resume checks were performed on any employees that handle cash transactions or, as is more likely in Apollo's case, have access to company funds, and should also ensure that a bare minimum of two people check all transaction receipts against purchase orders, sales records, etc. (Coyle 2000). This separation and redundancy of duties is a key control in the cash cycle.

Cash Cycle: Test of Transaction

In order for income to be recognized and reported, it must first be earned and realized, and thus ensuring that the actual monetary transactions that are recorded and expected occur as reported is one of the primary tasks of the auditor. At Apollo Shoes, ensuring that retailers make payments on their purchases in the time periods specified in their agreements, that defaults are kept below a certain level, and that suppliers are paid consistently and in a timely fashion are all parts of the transaction testing process (Coyle 2000). The auditor also needs to make sure that internal communications regarding transactions are made in an accurate and timely fashion; sales and purchasing departments must have effective communication with the accounting department in order to maintain current and accurate assessments of the cash flow and capital situation of the company during different phases of production, changes in sales or materials costs, and other fluctuations.

Cash Cycle: Analytical Procedure

As in the analysis of the inventory and warehousing numbers of the company, comparison of cash cycle figures from the current audit with figures from previous years makes up the analytic process of auditing the cash cycle (Arens et al. 2008; Coyle 2008). Assuring that profit margins remain in keeping with previous averages, accounting for expected/known changes in the business, is part of this process (Arens et al. 2008). Apollo Shoes should not have experienced significant changes in margin.