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Journal of Business Cases and ApplicationsVolume 20Inventory observation: Applied case study for audit studentsTrish DriskillUniversity of the Incarnate WordKelly PittmanUniversity of the Incarnate WordABSTRACTThis case is based on actual external audit procedures used in a year-end inventoryobservation for a merchandising company. Students in an undergraduate auditing course areorganized into “audit teams” to perform detail testing of a fictitious inventory account, while theinstructor acts in the role of both “audit senior” and “client contact”. Audit teams must evaluateaudit assertions for inventory, performs designated testing procedures, document the result oftesting using audit workpapers and provide a conclusion on the overall reliability of the client’sinventory account balance. The case uses physical picnic tables and benches across an universitycampus as fictitious inventory accounts. Students are provided with a trial balance, inventoryaccount subledger, company inventory manual, and corresponding invoices. Additionalinformation is provided by the “client” as requested by the audit team. Students must completeaudit steps for the inventory observation and prepare a full set of audit workpapers withdocumentation of procedures and conclusions. This case enhances students’ ability to thinkcritically, improves written business communication and directly applies Generally AcceptedAuditing Standards (GAAS) in real-world scenarios. This case can easily be modified at anotherinstitution or extended into a graduate level course.Keywords: audit case study, inventory, audit procedures, workpapers, accounting, managementassertionsCopyright statement: Authors retain the copyright to the manuscripts published in AABRIjournals. Please see the AABRI Copyright Policy at http://www.aabri.com/copyright.htmlInventory observation: applied, Page 1

Journal of Business Cases and ApplicationsVolume 20INTRODUCTIONTeaching auditing in the classroom is often a challenging task. The theoretical subjectmatter can seem impractical and insignificant to the business environment. Thus, audit educatorsstruggle to motivate students’ attention towards the subject matter (Boyle & Lloyd, 2013). Senioraccounting students approach their last year of courses and anticipate auditing to be similar to therest of their undergraduate accounting courses involving numbers and undeviating answers(Davidson, 2017). Before taking an audit course, accounting students experience their entireundergraduate courses using a quantitative mindset (Boyle & Lloyd, 2013). Yet, auditing isrevolves around more qualitative methods that often do not have conclusive answers (Boyle &Lloyd, 2013). Auditing remains grounded in theory and concepts that guide an individual tomake unique conclusions regarding each specific circumstance. In essence, auditing focusesmore on “study of accountANTS, as the study of accountING” (Boyle & Lloyd, 2013).Therefore, auditing students must adapt to a different thought process when understanding thesubject material.Additionally, another concern associated with the challenges of audit education involvestextbooks. The majority of audit textbooks utilize a concept-based framework as opposed apractice method (Boyle & Lloyd, 2013). By simulating real audit experiences, students would beable to better experience and understand the audit profession. For example, audit textbooks donot demonstrate the progressive stages and relationships between those audit steps, such asplanning, internal control, substantive testing, and reports (Boyle & Lloyd, 2013). Along withthis issue, internal control remains rapidly evolving. Thus, educating audit students on the everchanging internal control environment remains difficult (Maijoor, 2002).The theoretical models in audit education remain difficult to explain to students lackingreal-world knowledge (Fernandes, 1994). Thus, auditing students must experience theaccounting cycle and not just memorize the facts. Classroom interaction increases if students areable to picture the accounting cycle in the business environment (Boyle & Lloyd, 2013).Typically, first-year auditors are flung into the staff responsibilities and feel completelyoverwhelmed and unable to transfer theory to practice (Davidson, 2017).Therefore, introducing audit practices via hands-on experiences enables students toincorporate concepts in the classroom to the audit profession. Alternatively, the lack of auditsimulation in the classroom significantly impedes individuals in grasping auditing theories andconcepts (Boyle & Lloyd, 2013). The Bedford Report (1986), initiated by the AmericanAccounting Association, resulted from a previous gap in what educators where teaching inaccounting and how the accounting profession was changing. The Bedford Report (1986) urgedaccounting educators to embrace modern instructional pedagogies, such as role-playing.Unfortunately, accounting education has not significantly changed since the Bedford Report(Siegel, Sorensen, Klammer, & Richtermeyer, 2010). The Accounting Education ChangeCommission (1990) also encouraged active learning environments for accounting students toexperience simulations of accounting practices. For example, role-playing allows students toexperience the business environment (Yardley-Matwiejczuk, 1997).The researchers posit that a hands-on approach to audit education significantly increasesstudent knowledge and transfer of the theoretical methods within the audit profession andcatapults into the audit profession with confidence. The past audit research agrees with theresearcher conclusions. Understanding and gaining expertise in a complicated subject, such asauditing, demands active learning instructional methods in the classroom (Bonner, 1999).Inventory observation: applied, Page 2

Journal of Business Cases and ApplicationsVolume 20Knechel (2000) agrees that accounting educators must create learning environments that allowthe students to gain hands-on experiences in the audit world. Role-playing cultivates real lifeexperiences in the audit profession, which transfers individuals from thinking like a student toacting like an auditor (McMillian, 1994). Researchers have concluded that active learningcontributes to the learning process in audit education (Davidson, 2017; Healy &McCutcheon,2008). The most successful audit educations are able to combine the knowledge of theory andaudit concepts into developing audit skills to put into practice (Armitage & Poyzer, 2010).Overall, the research points towards all the benefits of adopting role-playing in the accountingclassroom. However, little research has been performed on how to incorporate role-playinginstructional methods into the classroom (Boyle & Lloyd, 2013). Based on the lack of teachingmethods and examples, the researchers propose an audit case for undergraduate students thatincorporates active learning pedagogies utilizing a hands-on approach to auditing inventory.CLASSROOM USEThis case requires undergraduate accounting student to perform auditing procedures andworkpaper documentation using Generally Accepted Auditing Standards (GAAS) specificallyfocusing on key management assertions of relevant to inventory accounting: existence,completeness, valuation, rights/obligations and presentation/disclosure. The case is used in asenior level undergraduate auditing course as a practical application of audit procedures in aprimarily theoretic course. Student learning outcomes related to professional communication,writing and critical thinking are a focus of this case. Written documentation of both testingprocedures and workpaper preparation should be clear and concise; all communication with the“senior” and “client” via email or in person should be performed in a professional manner.Although the case is fictitious in that picnic tables across a campus are not technically classifiedas inventory, it can easily be applied or replicated on any campus with a number of physicalassets.STUDENT CASE INSTRUCTIONS FOR INVENTORY OBSERVATIONThe case is designed around teams of three to four students collectively acting as a “staffauditor” in a public accounting firm. Each team is assigned to an inventory observation for theclient, UIW, specifically for the Picnic Table asset group. (Hint: Although Picnic Tables are nottrue “inventory” since they are not being sold, the teams will observe the asset as if it wereinventory). UIW has several types of picnic tables located across campus, each with a differentassigned inventory cost and description.The following information is provided to each team: Inventory Observation Instructions (Appendix A)Audit program for inventory: picnic table asset account. (Appendix B)Picnic table inventory record detailing all picnic tables as of the date of the inventoryobservation. (Appendix C)Partial adjusted trial balance as of the inventory observation date and the completeBalance Sheet. (Appendix D)Inventory observation: applied, Page 3

Journal of Business Cases and Applications Volume 20Client’s picnic table inventory manual describing the various types of tables, theirdescriptions and assigned costs. (Appendix E)Requirements: Groups will complete the blank audit program (matrix) for the picnic table inventoryasset account. The audit program includes both relevant account assertions as well as theassigned audit steps. Students must describe specifically how each assertion applies to theaccount and link the audit steps to the applicable assertions in a matrix format. Teamswill then sign-off and date the audit steps as work is performed.Groups will use the client’s inventory record as workpaper K1 and document allnecessary audit steps and conclusions on the workpaper. (Any relevant supportingevidence can be assigned additional workpaper references such as K1-1, K-2 etc). Theinstructor will act as the “client” in the event that additional supporting documentation isneeded. It is noted that in a real-world scenario the style and preparation of workpaperswill be specific to the public accounting firm; however, this is an opportunity to discussthe practice of using cross-references and tickmarks to document work.The engagement team has determined that the materiality scope for this asset account isindividual and/or combined misstatements greater than 750.00. Groups must make sureto keep a summary of all noted errors on workpaper K1. If time permits, or in moreadvanced courses, the groups will use the noted errors to extrapolate potential audit errorsand make overall conclusions regarding the likelihood of material misstatements andpotential adjusting entries.Groups should complete all audit steps outlined on the blank audit program and mayrequest additional supporting evidence from the client if necessary. Any client requestsshould be made either in person or via email using a professional communication style.In the event that the groups have questions regarding work, they are encouraged to asktheir acting senior (instructor) for guidance in a professional manner. The practice of roleplaying staff and senior will provide an opportunity to practice both oral and writtencommunication.Assigned audit steps:1. Trace the total balance per the inventory record (K1) to the adjusted trial balance. (Theaudit manager has already agreed the adjusted trial balance to the financial statements.)2. Foot and cross foot the inventory record (K1) to ensure all calculations have beenproperly recorded. The case documents can be easily adjusted to either have errors in thecalculation of the inventory balance. Students learn how to reconcile and notedifferences in calculations and can focus on understanding that account balances from thespecific account records are used to populate the trial balance and eventually the financialstatements.Inventory observation: applied, Page 4

Journal of Business Cases and ApplicationsVolume 203. Trace assigned inventory costs for each inventory category per the inventory record to thecompany’s Picnic Table manual. The picnic table manual provided includes adescription of each inventory classification as well as standard costs used for recordingpicnic tables. The initial manual provided to each group only includes two differenttypes of inventory. Most groups find additional types of inventory upon their observationand must request a revised manual from the client.4. Verify that the standard inventory costs listed on the inventory manual agree to originalinvoice documentation. Invoices are not provided to the groups unless specificallyrequested. The invoice provided is for the most recent purchase of each classification.The invoices themselves are included in an Excel file with different invoices on each tabof the file. Groups should discover additional invoices included for other types of picnicinventory. This typically prompts a client question as to what the additional invoicesrelate to and, the “client” then has an opportunity to explain that the initial inventorymanual is not complete.5. Select a sample of 7 items from the inventory record (K1). Trace the sample to the“floor”, by locating and physically observing the asset on campus. Check that allinformation pertaining to the asset agrees with your physical inspection of the item andnote selected items with a tickmark reference on K1. Groups should note that this stepprimarily tests the existence of items.6. Walk through campus and randomly select a sample of 4 items from the “floor”. Traceand agree this sample to the inventory record. Ensure that assets are properly includedand documented in the inventory record. Make note of these “floor” samples on K1 orcreate a separate workpaper to note this work. Groups should note that this step primarilytests the completeness of the inventory record.7. Once all samples have been tested and work is documented students must determinewhether any material misstatements are present either on an individual basis or in total.Groups s