| Course | ACC 640 Auditing |
|---|---|
| Module | Module 6 |
| Paper type | graduate milestone audit program for inventory |
| Length | About 1,020 words, 6 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | MS Accounting |
| Updated | October 2026 |
Free sample paper for ACC 640 Module 6
Audit Program for Inventory Held at Third-Party Warehouses
[Student Name]
Southern New Hampshire University
ACC 640: Auditing
Milestone Two
[Instructor Name]
[Date]
The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.
Audit Program for Inventory Held at Third-Party Warehouses
Introduction
Inventory at December 31 is expected to be about $118 million, 39 percent of total assets, up 22 percent while sales rose 4 percent. All of it sits at two third-party logistics warehouses, one in Reno and one in Portland. Milestone One assessed inventory as a significant risk for existence, because goods are held by others, and for valuation, because aged seasonal styles have accumulated. This program responds to those risks under AS 2510 (Public Company Accounting Oversight Board, 2016).
Existence and Completeness
AS 2510 requires direct confirmation with custodians of inventory held by others and, when the amount is material, additional procedures. We will do all three that the standard suggests.
Existence and completeness procedures
| Procedure | Assertion | Timing and extent |
|---|---|---|
| Observe the operator's full count at Reno | Existence, completeness | December 30, two staff on site |
| Observe the operator's full count at Portland | Existence, completeness | January 3, two staff on site |
| Test counts, records to floor | Existence | 60 items selected by monetary unit sampling from the count records |
| Test counts, floor to records | Completeness | 40 items selected from bins across all aisles |
| Confirm quantities directly with both operators | Existence | All locations, as of December 31 |
| Evaluate SOC 1 Type 2 reports and user entity controls | Existence | Both operators, covering January to September |
Test count sizes come from the firm's sampling tables using performance materiality of $660,000 and a high risk assessment. The Reno operator's warehouse also stores goods for other brands, so we will confirm that the company's goods are segregated and tagged, and we will include a sample of bins labeled for other owners to check that none are on the company's count.
Rollback from the Portland Count
The Portland operator counts only on January 3 because of its holiday staffing. We will roll the count back to December 31 by subtracting receipts and adding shipments for January 1 and 2, testing each movement to bills of lading and receiving reports. With only two days and about 9,000 units moving, the rollback can be tested in full. Any unexplained difference between the rolled-back quantity and the December 31 records will be investigated before we rely on the count.
Cutoff
We will select the last five receiving and shipping documents before year end and the first five after at each warehouse, recorded before the counts, and trace them to the inventory and sales records to confirm they are in the right period. Because online sales cutoff is a significant risk, the shipping tests will be coordinated with the revenue team's full-population analytics, so the two areas use the same carrier data.
Valuation: Cost
Inventory is carried at standard landed cost, including product cost from Asian suppliers, ocean freight, duties and inbound handling. We will select 30 styles by monetary unit sampling and trace the standard cost components to supplier invoices, freight bills and customs entries, and test the capitalized variance allocation at year end. Tariff changes in 2025 increased duty rates on some categories, so we will verify that the updated rates were applied to receipts after the effective dates.
Valuation: Net Realizable Value
Under ASC 330, the company must write inventory down whenever expected selling price, less costs to sell, falls below cost. Management reserves 50 percent of cost for styles older than two seasons. We will obtain the aging by style, test it to receipt dates, and compare cost to selling prices in January and February, including markdowns and sales to off-price retailers. Early results show that eight discontinued tent and jacket styles, with cost of $4.5 million, are selling to off-price buyers at about 30 percent of cost, well below the 50 percent the formula assumes, which suggests the reserve is about $900,000 short. Christensen et al. (2012) show that for estimates with high uncertainty, the range of reasonable outcomes can exceed materiality, so we will document the range and discuss it with management rather than adjust to a point estimate without support.
Analytics and Presentation
We will compare turnover by product line with prior years and peers, and gross margin by month with expectations, investigating differences above $330,000, half of performance materiality. We will also review the inventory note for the reserve method and any purchase commitments to suppliers (Arens et al., 2020).
Fraud Considerations
The fraud brainstorming in Milestone One raised two inventory scenarios: delaying markdowns on aged styles to protect margins, and recording fictitious goods at a warehouse we do not visit. The first is addressed by the net realizable value testing against actual post-year-end prices, which management cannot control after the fact. The second is addressed by observing both warehouses rather than relying on one, by confirming directly with the operators rather than through the company, and by testing a sample of the largest receipts in the last month of the year to supplier invoices and ocean bills of lading. We will also review manual journal entries to inventory and cost of sales after the count dates, because adjustments posted between the count and year end are a common way to change counted results.
Evaluating the Evidence
At the end of testing, the senior will summarize results by assertion. Count differences found in test counts will be projected to the population using monetary unit sampling; if the projected error, once sampling risk is added, nears performance materiality, we will ask the operators to recount affected areas. Confirmation differences will be investigated to the operators' records. The valuation shortfall will be compared with management's position and, if not corrected, recorded on the summary of uncorrected misstatements. The engagement partner will review the count observation memos personally, since inventory is the largest asset and a significant risk, and the engagement quality reviewer will read the valuation conclusion before the report date.
Conclusion
Each assertion for inventory is addressed by at least one procedure designed for the risk Milestone One identified. Existence relies on counts, confirmations and service auditor reports together; valuation relies on later selling prices rather than the formula. The possible reserve shortfall will be accumulated as a likely misstatement for evaluation in Milestone Three.
References
Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2020). Auditing and assurance services (17th ed.). Pearson.
Christensen, B. E., Glover, S. M., & Wood, D. A. (2012). Extreme estimation uncertainty in fair value estimates: Implications for audit assurance. Auditing: A Journal of Practice & Theory, 31(1), 127-146. https://doi.org/10.2308/ajpt-10191
Public Company Accounting Oversight Board. (2016). Auditing inventories (AS 2510). Author.
What the ACC 640 Module 6 instructions ask for
The second ACC 640 milestone usually asks you to develop an audit program for a significant account in the case, often inventory, revenue or receivables. Plan to list the relevant assertions, connect each to the risks assessed in Milestone One, and design procedures that would detect a misstatement in that assertion, including tests of controls if you plan to rely on them, substantive analytics and tests of details. Explain the nature, timing and extent of each procedure, including sample sizes, and cite the standards that require or guide them. Graders look for procedures that answer specific risks rather than a generic checklist copied from a textbook, and for timing that fits the client's count dates.
How this ACC 640 Module 6 milestone two example is built
The milestone builds an inventory program for $118 million held at warehouses in Reno and Portland. Existence is addressed by observing counts at both, test counts from the floor to the records and from the records to the floor, and confirmation of quantities with the operators, supported by their SOC 1 reports. Because the Portland count is on January 3, a rollback reconciles it to December 31. Cutoff tests cover the last and first five days of receiving and shipping. Valuation is tested by tracing landed costs to invoices, freight and duty bills, and by reviewing aged styles against January markdown prices, which suggests a reserve shortfall of about $900,000. The program also covers fraud scenarios and how the team will judge whether the evidence is enough.
Where the ACC 640 Module 6 rubric puts the points
Rubrics for the second ACC 640 milestone typically score the linkage of procedures to assertions and risks, the appropriateness of each procedure, nature, timing and extent, sample sizes, use of the work of others, consideration of fraud and use of the standards. Top papers show which assertion each procedure addresses and in which direction it tests, explain how the procedures respond to significant risks and size samples from performance materiality. Graders also reward handling of inventory held by third parties, including confirmation and the service auditor's report. Common deductions include testing only from records to floor, which cannot detect understatement, omitting valuation, relying on confirmations alone and generic procedures with no link to the case.
ACC 640 Module 6 help: the mistakes that cost points
Audit programs most often slip on direction of testing: tracing from records to the warehouse floor tests existence, while tracing from the floor to the records tests completeness, and a program needs both. A second weak spot is valuation of aged inventory, which requires evidence about selling prices after year end rather than management's reserve formula alone. If your account is receivables or revenue instead, the same structure of assertion, risk, procedure and evidence applies. Lay out the program as a table with columns for assertion, risk and procedure before writing; a blank cell shows a gap the grader would find. Then size each test from performance materiality and say so.
Get ACC 640 Module 6 written to your instructions
Send the ACC 640 Milestone Two guidelines and the case details for your account. The milestone will design procedures by assertion, size the tests, link each to the assessed risks and cite the standards behind them. Plan on roughly two days; your first costs nothing. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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ACC 640 Module 6 questions, answered
Where can I find a free ACC 640 Module 6 Milestone Two sample?
This page includes a full ACC 640 Milestone Two audit program for inventory held at third-party warehouses.
What must an auditor do when inventory is held by third parties?
Under AS 2510, obtain direct confirmation from the custodian and, if the inventory is material, apply additional procedures such as evaluating the custodian's controls, observing counts or obtaining a service auditor's report.
Why test counts in both directions?
Tracing from the records to the floor tests existence; tracing from the floor to the records tests completeness. Each detects a different kind of misstatement.
What is a rollback of an inventory count?
A reconciliation of quantities counted at a date after year end back to year end by adjusting for receipts and shipments in between, tested with source documents.
How is inventory valuation tested for obsolescence?
By reviewing aging, comparing cost to subsequent selling prices or markdowns, analyzing turnover by product and evaluating management's reserve method and assumptions.