Audit of Inventory, Warehousing and Payroll Accounts and Cycles of Starbucks Company - Research Paper

Introduction

Starbucks coffee company is a company registered in the United States. The company operates a high production unit responsible for the roasting and distribution of coffee products. The company has grown rapidly since the operation and now operates over 24000 retail stores in about 70 countries across the world. As per the assignment our team was responsible for the auditing of the inventory, warehousing and payroll accounts and cycles of Starbucks Company. The audit process involved identification of risk factors, the performance of tests of controls on balances and transactions as well as the application of analytical procedures of the three depart of Starbucks Coffee Company.

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Inventory

The balance sheet of Starbucks Coffee Company indicates an increase in the inventory balances from $2.5 billion in 2017 to $8.8 billion in 2018 (Annual Report, 2018). The inventory balances are high since the company's stores more of raw materials, work in progress as well as finished goods in the form of processed coffee and other beverages. However, the raw materials and the work in progress are less material for audit purposes; thus finished goods are considered. Inventories are stated at the lowest cost, and the company keeps records of inventory reserves for the obsolete and slow-moving coffee which are used in determining shrinkage between the physical counts. Inventories are valued at the Last in First out (LIFO) method since the coffee is expected to consume in one operating cycle.

Substantive Auditing Procedures

The substantive audit procedures applied will first involve the reconciliation of end balances of the inventories in the general ledger. The reconciliation is aimed at tracing the valuation of the inventories based on the physical inventory count to determine whether it has been recorded in the general ledger. The second substantive procedure involves the observation of the physical inventory count (Knechel, 2016). Observation will aid in identifying whether they are actual inventory records of the physical counts. The procedure will also aid in coming up with an understanding of the physical inventory count of Starbucks to develop the audit report.

Tests of Control

The tests of control procedure involved are the inspection of documents relating to inventory. The procedure will help identify if the inventory document were adequately approved and proper control checks had been established (Taylor et al., 2018).

Analytical Rrocedures

The team compared the inventory balances between different years to establish whether there are proper controls and cut-off. The team further evaluated the inventory turnover to determine if the company was managing its inventories properly.

Warehousing

Starbucks Corporation manages its private warehouse. The warehouse is used for the storage of Starbucks finished products and raw materials. The warehousing strategy of the corporation is aimed at managing costs in the company. There are five regional distribution centers of which Starbucks manages two while third-party logistics companies manage three. The coffee stored in most of the warehouse involves the roasted coffee beans.

Substantive Audit Procedures

The audit will take place for both the company warehouse as well as the third-party warehouses which are used for the distribution of Starbucks products. The substantive procedures used will first involve the writing a letter requesting direct confirmation from warehouses to establish the inventory balances. The response should explain the quantity and the condition of the products stored in the warehouses. The team will also inspect the relevant documentation about the inventory stored as well as the previous audit reports to ascertain the materiality of the inventory records. Furthermore, to ensure controls, the team will be tasked to participate and attend the physical inventory count of the warehouses to ensure the records are in line with records in the production department during a particular financial year.

Payroll Accounts and Cycles

The payroll accounts and cycles involve how the Starbucks Corporation compensates its employees for the labor services to the company. Starbucks employees are paid based on an hourly rate. The payroll accounts also include the payment of all benefits, employee income taxes, as well as the contribution to pension schemes, advanced to Starbucks employees. The payroll accounts involve the human resources, payroll preparation, timekeeping and preparation of payroll tax returns (Bieg & Tolland, 2016).

Substantive Procedures

The team will compare the actual payroll expenses with the budgeted payroll expenses to determine whether the company's payroll reflects the estimated costs. Also, the team will review the payroll transactions, payroll schedules, and check with supporting documents to determine whether the payroll event occurred. To ensure the accuracy of the reports the audit team will agree the payroll rates as well as recalculate the rates to determine mathematical accuracy of the rates used. The team will also reconcile the actual working hours with the total hours paid to avoid any fraud in the number of hours on the payroll (Griffin, 2017).

Analytical Procedures

The tests of control will involve the comparison of the labor costs with the cost of previous years used to determine payroll in the company (Mitra, 2016). The team will also test the reasonableness of accrual payroll balances by comparing dates of acknowledgment receipts and bank transfer balances to employees.

References

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.

Bieg, B. J., & Toland, J. (2016). Payroll Accounting 2016. Nelson Education.

Griffin, N. (2017). Effectiveness of internal controls: Payroll fraud (Doctoral dissertation, Utica College).

Mitra, A. (2016). Fundamentals of quality control and improvement. John Wiley & Sons.

Taylor, R. J., Cruz, J. S., Propes, W. M., Travis, R., Alexander, M. D., Scobey, L. A. M., ... & Jones, M. (2018). U.S. Patent Application No. 15/883,747.

Annual Report, (2018). Starbucks Corporation. Starbucks Fiscal 2018 Annual Report. Retrieved from: https://www.sec.gov/Archives/edgar/data/829224/000082922417000049/sbux-1012017x10xk.htm (Accessed March 9 2019)