AUDIT PROGRAM FOR INVENTORY

Legal Company Name Client:

Balance Sheet Date:

Audit Objectives Financial Statement Assertions

 Existence or occurrence
Inventories included in the statements of financial position physically exists.
 Completeness
Inventories represent items held for sale in the ordinary course of business, in the process
of production for such sale, or in the form of material or supplies to be used in the  Presentation and disclosure
production process or in the rendering of services.
 Existence or occurrence
Inventory quantities include products, materials, and supplies owned by the company (on
 Completeness
hand, in-transit, or stored at outside locations.
 Rights and obligations
The entity has legal title or similar rights of ownership to the inventories.  Rights and obligations
Inventories are properly stated at the lower of cost and net realizable value.  Valuation or allocation
Inventories are properly described and classified in the financial statements and
 Presentation and disclosure
disclosures are adequate.

Audit Procedure Performed By Work Paper Reference

1. Observe physical inventory counts.
 Test shipping and receiving cut off procedures.
 Account for all inventory tags and count sheets used in recording the
physical inventory counts.
 Test the clerical accuracy of inventory listings.
 Trace test counts recorded during the physical inventory observation to
the inventory listing.
 Reconcile physical counts to perpetual records and general ledger
balances and investigate significant variations.
  Test inventory transactions between a preliminary physical inventory date
and at the end of the reporting period.
2. Reconcile the inventory count to the general ledger.
3. Review perpetual inventory records, production records, and purchasing records
for indications of current activities.
4. Analytically review the relationship of inventory balances to recent purchasing,
production, and sales activities, and to anticipated sales volume.
5. Examine paid vendors’ invoices, consignment agreement, and contracts.
6. Obtain confirmation of inventories at locations outside the entity.
7. Cut-off Analysis. Examine the procedures for halting any further receiving into the
warehouse or shipments from it at the time of the physical inventory count.
8. Review purchase records.
9. Trace the labour charged during production on time cards or labour routines to
the cost of the inventory if direct labour is included in the cost of inventory.
Investigate whether the labour cost listed in the valuation are supported by payroll
records.
10. Review the bill of materials for a selection of finished goods items if a significant
proportion of the inventory valuation is comprised of finished goods, and test
them to see if they show an accurate compilation of the components in the
finished goods items, as well as correct costs. Test these items again if the auditors
have noticed an error trend in the prior years for specific inventory items.
11. Determine whether the amounts you have recorded as allowances for obsolete
inventory or scrap are adequate, based on the procedures for doing so, historical
patterns, “where used” reports, and reports of inventory usage ( as well as by
physical observation during the physical count).
12. Test the inventory layers that have recorded to verify that they are valid when
using FIFO or LIFO inventory valuation system.
13. Follow the lower of cost or market rule by comparing a selection of market prices
to the record costs.
14. Inventory must be valued at lower of cost or market ( also known as net realizable
value)
 a. Cost: Calculate the unit cost of inventory again to make sure pricing is
accurately determined.
b. Market: Examine subsequent sales of inventory to see if it was sold for more
or less than cost or look at the gross profit margins.
15. The auditor observes whether the client complies with the proposed policies or
procedures for the count- Are this procedures being performed correctly and
efficiently?
16. Observe the quality and the condition of the goods- Is there any sign of
impairment or obsolescence?
17. Any necessary adjustments must be followed up to ensure that the inventory
records and general ledger reflect the adjustments.
18. Review if there are any cost that are not related to inventories that were included
in the cost of inventories.
19. Review consign inventories.
20. Inventories in Transit. Inventories in transit is sometimes large and sometimes has
small amount.
21. Review inventories written off during the year.
22. Review the costing method and accounting policy that uses by entity to valuate
inventories.

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit program has been achieve.

Performed By: _______________________________________________________________________________ Date: _______________

Reviewed and Approved By: ____________________________________________________________________ Date: _______________

Conclusions:

Comments: