F – CREANTE CLIENTI / Receivables

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paper ref.
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Working

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date
Task description

1. Agree detailed listing to trial balance (A)

Obtain detailed listing of inventories item by item and reconcile totals (values) to the trial balance. Investigate
any differences.
2. Scan detailed inventory listing for unusual items (A)
Scan the detailed inventory listing and investigate any significant or unusual items.
3. Test stock counts to / from detailed inventory listing (C, A, E)
Obtain year-end stock count (inventar), including count sheets. Trace quantities of selected items from the
detailed listing to the count sheets and investigate discrepancies. Trace test counts recorded during the physical
inventory to the detailed inventory listings. Investigate any differences. This test is done when we do not
participate in the year-end stock count.
4. Perform inventory observation (C, A, E, CO, V)
REQUIRED STEP (ISA 501) Consider the need for and timing of performing inventory observation.
Consider the need for, and timing of, performing inventory observation.
Note: When inventory is material to the financial statements, sufficient appropriate audit evidence, regarding its
existence and condition should be obtained, by attendance at physical inventory counting unless impracticable.
Such attendance will enable us to inspect the inventory, to observe compliance with the operation of
management’s procedures for recording and controlling the results of the count and to provide evidence as to
the reliability of management’s procedures.
If unable to attend the physical inventory count on the date planned due to unforeseen circumstances, physical
counts should taken or observed on an alternative date and, when necessary, we should perform tests of
intervening transactions.
Where attendance is impracticable, due to factors such as the nature and location of the inventory, consider
whether other alternative procedures provide sufficient appropriate audit evidence of existence and condition
that no scope limitation is needed.
For practical reasons, the physical inventory count may be conducted at a date other than period end. This will
ordinarily be adequate for audit purposes only when we have at least limited comfort from controls. We should
assess, by performing appropriate audit procedures, whether changes in inventory between the count date and
period end are correctly recorded.
Plan wall-to-wall inventory observation (C, A, E, V)
a. Determine the dates of observations.
b. Determine the location of and method adopted by the company for testing the existence of each
location and type of inventory (e.g., raw materials, work in progress, finished goods). When inventory
is situated in several locations, we should consider at which location attendance is appropriate, taking
into account the materiality of the inventory and the assessment of risk of material misstatement at
different locations.
c. Determine the nature and a rough approximation of the value, by inventory location or type.
d. Select the locations to be visited and determine the extent to which physical inventory counts are to be
observed.
e. Review the company’s written inventory instructions for adequacy and clarity; for example:
 Determine whether the instructions are reviewed and approved by a responsible official and
effectively communicated to persons participating in the count.
 Determine how slow-moving, damanged or sub-standard inventory will be identified and
recorded by persons participating in the count.
 Suggest changes as deemed necessary.
f. Obtain lists of or identify the inventory count teams and determine whether they include:
 Persons able to identify the nature and quality of the items.
 Persons from departaments that have no responsibility for the custody, movement, or
recording of the inventory.
If both of the above are not present, it may be necessary to revise the extent of work performed
to ensure that a complete and accurate count is achieved and that slow-moving, obsolete, and
damaged inventory is adequately identified.
g. Determine whether information needed for proper identification of the inventory and subsequent
tracing of the test counts to the inventory listings exists in usable form.
h. Determine whether procedures are adequate to control the use of inventory tags or sheets by the
count teams ( e.g., by using pre- numbered tags or sheets and accounting for all such tags or sheets,
both used and unused) and consider the division of duties between persons responsible for tag or
 count sheet control, counting inventory and inputting completed tags or count sheets to inventory
records.
i. Determine whether procedures are established to ensure proper cutoff. Such procedures should cover
incoming goods, outgoing shipments and internal transfers.
j. Inquire whether there are inventories owned by the company in the custody of others or inventories
owned by others on the company’s premises. Determine the extent to which inspection and
confirmation of these inventories is necessary (refer also to the procedures for inventory sold on
consignment in the accounts receivable area).
k. Consider whether expert help is necessary to verify quantities or test valuation of inventory due to the
characteristics of the inventory or its storage. If a non-Firm person is used for this purpose, consider
the steps in the audit area “Use of the work of expert’s.
5. Perform substantive analytical procedures (C, A, E, CO, V)
Perform, to an extent to achieve the desired degree of assurance, substantive analytical procedures for
inventory – resale. Also, consider any information obtained in preliminary analytics. The degree of assurance
achieved is dependent on the natural limitations of analytical procedures and the rigor with which we apply the
test. Consider using financial benchmarking in steps a. and d. of the analytical procedures.
Substantive analytical procedures include the following steps:
a. Develop an expectation, based on appropriate data (refer to guidance below for examples). Assess
reliability of the data, considering the extent of comfort from controls.
b. Determine the variation amount or % (threshold) to be used in the investigation of differences from
expectations.
c. Compute the differences between recorded amounts and the expectations
d. Investigate variations from expectations by seeking relevant explanations from management and
appropriate corroborating evidence ( e.g. reviewing ledgers, examining supporting documentation).
Examples of analytical procedures:
a. Performing a fluctuation analysis; consider the usefulness of obtaining a schedule categorized by
subsidiary, product line, division , etc. and/or reported weekly, monthly, or quarterly amounts.
b. Dividing the account balance into component parts and scrutinizing the individual parts for unusual
items.
c. Computing financial ratios and compring results with industry averages and competitors, where
applicable . Ratios applicable to inventory – resale include:
Inventory turnover ratio = Cost of goods sold/Average inventory
Days cost of sales in inventory = Finished goods inventory (end of year)/(Cost of sales/365)
d. Analyzing trends in the company’s inventory balance both prior and subsequent to financial statement
dates. Commpare the inventory balances to total inventory and gross and net sales.
e. Comparing inventory quantities by product line or style number with units sold during the year.
f. Developing a three way analysis of inventory, sales, and purchase activity and review the relationships
and trends for inconsistent or illogical conditions ( e.g., increasing sales, increasing inventory, and
decreasing purchases).
g. Analyzing trends in the inventory reserve balances, with the exceptions ol LIFO reserves, of total
finished goods inventory balances; including analyzing the nature of the reserve balances (e.g.,
obsolete, slow moving, damaged, shelf life expired).
6. Test costing of inventory detail (A, V)
Test the costing of the detailed priced inventory listings to obtain the desired level of assurance that accuracy is
achieved by performing the following:
a. Obtain and document an understanding of methods and procedures for costing inventory.
b. Perform audit procedures to ensure that the inventory costs are appropriate, e.g., trace unit costs of
inventory items to and from suppliers’ invoices.
c. Determine whether the method of inventory pricing is consistent with the prior year.
d. Test the mathematical accuracy of the detailed priced inventory listings; verify the following:
i. Extended cost (that is, cost X quantity); and
ii. Addition of the detailed priced inventory listings;
e. If appropriate, involve an expert to provide assistance in evaluating the appropriateness of the value
assigned
7. Test cut-off (CO)
Obtain detail of stock movements at the period end and begining of next period. Select last 5 movements in and
last 5 movements out and then the first 5 movements in and 5 movements out and obtain supporting documents
(invoices from suppliers and NIR for ins; invoices issued to customers and “aviz de expeditie” for outs). Test that
the transactions have been booked in the correct period.
8. Perform inventory and cost of goods sold reconciliation (C, A, CO)
Where practicable, review reconciliation of opening inventory, quantities purchased or manufactured, quantities
sold and closing inventory in order to determine whether, within reasonable limits, all goods purchased have
been accounted for. Where differences arise, due to normal causes such as losses in transit or absorption,
determine whether they appear reasonable ( e.g. by comparison with past experience). Where differences are
significant, determine whether they have been investigated and adequate explanations obtained.
9. Test net realizable value of stocks (V)
Test the net realizable value of finished goods by reference to current sales prices for the products.
Obtain sales after the period end. Select a number of invoices issued to customers for stocks sold. Compare the
sale price to cost of stocks as at the year end (cost of selling should be deducted from the sales price before
making the comparison to cost).
10. Review the need for and calculation of value adjustments (V)
Determine whether allowances have been made for scrap, obsolete, unsalable, slow-moving, or overstocked
items. Perform the following procedures:
a. Ascertain from discussions with the client how management determines the amount of adjustments
required to reduce inventory to net realizable value.
b. Compare the book value of individual inventory items selected with expected selling prices at the time
of sale less cost of marketing, selling and distribution and determine whether adequate adjustment
has been made for any expected losses.
c. Where adjustments are made by the use of formulae, determine by reference to the details recorded
on the previous year working papers whether formulae used to calculate adjustments are: 1.
consistent with previous years and 2. appropriate to the circumstances of the business.
d. Consider whether any adjustments are required due to: increased costs of purchases that have not
been fully reflected in the selling prices; falling selling prices; any decisions, as part of the company’s
marketing strategy, to sell products at a loss; carrying value of inventory exceed selling prices;
obsolete, slow-moving, scrapped or damage items (information may be obtained also from stock
take), changes in foreign currency rates.
e. Review records, sales analyses, and other information to determine actual usage of the items during
the year.
f. Taking in consideration the sales of slow moving items during the period, calculate now long it will
take to sell the slow moving items – discuss with management whether adjustments are required.
g. Compare the prior year listing of obsolete items to the final inventory listing of the current year to
determine that prior year valuations have not been increased.
h. Investigate and explain any unusual exceptions to these steps.
i. If stock items are perishable, obtain expiration dates and enquire about the adjustment of value for
expired items.
11. Production cost testing
For work-in-process and finished goods manufactured by the company, test the costs as follows:
a. Determine the nature of the cost accounting system used to accumulate finished goods cost, i.e., a job order
system or process cost system. Determine the source documents used to compute finished goods costs.
b. For finished goods selected for testing (normally testing a limited number of items is adequate if the
manufacturing process for other items is basically the same) obtain a copy of a recent job order or process
production report for the manufacture of the item.
c. Trace quantities of raw material and labor charged during manufacturing to appropriate supporting
documents such as bills of material, requisition forms, time cards, etc. Vouch the cost of material to the raw
material inventory summary or to vendor invoices. Vouch the labor hours and rates to payroll records. If labor is
applied based on machine hours, consider observing an order-in-process to test the reasonableness of the
hours.
d. Test the company overhead rate by:
(1) Determining which general ledger expense accounts should be included in overhead.
(2) Adjust the total of these balances for any abnormal cost and idle capacity cost.
(3) Divide the total adjusted cost in (2) by an estimate of direct labor hours or machine hours incurred
during the period.
(4) Compare the resulting rate to the rate used by the company and explain variations.
e. For work-in-process, test the pricing by computing the overall percentage complete times the finished goods
cost. Alternatively, test the cost of material and labor charged to work-in-process at the physical inventory date.
Recompute the overhead charge.
f. Test the net realizable value of manufactured finished goods by comparing costs to current sales prices (after
deducting reasonable disposition costs).
g. Determine if the valuation method is in accordance with GAAP, consistently applied.