AUDIT OF INVENTORY CYCLE
AUDIT OF INVENTORY CYCLE INTRODUCTION
Factors affecting the complexity and audit of inventory
include:
Often major item in the balance sheet & make up
largest item in the working capital. Located at different locations Diversity of items create difficulties; jewels, chemicals etc Difficulties in valuation; factors like obsolescence. Methods of valuation may differ
CLASSIFICATION OF INVENTORY
Depends on the nature of business
Eg. Retail/ wholesale merchandise on hand Eg. Servicing (hospital)- food, medicines and med.
Supplies. Eg. Manufacturing Raw Material, WIP, Finished goods.
BUSINESS FUNCTIONS & FLOW OF DOCUMENTS
Flow of Inventory & Costs
Refer to Figure 21-1 p.633
Functions in the inventory & warehousing cycle
Refer to Figure 21-2 p.634
Audit of Inventory
Refer to Figure 21-3, p.636
Acquire and record raw materials, labor and overhead Internally transfer assets and costs Ship goods and record revenue and costs Physically observe inventory
Price and compile inventory
MAJOR CONTROLS & AUDIT PROCEDURES
Analytical Procedures p.640
Balance related audit objectives & Test of Detail
of Balances for Physical Inventory Observations Table 21-2, p.644.
AUDIT TESTS TO SATISFY THE OBJECTIVES ON INVENTORY
Ownership
Enquire whether there is any stock held on behalf of 3rd
parties & ensure that such items are excluded from stock. For material amount, obtain confirmation from 3rd party. Select a sample of items from the final stock sheet and trace the copies of the rough stock sheets taken during stock-take Ensure that all sheets in the sequence recorded at the stock-take are available
AUDIT TESTS TO SATISFY THE OBJECTIVES ON INVENTORY
Valuation
1. Test the additions and extensions of the final stock sheet
2. Ascertain the method used for valuing stock and consider
whether
It has been correctly applied
It is an acceptable basis of valuation under FRS 102 It is consistent with previous years & co.s acc policy
3. Review WIP and ensure that Costs have been recorded correctly Review any profit taken in the light of work carried out (i.e. stage of completion), costs to date, expected costs to complete & contract value Adequate prov. has been made for any anticipated losses
AUDIT TESTS TO SATISFY THE OBJECTIVES ON INVENTORY
Provisions Obtain details of the basis for making provisions & determine whether it is both adequate & consistent Review the stock sheets & ensure that any items identified as damaged, slow moving / obsolete have been correctly written down Review all items of stock & WIP & consider whether any further provision is necessary Select a sample of stock items and compare costs to the selling price less expenditure necessary for realization
AUDIT TESTS TO SATISFY THE OBJECTIVES ON INVENTORY
Cut-off Review the results of the tests on cut-off carried out on debtors & creditors (since this is related to the movement of inventories) Ensure they p.v. adequate assurance as to the accuracy of the year end cut off Disclosure Accounting policies & cost formulas for measuring inventories Classification of inventories Purchases from related parties Inventories carried at NRV Inventories pledged as security COGS
STOCK-TAKE ATTENDANCE Before the stock-take
1. Record the following details
Location (s) being counted Date (s) of count & attendance Types of stock held at location
Brief description of the procedures adopted
Name of client staff counting the stock Name of audit staff taking part
STOCK-TAKE ATTENDANCE Before the stock-take
2. Ascertain & note whether The stock-take teams were briefed prior to commencing the count The teams only include people who are not responsible for storing & recording of stock & WIP Stock was counted by teams of two (one person counting, another person records) The teams were asked to identify damaged, slow-moving / obsolete stock The teams were made aware of any stocks held on behalf of 3rd parties & these were excluded from the count
STOCK-TAKE ATTENDANCE During the stock-take
1. Determine whether The teams were counting & recording correctly The counts were being controlled to ensure that all stock was counted and only once There was adequate control over stock sheets that they are all accounted for (e.g. pre-numbered) 2. If serially numbered sheets are used, record the
numbers of all sheets used at the end of the count 3. Select a sample of items from completed stock sheets and check to ensure that the number has been recorded correctly
STOCK-TAKE ATTENDANCE During the stock-take
4. Count a sample of stock items & ensure that they have been recorded
properly on the final stock sheets.
5. Extract or copy details of a sample of rough sheets for checking at the
final audit
6. Ascertain whether any stock is held on behalf of 3rd party. If there is,
make sure it has been identified & excluded from the count
7. Note any old / damaged stock during the count. Ensure it is marked
as such on the final stock sheets.
CUT-OFF
Ensure no movement of stock Record details of the last goods dispatch number and the GRN
STOCK-TAKE ATTENDANCE After the stock take
1. Write a report on the stock take, concluding:
The accuracy of the count and,
The extent of reliability of the stock count
Price Test
Inventory price test: all tests of the clients unit
prices to determine whether they are correct. Inventory compilation tests: all tests of the summarization of the physical quantities, the extension of price times qty, footing the inventory summary and tracing the total to GL.
