| Test your understanding 3 — Inventory | (a) | Before the inventory count — Contact the client to obtain a copy of the inventory count instructions to understand how the count will be conducted and assess the effectiveness of the count process. - Review working papers obtained from the previous auditor (in subsequent years inspect prior year working papers) to understand the inventory count process and identify any issues that should be taken into account this year. — Contact the client to obtain details of date, time and locations of the inventory count(s). — Obtain a list of locations where inventory is stored and select which locations will be attended by the audit firm if not all locations can be visited. Priority should be given to locations with a high value of inventory or locations with poor controls.Ie (b) During the count Tests of controls Substantive procedures Cone onsider the need for using an expert to assist in valuing the ventory being counted pecetain whether any inventory is held by third parties, and Possible, make arrangements to visit the third-party site. Reauast a direct confirmation of inventory balances held at € year end from any third-party warehouse providers ae quantities and condition of inventory owned by the ient. Observe the count to ensure that the inventory count instructions are being followed. For example: = No movements oi inventory occur during the count. — Teams of two people perform the count. — Sections of inventory are tagged as counted to prevent double counting. = Damaged/obsolete items have been separately identified so they can be valued appropriately. Inspect the count sheets to ensure they have been completed in pen rather than pencil. Inspect the count sheets to ensure they show the description of the goods but do not show the quantities expected to be counted. Re-perform the sequence check on the count sheets to ensure none are missing. Enquire of the counting staff which department they work in to ensure they are not warehouse staff. Select a sample of items from the inventory count sheets and physically inspect the items in the warehouse: existence. | Select a sample of physical items from the warehouse and trace to the inventory count sheets to ensure that they are recorded accurately: completeness. Enquire of management whether goods held on behalf of third parties are segregated and recorded separately: rights and obligations | Inspect the inventory being counted for evidence of damage or obsolescence that may affect the net realisable value: valuationRecord details of the last deliveries prior to the year end. This information will be used in the final audit to ensure that no further amendments have been made: completeness & existence Obtain copies of the inventory count sheets at the end of the inventory count, ready for checking against the final inventory listing at the final audit: completeness and existence. Attend the inventory count at the third-party warehouses: completeness and existence. At the final audit Trace the items counted during the inventory count to the final inventory list to ensure it is the same as the one used at the year end and to ensure that any errors identified during counting procedures have been rectified: completeness, presentation. Cast the list (showing inventory categorised between finished goods, WIP and raw materials) to ensure arithmetical accuracy and agree totals to financial statement disclosures: completeness, classification. Trace goods received immediately prior to the year end to year-end payables and inventory balances: completeness & existence. Trace goods despatched immediately prior to year end to the general ledger to ensure the items are not included in inventory and revenue (and receivables where relevant): completeness & existence. Inspect purchase invoices for the name of the client: rights and obligations. Inspect purchase invoices for a sample of inventory items to agree the cost of the items: valuation. Inspect post-year-end sales invoices for a sample of inventory items to determine if the net realisable value is reasonable. This will also assist in determining if inventory is | held at the lower of cost and net realisable value: valuation. | Recalculate work-in-progress and finished goods valuations using payroll records for labour costs and utility bills for overhead absorption: valuation. Inspect the ageing of inventory items to identify old/slow- moving amounts that may require an allowance, and discuss these with management: valuation.Calculate the inventory holding period and compare this to | prior year to identify slow-moving inventory which requires | | an allowance to bring the value down to the lower of cost | and NRV: valuation. (Analytical procedure) | | Calculate the gross profit margin and compare this to prior year, investigate any significant differences that may highlight an error in cost of sales and closing inventory: | valuation. (Analytical procedure)