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Audit of Inventory

The audit of inventory is often complex due to its size on the balance sheet, multiple locations, and difficulties in observation and valuation. The auditor must observe the physical inventory count, test pricing and compilation of inventory values, and ensure inventory is properly valued and controls are functioning effectively. Key areas of focus include physical controls, perpetual inventory records, unit costing, cut-off of purchases and sales, and compliance with costing methods and valuation standards.

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Alvin Joy
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59 views

Audit of Inventory

The audit of inventory is often complex due to its size on the balance sheet, multiple locations, and difficulties in observation and valuation. The auditor must observe the physical inventory count, test pricing and compilation of inventory values, and ensure inventory is properly valued and controls are functioning effectively. Key areas of focus include physical controls, perpetual inventory records, unit costing, cut-off of purchases and sales, and compliance with costing methods and valuation standards.

Uploaded by

Alvin Joy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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AUDIT

INVENTORY
AUDIT OF INVENTORY

• Often the most complex and time-consuming. Why?


⚬ Often the largest account on the balance sheet.
⚬ Often in different locations, making physical control and counting difficult.
⚬ Often difficult for auditors to observe and value (ex: jewel, electronics
parts, chemical)
⚬ Valuation is also tricky when the estimation of inventory obsolescence is
necessary and when manufacturing costs must be allocated to inventory.
⚬ Several acceptable inventory valuation methods
AUDIT OF INVENTORY

• Six functions make up the inventory and warehousing cycle:


⚬ Process purchase orders
⚬ Receive raw materials
⚬ Store raw materials
⚬ Process the goods
⚬ Store finished goods
⚬ Ship finished goods
AUDIT OF INVENTORY
AUDIT OF INVENTORY
AUDIT OF
INVENTORY
AUDIT OF COST ACCOUNTING

• There are two broad categories of controls:


⚬ Physical controls over raw materials, work-in-process, and finished goods
inventory
⚬ Controls over the related costs

• Perpetual inventory master files maintained by persons who do not have custody
of or access to assets are a useful control
AUDIT OF COST ACCOUNTING

• Tests of Cost Accounting: The auditor is concerned with four aspects of cost
accounting:
⚬ Physical controls over inventory
⚬ Documents and records for transferring inventory
⚬ Perpetual inventory master files
⚬ Unit cost records
SUBSTANTIVE ANALYTICAL PROCEDURES
PHYSICAL OBSERVATION

• Inventory Observation Requirements for the Auditor:


⚬ Be present at the time the client counts its inventory.
⚬ Observe the client’s counting procedures.
⚬ Make inquiries of client personnel about their counting procedures.
⚬ Make their own independent tests of the physical count
PHYSICAL OBSERVATION

• Controls Over Physical Count


• Audit Decisions:
⚬ Timing
⚬ Sample Size
⚬ Selection of Items—should be careful to:
￭ Observe the counting of the most significant items.
￭ Inquire about items that are likely obsolete or damaged.
￭ Discuss with management the reasons for excluding any material items.
• Physical Observation Tests:
PRICING AND COMPILATION

• Must verify that the physical counts of inventory are correctly priced and
compiled.
⚬ Inventory price tests include tests of the client’s unit prices to
determine whether they are correct.
• Pricing and Compilation Controls: Standard cost records that indicate
variances in material, labour, and overhead costs are helpful to evaluate
the reasonableness of production records.
PRICING AND COMPILATION

• Valuation of Inventory concerns:


⚬ Must be in accordance with accounting standards.
⚬ Must be consistent from year to year.
⚬ Inventory cost versus market value (replacement cost or net realizable value)
must be considered.
• Pricing Purchased Inventory
• Pricing Manufactured Inventory
• Cost or Market
INTEGRATION
OF THE TESTS

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