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A4 - M4

The document outlines the inventory cycle process, detailing the roles of purchasing, receiving, warehousing, and shipping departments. It emphasizes the importance of auditing inventory balances through observation, testing, and verification of existence, rights, obligations, and completeness. Additionally, it highlights the need for accurate presentation and disclosure of inventory-related information in financial statements.

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Khaled Al-Sanabani
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13 views6 pages

A4 - M4

The document outlines the inventory cycle process, detailing the roles of purchasing, receiving, warehousing, and shipping departments. It emphasizes the importance of auditing inventory balances through observation, testing, and verification of existence, rights, obligations, and completeness. Additionally, it highlights the need for accurate presentation and disclosure of inventory-related information in financial statements.

Uploaded by

Khaled Al-Sanabani
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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Inventory Cycle

A4 – M4
IC related to Inventory cycle
1. Purchasing: proper approved POs and Serially numbered. Sent to Accounting and
receiving department.
2. Receiving: receiving department is solely responsible for receipt of goods. Also
responsible for verification of qtys, detection of damaged goods, preparation of
receiving reports and delivery of goods received to warehouse department. Blank
copy of PO.
3. Warehouse: act as custodian for the verified qty of goods received.
4. Shipping: responsible for shipment of goods after authorization (approved SOs from
credit department).
Performing specific procedures to obtain evidence
• Auditing Inventory balance:
Observation of BB and EB of inventory counts is a GAAS required procedure. Attendance
by the auditor at the physical inventory count involves the following dual-purpose tests:
1. Evaluating management’s instructions and procedures for the inventory count. TOC
2. Observing the performance of management’s count procedures. TOC
3. Inspecting the inventory to ascertain its existence and condition. SP
4. Performing test counts. Double check (accuracy) SP
Well-kept perpetual inventory system, and physical cycle counts throughout the year, You
can observe inventory before or after year end if necessary.
Evidence for GAP period.
High CR, observation should be performed at year end.
Completeness: test physical inventory report by tracing test counts to the report. Select
sample of prenumbered inventory tags and trace to physical inventory report sheets.
Valuation, allocation and accuracy: Test math accuracy of inventory report and reconcile to
GL. Inquire about obsolete or damaged goods and scan perpetual records for slow moving
items. Examine vendor invoices and review direct labour rates.
Performing specific procedures to obtain evidence
• Auditing Inventory balance:
Existence: Observation main purpose is to establish existence. Vouch sample of items
from inventory report sheets to prenumbered inventory tags.
Rights and Obligations: Consigned goods? Off-site inventory ?Inventory in transit ?
Public warehouses: Significant ? Yes then observe. No then confirm.
• Auditing inventory transactions: audited as part of revenue and purchase
cycle.
Performing specific procedures to obtain
evidence
• Auditing Presentation and Disclosure:
1. Completeness: ensure all required disclosures related to Inventory have been
included in the notes. Cost method (FIFO, LIFO), Valuation method (LCM, LCNBV),
Categories (Raw, WIP, FG), Consigned ? Warranty obligations ?
2. Valuation, allocation, and accuracy: read the footnotes and other info to determine
whether the info is accurate and presented at the appropriate amounts.
3. Rights and Obligations: inquire management and BOD (BOD minutes) of any pledged
or assigned goods ?
4. Understandability of presentation and classification: Note are understandable?
Proper classification between Raw materials, WIP, and Finished goods.

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