A4 - Inventory Cycle

Question 1

what is the primary purpose of inventory observation?

Answer 1

to establish the existence of inventory. It also tests completeness

Question 2

what procedures to perform to test valuation, allocation, and accuracy?

Answer 2

• Test mathematical accuracy
• Inquire about obsolete or damaged goods
• Examine vendor invoices, review direct labor rates, test the computation of standard overhead rates, and standard cost variance analyses

Question 3

what procedures to test rights and obligations?

Answer 3

• consigned inventory on hand needs to be excluded from physical count
• consigned goods in the hands of consignees are included
• inventory in transit at year end should be accounted properly

Question 4

what disclosures are required for inventory?

Answer 4

• cost method (LIFO, FIFO, weighted average) and valuation method (NRV or Lower cost or market)
• Pledged or assigned inventory
• consigned inventory
• raw materials, WIP, and finished goods balances
• significant loss from write-downs or purchase commitments
• warranty obligations

Question 5

what procedures to test existence and completeness for inventory?

Answer 5

Existence: vouch backward from inventory report listing schedule to inventory tags and the auditor’s recorded count sheets

Completeness: trace up either from auditor’s test counts or from inventory tags to inventory report listing schedule