A4 Inventory Cycle

Question 1

Verifying Inventory

Answer 1

To gain assurance that all inventory items in a client’s inventory listing are valid, an auditor most likely would trace items listed in the listing to inventory tags & the auditors recorded count sheets.

This verifies Existence of the items.

Question 2

Inventory Counts

Answer 2

Observation of physical inventory counts provides evidence about existence & completeness. Observing the inventory provides evidence that it physically exists, observing actual count provides evidence regarding completeness.

A Dual purpose test also test internal controls and substantive test regarding inventory.

Question 3

Tracing Sample of Inventory Tags

Answer 3

Tracing this sample to a client’s computerized listing of inventory items is to determine whether the inventory items represented by tags were included on the listing. This directional test of tracing is generally used to test completeness (of the inventory list).

Question 4

Interim Testing

Answer 4

Permitted when the risk of material misstatement is low.

If the entity has a well kept perpetual inventory records that are checked periodically by comparisons with physical counts, then it is believed to have a strong internal control over inventory and therefore low risk of MM.

Question 5

Presentation & Disclosure of Inventory

Answer 5

This assertion is best addressed by obtaining confirmation of Inventories that are pledged under loan agreements for nonissuers. This helps determine that inventory related obligations (pledge under a loan) are properly disclosed.

Question 6

Inventory Count Date

Answer 6

If count is done at a date other than the date of the FS, the auditor should obtain evidence about whether changes in inventory balance between the count date and FS date are done properly. If assessed level of CR is HIGH, observation procedures should be done at year end.