Assertions - Inventory

Question 1

Completeness - Inventory

Answer 1

Perform cutoff procedures for shipping and receiving.

Inventory turnover ratio, vertical analysis, non financial info.

Trace test counts of inventory to the client’s inventory listing.

Vouch sample of cash disbursements just after year end to receiving reports and vendor invoices to detect unrecorded liabilities.

Inspection of receiving and issuing procedures for disclosing unrecorded liabilities.

All inventory on hand in reflected in the ending inventory balance.

Question 2

Accuracy - Inventory

Answer 2

Compare G/L balances with financial statements.

Question 3

Valuation/Allocation - Inventory

Answer 3

Recorded at lower of cost or market?

Inventory turnover ratio to discover slow moving or obsolete product.

Test entity’s computation of standard overhead rate.

Inquiries of warehouse personnel concerning obsolete or slow moving inventory.

Confirm no excessive costs for an idle plant were charged to inventory.

For a manufacturing firm, test entity’s computation of standard overhead rates.

Question 4

Existence - Inventory

Answer 4

Observation.

Trace items in inventory perpetual records to inventory tag/auditor’s test counts.

For a portion of inventory in public warehousing, confirmation is satisfactory.

Vouch items listing in the inventory listing schedule to inventory tags and the auditors recorded count sheets.

Question 5

Cutoff - Inventory

Answer 5

Purchase and sales cutoff.

Holds legal title to the goods.

To test whether inventory purchased and title has passed before year end is recorded.

Question 6

Rights/Obligations - Inventory

Answer 6

Inspect agreements to determine whether any inventory is pledged as collateral.

Vouch recorded purchases to documentation.

Question 7

Occurrence - Inventory

Answer 7

Vouch sample of recorded purchases to documentation.

Vouch sample of recorded cost of sales to documentation.

Vouch sample of entries in the voucher register to supporting documents.

Question 8

Classification/Understandability - Inventory

Answer 8

Read financial statements. Displayed as current assets? Cost of sales properly reflected in income statement?

Have adequate disclosures been made regarding inventory measurement, cost flow assumptions, pledging of inventory?

Obtain management representation letter. Inquire of management.