audit procedures, inventory Flashcards
What two components make up the final inventory figure in financial statements?
Quantity and Value.
How does attendance at the inventory count help the auditor?
It provides evidence about the Quantity of inventory.
How can the auditor gather evidence about the Valuation of inventory?
By identifying items that are damaged, old, or dusty, which may need to be scrapped or discounted.
What are the main risks of inventory balances being misstated?
Inventory does not exist
Missing inventory is excluded
Obsolete or damaged items included at incorrect value
Inventory belonging to third parties is included
Sold items are included.
What are common sources of information for inventory audit procedures?
Client controls over inventory counting
Auditor attendance at inventory count
Confirmations from third parties
Purchase invoices
Work-in-progress (WIP) records
Post year-end sales invoices, price lists, or sales orders
How can analytical review be helpful in auditing inventory?
It reveals movements in inventory due to transactions in the revenue and purchase cycles.
What should be reviewed before the inventory count?
Locations and instructions
Need for expert assistance
Control systems and internal audit arrangements
Inventory held at third-party premises.
What should the auditor do during the inventory count?
Observe for compliance with instructions
Check cut-off arrangements
Ensure third-party inventory is kept separate
Perform two-way test counts for
Existence and Completeness
Identify slow-moving or old inventory needing impairment.
What follow-up action should be taken after the inventory count?
Verify that sample quantities selected at the count match the final inventory listing.
What are the auditor’s responsibilities for perpetual inventory counts?
Ensure all inventory lines are counted at least annually
Confirm up-to-date records
Ensure satisfactory count procedures
Ensure management investigates and corrects material differences.
What is the Existence assertion procedure for inventory?
Take a sample of items counted by the client from count sheets and agree it to the actual items in the warehouse.
What is the Rights and Obligations assertion procedure for inventory?
Seek confirmation from third parties regarding inventory held on their behalf at the client’s premises, or held by the client at third-party premises.
What is the Completeness assertion procedure for inventory?
Select a sample of items in the warehouse, count them, and agree to the client’s count sheets.
How does the auditor verify Valuation for inventory?
To verify cost:
Agree costs to purchase invoices.
For manufactured inventory, agree materials and labor costs and reperform overhead calculations.
To verify net realisable value (NRV):
Inspect post year-end sales invoices for selling prices.
For unsold items, check order books or price lists.
Identify obsolete items during the count.
Review aged inventory listing for old or slow-moving items, discussing impairment with management.
