Chapter 12: Inventory & PPE

Question 1

Audit Objective of Inventory

Answer 1

Overall, the audit objectives in respect of inventories are to ensure they actually exist, are owned, and are properly valued.

Question 2

Two Types of Inventory

Answer 2

1) Merchandising Entity: inventory consists of goods acquired for resale.

2) Manufacturing Entity: inventory consists of raw materials, work in process, and finished goods.

Question 3

What are the two key functions involved in inventory records being compared to actual inventory?

Answer 3

1) An inventory count
2) A comparison of actual items on hand to inventory records.

Question 4

What are the key parts of Inventory Count?

Answer 4

1) Assigning and Communicating Responsibility: responsibility should be assigned to a person without custody of inventory recording responsibilities.
2) Preparing: items not to be counted should be clearly marked.
3) Identifying: inventory to be counted must be properly identified.
4) Counting: count teams often work in pairs to ascertain quantity.
5) Checking: often all counts are doubled checked and all discrepancies recounted.
6) Clearing: as items are counted, teams should leave a mark to prevent duplicate counting.
7) Recording: control over count sheets is key.
8) Cut-Off: serial numbers need to be recorded to ensure count is compared with inventory records.

Question 5

What are the six factors contributing to the risk of material misstatement of inventory?

Answer 5

1) Typically high volume of transactions.
2) Contentious valuation and allocation issues.
3) Special procedures are often required to determine quantity or value.
4) Inventories are often stored at multiple locations.
5) Inventories are vulnerable to spoilage, obsolescence, and other valuation issues.
6) Sold inventory may be subject to return and repurchase agreements.