Inventory

Question 1

Why is inventory a “dual purpose” test?

Answer 1

Auditors have two purposes:

1) Internal control objectives- comparing inventory actually on hand to what they actually have on hand.
2) Substantive objectives- gathering to evaluate the dollar-balance reported for inventory

Question 2

What is the number one assertion for inventory?

Answer 2

EXISTENCE- Assets are usually the existence assertion as the focus

Question 3

What are count tags?

Answer 3

used to conduct the count (emphasis is on the quantities of items counted); tags should be prenumbered (and the sequence should be accounted for)

Question 4

List the steps to performing the inventory portion of the audit?

Answer 4

1) Determine quantities- Audit performs test counts & compares to the client
2) Price Test- Verify the reasonableness of the clients cost/unit
3) Extensions- Test the quantity X cost/unit (check total and agree to client’s listing)

Question 5

How do you test completeness?

Answer 5

Perform cut-off test for sales & purchase (a few days before and after year end)

Question 6

How do you test the sales side of cutoff?

Answer 6

Inspect shipments for the last few days of hte period under the audit and compare the entries

Question 7

How do you test the purchases cutoff?

Answer 7

Inspect shipments received for the last few days of the period under audit and compare to entries in the purchases journal

Question 8

How do you test rights and obligations assertion?

Answer 8

Inquire of management about inventory used as collateral for debt; inquire about inventory on consignment, document management response in the management rep letter

Question 9

How does the auditor address valuation for inventory?

Answer 9

perform analytical procedures to identify excess inventory (eg inventory turnover ratio) inquire about excess and obsolete inventory; be attentive to dusty boxes during the physical count