Inventory Cycle - M4

Question 1

What are the audit procedures for inventory observation?

Answer 1

• The auditor should use alternative procedures to verify inventory when it is impractical (or impossible) to observe the client’s physical inventory count or if the client’s inventories are considered to be immaterial.
• Auditor should observe the physical counts unless deemed immaterial.
• When performing interim date inventory counts, the auditor should perform follow ups to ensure that any changes between the physical count date and the financial statement date are properly recorded.

Question 2

What are some audit procedures to verify managers existence assertion regarding inventory?

Answer 2

• Tracing from the inventory schedule to the inventory tags and the auditor’s recorded count sheets verifies the validity (existence).
• Note that the correct term for the directional test for existence is “vouch.” However, in practice (and on the CPA Exam), the term trace is sometimes used interchangeably with the term vouch.
• Observing physical inventory counts does provide evidence
  about existence (Does inventory physically exist?)

Question 3

What are some audit procedures to verify managers completeness assertion regarding inventory?

Answer 3

• Tracing from receiving reports and vendors’ invoices to the inventory listing are cutoff procedures used to verify completeness.
• Tracing from inventory tags to the inventory listing schedule verifies the completeness.
• Tracing to receiving reports and to vendors’ invoices from the inventory tags might be used to verify completeness.
• Observing physical inventory counts does provide evidence about completeness.

Question 4

What are some audit procedures to verify managers rights and obligation assertion regarding inventory?

Answer 4

• The auditor becomes comfortable with rights assertion by examining paid vendors’ invoices, consignment agreements, and contracts. (Does the client have legal title to the inventory?)
• Obtaining confirmation of inventories at locations outside the entity.

Question 5

What are some audit procedures to verify managers valuation and allocation assertion regarding inventory?

Answer 5

Are inventories properly stated at cost?