Inventory Level

Question 1

Inventory level

Answer 1

Main Risks:
1. Inaccurate Inventory Records: Inventory records may not reflect actual quantities.
2. Theft or Damage: Inventory may be stolen or damaged.
3. Incorrect Valuation: Inventory may be valued incorrectly.
4. Insufficient Inventory: Too little inventory may lead to unfulfilled customer orders.
5. Excess Inventory: Too much inventory ties up capital unnecessarily.

Control Objectives:
1. Accuracy: Ensure inventory records are complete and accurate.
2. Security: Protect inventory against loss and damage.
3. Valuation: Ensure inventory is valued correctly.
4. Optimal Levels: Maintain appropriate levels of inventory to meet customer demand without overstocking.

1. Physical Safeguards
   
   • Control: Restrict access to storage areas and perform regular inventory counts.
   • Test: Check compliance with access restrictions and confirm periodic inventory counts against records.
2. Recording Inventory
   
   • Control: Record and authorize all inventory movements, segregate duties (ordering, custody, accounting), and maintain proper documentation.
   • Test: Verify that inventory movements agree with dispatch and goods received documents, and check for proper authorization documentation.
3. Valuation
   
   • Control: Apply IAS 2 for inventory valuation, identify obsolete and slow-moving items.
   • Test: Review inventory valuations to ensure they follow IAS 2 principles and check procedures for identifying obsolete items.
4. Inventory Management
   
   • Control: Set maximum and minimum inventory levels, establish re-order levels and quantities.
   • Test: Review inventory levels for excess or shortages, monitor out-of-stock situations, and check re-order procedures.

Imagine a company, XYZ Ltd., managing its inventory. Here are some controls and tests:

1. Physical Safeguards: XYZ Ltd. restricts access to its warehouse to authorized personnel only and conducts monthly inventory counts. The auditor checks access logs and observes an inventory count to ensure compliance.
2. Recording Inventory: All inventory movements are recorded in the inventory management system, and duties are segregated. The auditor reviews inventory records and compares them with dispatch and goods received documents to ensure accuracy.
3. Valuation: XYZ Ltd. values its inventory at the lower of cost and net realizable value, following IAS 2. The auditor reviews inventory valuation reports and checks for procedures to identify obsolete items.
4. Inventory Management: The company sets maximum and minimum inventory levels and monitors re-order points. The auditor reviews inventory reports to ensure levels are appropriate and checks for any out-of-stock situations.

By implementing these controls and regularly testing them, XYZ Ltd. can ensure accurate and secure inventory management.

If you have any more questions or need further examples, feel free to ask!