Inventory Risks and Controls Flashcards
Audit risk explanation for price of components steadily increasing when inventory is valued at cost?
NRV of value may have fallen below the cost incurred by company, resulting in inventory valuation being overstated
Auditor’s response for price of components steadily increasing when inventory is valued at cost?
Also select a sample of inventory items and compare cost shown on PI with sales price charged at and after year end to confirm that NRV is above cost
Audit risk explanation purchases raw materials from overseas suppliers and has responsibility for goods at point of dispatch, with materials in transit for six weeks
Risk cut-off is not accurate and inventory and payables are understated as company may not correctly recognise raw materials
Auditor’s response for when purchases raw materials from overseas suppliers and has responsibility for goods at point of dispatch, with materials in transit for six weeks
Audit team should undertake detailed cut-off testing of purchases of raw materials at year end
Audit risk explanation for inventory being noted as being damanged due to containing contaminated sole. And inventory holding period increased from 28 days to 54 days
If damaged inventory not written down to NRV, inventory is overstated and cost of sales understated
Auditor’s response for inventory being noted as being damanged due to containing contaminated sole. And inventory holding period increased from 28 days to 54 days
Discuss with finance director whether damaged inventory is written down to its NRV and agree write down to final inventory valuation
Audit risk explanation for 1.1 inventory damaged as a result of figure and has not been replaced. Along with 1.9 inventory balance in year end and inventory holding period has increased?
Risk inventory has not been fully written off and there is other slow-moving inventory. Inventory may be overstated and cost of sales is undersated
Auditor’s response for 1.1 inventory damaged as a result of figure and has not been replaced. Along with 1.9 inventory balance in year end and inventory holding period has increased?
Audit team should discuss with management process for identifying damaged inventory items following the fire and review outcome to agree that items identified have been written off incorrectly
Audit risk explanation for if production provblems affecting quality of a significant batch of tyres. Therefore inventory holding period has increased from 34 to 41 days
Inventory may be overvalued as NRV may be below its cost. If inventory can’t be fixed, may need to be written off completely. There is a risk of overstatement of inventory
Auditor’s response for if production provblems affecting quality of a significant batch of tyres. Therefore inventory holding period has increased from 34 to 41 days
Testing should be undertaken to confirm cost and NRV of affected products in inventory and all inventory on a line-by-line basis is valued correctly
Audit risk if In June, a fire damaged inventory such that it has been written down from $0.9 million to $0.2 million which is its scrap value?
If goods remain unsold afer the year-end, scrap value may be voerstated. Risk of inventory is overvalued
Auditor’s response if In June, a fire damaged inventory such that it has been written down from $0.9 million to $0.2 million which is its scrap value?
Review whether any of the goods were sold pre or post year end and at what value; this should assess whether the attributed scrap value is reasonable
Audit risk if company purchases their goods from its main suppleir and has responsibility for goods at the point of dispatch?
Risk cut-off of purchase may not be accurate as may not be recognise the goods from the point of dispatch. Also risk inventory and trade payables understated
Auditor’s response if company purchases their goods from its main suppleir and has responsibility for goods at the point of dispatch?
Review controls the company ahs in palce to ensure inventory is recorded from point of dispatch
Audit risk explanation for company utilising a perpetual inventory system at its warehouse rather than a full year-end count?
Inventory could be under or overstated if perpetual inventory counts are not all completed, such that some inventory lines are not counted in the year
Auditor’s response for company utilising a perpetual inventory system at its warehouse rather than a full year-end count?
The completeness of the perpetual inventory counts should be reviewed and the controls over the counts and adjustments to records should be tested
Audit risk explanation for during itnerim audit, it was noted that there were significant exceptions with inventory records being higher than inventory in the warehouse?
As year-end quantities will be based on the records, this likely to result in overstated inventory
Auditor’s response for during itnerim audit, it was noted that there were significant exceptions with inventory records being higher than inventory in the warehouse?
Should be discussed with management ASAP as it may not be possible to put reliance on inventory records at year end
Audit risk explanation for company planning to undertake the full-year-end inventory counts after year end and then adjust for movements from the year end
If adjustments are not completed accurately, then year-end inventory could be under or overstated
Auditor’s response for company planning to undertake the full-year-end inventory counts after year end and then adjust for movements from the year end
Auditor should attend the inventory count held after year end and note details of goods received and despatched post year end to agree to the reconciliation
Audit risk explanation for company likely to have a material level of WIP at year end, being construction WIP as well as ongoing maintenance services, as company has annual contracts for many of the buildings constructed
If percentage completion for WIP is not correctly calculated, the inventory valuation may be under or over stated
Auditor’s response for company likely to have a material level of WIP at year end, being construction WIP as well as ongoing maintenance services, as company has annual contracts for many of the buildings constructed
Auditor should discuss with management the process they udnertake to assess percentage completion for WIP at year end. Process should be reviewed by auditor while attending year-end inventory count
Audit risk explanation for latest management accounts contain 2.1 of completed properties, this balance was 1.4 in September 20X4 (inventory)
Increase in inventory may be due to an increased level of pre-year-end orders. May indicate that they are overvalued
Auditor’s response for latest management accounts contain 2.1 of completed properties, this balance was 1.4 in September 20X4 (inventory)
Aged inventory report to be reviewed to assess whether inventory requires write down
Audit risk explanation for due to staff availability, company is planning to undertake a full year-end inventory count days before the year end and then adjust movements to the year end?
Adjustments may not be made accurately or completely. Risk that inventory could be overstated or understated
Auditor’s response for due to staff availability, company is planning to undertake a full year-end inventory count days before the year end and then adjust movements to the year end?
The auditor should attend the inventory count held after the year end and note details of goods received and despatched post year end to agree to reconciliation
Audit risk explanation for there being a significant number of sales returns made subsequent to year end
As they are pre-year-end sales, thney should be removed from sales. If not, revenue is overstated and inventoryu is understated
Auditors response for there being a significant number of sales returns made subsequent to year end
Review sample of post-year-end sales returns and confirm if they relate to pre-year-end sales, that revenue has been reversed and inventory included in year-end ledgers
Audit risk explanation for company’s year-end inventory count there were movements of goods in and out?
If goods in transit were not carefully controlled, then goods could have been omitted or counted twice. Results in inventory being under or over-stated
Auditor’s response for company’s year-end inventory count there were movements of goods in and out?
During final audit, GRN and GDN received during inventory count should be reviewed and followed through into inventory count records as correctly included or not
Audit risk explanation for company purchases goods from Europe and goods in transit for two weeks and these goods included in balance
Only goods which have been received into warehouse should be included in inventory balance and a respective payables balance recognised. Purchases and payables may not be accurate at cut-off
Auditor’s response for company purchases goods from Europe and goods in transit for two weeks
Audit team should undertake detailed cut-off testing of goods in transit from suppliers in Europe to ensure cut-off is complete and accurate
Audit risk explanation for goods in transit were not carefully controlled?
Goods could have been omitted or counted twice. This would result in inventory being under or overstated
Auditor’s response for goods in transit were not carefully controlled?
The GRN and GDN received during the inventory count should be reviewed and followed through into the inventory count records as correctly included or not.
Audit risk explanation for Hurling Co has halted further sales of its new product Luge and a product recall has been initiated for any goods sold in the last four months?
If there are issues with the quality of the Luge product, inventory may be overstated as its net realisable value (NRV) may be less than cost.
Auditor’s response for Hurling Co has halted further sales of its new product Luge and a product recall has been initiated for any goods sold in the last four months?
Perform tests of details to confirm cost and NRV of the Luge products in inventory by NRV being above cost
Audit risk explanation for the company is holding damaged paint products in inventory and overall the inventory holding period has increased from 45 days to 54 days.
The quality of these products is in doubt and management is investigating whether they can be rectified. There is a risk that this inventory may be overstated as its net realisable value may be below cost.
Auditor’s response for the company is holding damaged paint products in inventory and overall the inventory holding period has increased from 45 days to 54 days.
Discuss with the finance director whether the cost of the product will be written down and what, if any, modifications will be required to rectify the quality of the product.
Audit risk for Tte delivery time of three weeks from the company’s international supplier is likely to result in goods in transit at the year end?
Inventory is not recorded on dispatch; therefore, inventory and liabilities are understated at the year end
Auditor’s response for the delivery time of three weeks from the company’s international supplier is likely to result in goods in transit at the year end?
Extend cut-off testing by reviewing pre- and post-year-end GRNs and GDNs to verify that inventory is recorded at the correct point
Risk of inventory sheets detail quantities held at date of the count?
Counters may rely on sheet instead of counting themselves. This could result in overstatement or understatement
Control recommendation of inventory sheets detail quantities held at date of the count?
Count sheets shouldn’t contain quanities just product codes. Ensures counters have to physically count inventory
Risk of when an area is counted it is marked off on warehouse map in the office instead of marking it?
If map not updated properly, items of inventory could be incorrectly recorded
Risk of when GRNs not received by finance department for purchase invoices?
Could result in invoices being paid when they haven’t been received
Control recommendation of when GRNs not received by finance department for purchase invoices?
GRN should be sent to finance department on a timely basis for matching to purchase invoices
Risk of GDNs not being received immediately to finance department?
Could result in goods despatched being invoiced late. Cut-off issues for revenue and receivables
Control recommendation of GDNs not being received immediately to finance department?
GDNs should be sent to finance department on a more frequent basis (e.g. daily)
Risk when standard costs in inventory are out-of-date?
Raw materials and wages haven’t been adjusted. Causing inventory and profits to be misstated
Control recommendation when standard costs in inventory are out-of-date?
Actual costs for raw materials and labour should be compared to proposed standard costs to ensure they are a close approximation
Risk for GDNs not given same number as order numbers they relate to?
If GDNs are missing and company fails to raise invoices in a timely manner, could lead to a loss of revenue
Control recommendation for GDNs not given same number as order numbers they relate to?
A sequence of check of GDNs should be undertaken to identify any missing despatch notes
Risk if sales order department don’t receive copu of GDN
Not able to monitor if orders are being fulfilled on a timely basis, which could result in a loss of revenue and customer goodwill
Control recommendation if sales order department don’t receive copy of GDN
GDN should be amended to a four-part with one copy going to sales department
Risk for no GRNs not being processed regularly?
Result in delays for supplies being paid as purchase invoices can’t be agreed to a GRN
Control recommendation for no GRNs not being processed regularly?
Copy of GRNs should be sent to accounts department on a more regular basis
Risk for GRNs only being sent to accounts department
Significant level of unfilled orders leading to a loss of sales and stock-outs
Control recommendation for GRNs only being sent to accounts department
GRN should be created in three parts
Risk of when Goods received notes (GRNs) are sent to the accounts department every two weeks?
This will delay processing of invoices (understanding liabilities) and payments to suppliers as the purchase invoices cannot be agreed to a GRN
Control recommendation for when Goods received notes (GRNs) are sent to the accounts department every two weeks?
A copy of the GRNs should be sent to the accounts department more often, perhaps daily.
Tests of control for when Goods received notes (GRNs) are sent to the accounts department every two weeks?
Enquire of the accounts clerk how frequently GRNs are received, to assess if they are sent promptly
Risk of company values inventories using standard costs, which are not kept up-to-date
If standard costs were reviewed 18 months ago, there is the risk that costs are misstated as changes in raw materials and wages inflation may not have been adjusted for
Control recommendation of company values inventories using standard costs, which are not kept up-to-date
A senior manager in the production department should review all currently used standard costs
Tests of control of company values inventories using standard costs, which are not kept up-to-date
Obtain a copy of the standard costs used for valuation of inventories, determine when the last review was and inspect for evidence of review by the production director
Control deficiency inventory movements during the count
Goods may be missed or double counted due to movements in the warehouse
Control recommendation for inventory movements during the count
The goods which are manufactured on 31 December should be stored to one side, and at the end of the count should be counted once and included within finished goods
Direct control for goods received notes are received and checked?
Ensures company is not paying for goods it did not order
Tests of control for goods received notes are received and checked?
Observe warehouse department when receiving goods to understand level of checks being undertaken
Test of controls for when there are insufficient copies of GRN?
Review file of copy GRNs held by purchase ordering department and review evidence that GRNs are matched to orders
Test of controls for when inventory using out-of-date standard costs?
Obtain copy of standard costs used in inventory valuation, assess when review was last undertaken
Tests of control for when GRNs aren’t sent to accounts department frequently?
Enquire accounts clerk as it frequency of when GRNs are received to assess if being sent properly
Tests of control for when GRN is only sent to accounts department?
Review GRNs held by purchase ordering clerk and review evidence these are matched to orders and flagged as completed
Direct control for invoices raised from GDN. Ensures actual quantity and type of goods despatched rather than order may be different?
Reduces risk of customers being invoice incorrectly goods not received which will result in misstatement of revenue
Tests of control for invoices raised from GDN. Ensures actual quantity and type of goods despatched rather than order may be different?
For sample of invoices, agree quantity and type of goods to GDN. Inspect GDN for evidfence of being matched to invoices
Direct control for inventory levels checked on a regular basis to purchase of raw materials?
Reduces risk of inappropriate levels of stock being maintained, causing overstatement if not valued appropriately at lower of cost and NRV
Tests control control for inventory levels checked on a regular basis to purchase of raw materials?
Observe weekly stock check process is being performed by the factorry supervisors
Tests of control for warehouse department agrees the receipt of goods from suppliers to a copy of the purchase order
Review a sample of GRNs held in the warehouse department for signature, as evidence of checks being undertaken on receipt of goods.
Control risk if GRNs are not processed regularly?
This could result in delays in suppliers being paid as the purchase invoices could not be agreed to a GRN and also recorded liabilities being understated
Control recommendation if GRNs are not processed regularly?
A copy of the GRNs should be sent to the accounts department on a more regular basis, such as daily
Tests of control if GRNs are not processed regularly?
Enquire of the accounts clerk as to the frequency of when GRNs are received to assess if they are being sent promptly.
Direct control if sales invoices are raised from GDN?
This ensures the invoice relates to the actual quantity and type of goods despatched rather than the order which may be different
Tests of control if sales invoices are raised from GDN?
Inspect the GDN for evidence of being matched to invoices to ensure the control has been performed.
Control deficiency is when company values iots inventory using standard costs, whicha re kept up-to-date?
If standard costs reviewed a long time ago, risk costs are misstated since changes in raw materials may not have been accounted for
Control recommendation when company values iots inventory using standard costs, whicha re kept up-to-date?
Review of all standard costs should be undertaken bu a senior manager in production costs to determine if any adjustments need to be made
Tests of control when company values iots inventory using standard costs, whicha re kept up-to-date?
Obtain copy of the standard costs used for inventory valuation, assess when review was last undertaken and inspect evidence of review by production director
Direct control if warehouse department agrees the receipt of goods from supplier to a copy of the purchase orders abd confirms quantity/quality of goods and signs GRNs to evidence checks
Not recording liabilities which are related to paying for goods of an inferior quality
Tests of control if warehouse department agrees the receipt of goods from supplier to a copy of the purchase orders abd confirms quantity/quality of goods and signs GRNs to evidence checks
Review sample GRNs held in the warehouse department for signature, as evidence of checks being undertaken on receipt of goods
