Inventory Risks and Controls

Question 1

Audit risk explanation for price of components steadily increasing when inventory is valued at cost?

Answer 1

NRV of value may have fallen below the cost incurred by company, resulting in inventory valuation being overstated

Question 2

Auditor’s response for price of components steadily increasing when inventory is valued at cost?

Answer 2

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

Question 3

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

Answer 3

Risk cut-off is not accurate and inventory and payables are understated as company may not correctly recognise raw materials

Question 4

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

Answer 4

Audit team should undertake detailed cut-off testing of purchases of raw materials at year end

Question 5

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

Answer 5

If damaged inventory not written down to NRV, inventory is overstated and cost of sales understated

Question 6

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

Answer 6

Discuss with finance director whether damaged inventory is written down to its NRV and agree write down to final inventory valuation

Question 7

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?

Answer 7

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

Question 8

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?

Answer 8

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

Question 9

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

Answer 9

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

Question 10

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

Answer 10

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

Question 11

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?

Answer 11

If goods remain unsold afer the year-end, scrap value may be voerstated. Risk of inventory is overvalued

Question 12

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?

Answer 12

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

Question 13

Audit risk if company purchases their goods from its main suppleir and has responsibility for goods at the point of dispatch?

Answer 13

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

Question 14

Auditor’s response if company purchases their goods from its main suppleir and has responsibility for goods at the point of dispatch?

Answer 14

Review controls the company ahs in palce to ensure inventory is recorded from point of dispatch

Question 15

Audit risk explanation for company utilising a perpetual inventory system at its warehouse rather than a full year-end count?

Answer 15

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

Question 16

Auditor’s response for company utilising a perpetual inventory system at its warehouse rather than a full year-end count?

Answer 16

The completeness of the perpetual inventory counts should be reviewed and the controls over the counts and adjustments to records should be tested

Question 17

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?

Answer 17

As year-end quantities will be based on the records, this likely to result in overstated inventory

Question 18

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?

Answer 18

Should be discussed with management ASAP as it may not be possible to put reliance on inventory records at year end

Question 19

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

Answer 19

If adjustments are not completed accurately, then year-end inventory could be under or overstated

Question 20

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

Answer 20

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

Question 21

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

Answer 21

If percentage completion for WIP is not correctly calculated, the inventory valuation may be under or over stated

Question 22

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

Answer 22

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

Question 23

Audit risk explanation for latest management accounts contain 2.1 of completed properties, this balance was 1.4 in September 20X4 (inventory)

Answer 23

Increase in inventory may be due to an increased level of pre-year-end orders. May indicate that they are overvalued

Question 24

Auditor’s response for latest management accounts contain 2.1 of completed properties, this balance was 1.4 in September 20X4 (inventory)

Answer 24

Aged inventory report to be reviewed to assess whether inventory requires write down

Question 25

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?

Answer 25

Adjustments may not be made accurately or completely. Risk that inventory could be overstated or understated

Question 26

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?

Answer 26

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

Question 27

Audit risk explanation for there being a significant number of sales returns made subsequent to year end

Answer 27

As they are pre-year-end sales, thney should be removed from sales. If not, revenue is overstated and inventoryu is understated

Question 28

Auditors response for there being a significant number of sales returns made subsequent to year end

Answer 28

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

Question 29

Audit risk explanation for company’s year-end inventory count there were movements of goods in and out?

Answer 29

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

Question 30

Auditor’s response for company’s year-end inventory count there were movements of goods in and out?

Answer 30

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

Question 31

Audit risk explanation for company purchases goods from Europe and goods in transit for two weeks and these goods included in balance

Answer 31

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

Question 32

Auditor’s response for company purchases goods from Europe and goods in transit for two weeks

Answer 32

Audit team should undertake detailed cut-off testing of goods in transit from suppliers in Europe to ensure cut-off is complete and accurate

Question 33

Audit risk explanation for goods in transit were not carefully controlled?

Answer 33

Goods could have been omitted or counted twice. This would result in inventory being under or overstated

Question 34

Auditor’s response for goods in transit were not carefully controlled?

Answer 34

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.

Question 35

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?

Answer 35

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.

Question 36

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?

Answer 36

Perform tests of details to confirm cost and NRV of the Luge products in inventory by NRV being above cost

Question 37

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.

Answer 37

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.

Question 38

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.

Answer 38

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.

Question 39

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?

Answer 39

Inventory is not recorded on dispatch; therefore, inventory and liabilities are understated at the year end

Question 40

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?

Answer 40

Extend cut-off testing by reviewing pre- and post-year-end GRNs and GDNs to verify that inventory is recorded at the correct point

Question 41

Risk of inventory sheets detail quantities held at date of the count?

Answer 41

Counters may rely on sheet instead of counting themselves. This could result in overstatement or understatement

Question 42

Control recommendation of inventory sheets detail quantities held at date of the count?

Answer 42

Count sheets shouldn’t contain quanities just product codes. Ensures counters have to physically count inventory

Question 43

Risk of when an area is counted it is marked off on warehouse map in the office instead of marking it?

Answer 43

If map not updated properly, items of inventory could be incorrectly recorded

Question 44

Risk of when GRNs not received by finance department for purchase invoices?

Answer 44

Could result in invoices being paid when they haven’t been received

Question 45

Control recommendation of when GRNs not received by finance department for purchase invoices?

Answer 45

GRN should be sent to finance department on a timely basis for matching to purchase invoices

Question 46

Risk of GDNs not being received immediately to finance department?

Answer 46

Could result in goods despatched being invoiced late. Cut-off issues for revenue and receivables

Question 47

Control recommendation of GDNs not being received immediately to finance department?

Answer 47

GDNs should be sent to finance department on a more frequent basis (e.g. daily)

Question 48

Risk when standard costs in inventory are out-of-date?

Answer 48

Raw materials and wages haven’t been adjusted. Causing inventory and profits to be misstated

Question 49

Control recommendation when standard costs in inventory are out-of-date?

Answer 49

Actual costs for raw materials and labour should be compared to proposed standard costs to ensure they are a close approximation

Question 50

Risk for GDNs not given same number as order numbers they relate to?

Answer 50

If GDNs are missing and company fails to raise invoices in a timely manner, could lead to a loss of revenue

Question 51

Control recommendation for GDNs not given same number as order numbers they relate to?

Answer 51

A sequence of check of GDNs should be undertaken to identify any missing despatch notes

Question 52

Risk if sales order department don’t receive copu of GDN

Answer 52

Not able to monitor if orders are being fulfilled on a timely basis, which could result in a loss of revenue and customer goodwill

Question 53

Control recommendation if sales order department don’t receive copy of GDN

Answer 53

GDN should be amended to a four-part with one copy going to sales department

Question 54

Risk for no GRNs not being processed regularly?

Answer 54

Result in delays for supplies being paid as purchase invoices can’t be agreed to a GRN

Question 55

Control recommendation for no GRNs not being processed regularly?

Answer 55

Copy of GRNs should be sent to accounts department on a more regular basis

Question 56

Risk for GRNs only being sent to accounts department

Answer 56

Significant level of unfilled orders leading to a loss of sales and stock-outs

Question 57

Control recommendation for GRNs only being sent to accounts department

Answer 57

GRN should be created in three parts

Question 58

Risk of when Goods received notes (GRNs) are sent to the accounts department every two weeks?

Answer 58

This will delay processing of invoices (understanding liabilities) and payments to suppliers as the purchase invoices cannot be agreed to a GRN

Question 59

Control recommendation for when Goods received notes (GRNs) are sent to the accounts department every two weeks?

Answer 59

A copy of the GRNs should be sent to the accounts department more often, perhaps daily.

Question 60

Tests of control for when Goods received notes (GRNs) are sent to the accounts department every two weeks?

Answer 60

Enquire of the accounts clerk how frequently GRNs are received, to assess if they are sent promptly

Question 61

Risk of company values inventories using standard costs, which are not kept up-to-date

Answer 61

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

Question 62

Control recommendation of company values inventories using standard costs, which are not kept up-to-date

Answer 62

A senior manager in the production department should review all currently used standard costs

Question 63

Tests of control of company values inventories using standard costs, which are not kept up-to-date

Answer 63

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

Question 64

Control deficiency inventory movements during the count

Answer 64

Goods may be missed or double counted due to movements in the warehouse

Question 65

Control recommendation for inventory movements during the count

Answer 65

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

Question 66

Direct control for goods received notes are received and checked?

Answer 66

Ensures company is not paying for goods it did not order

Question 67

Tests of control for goods received notes are received and checked?

Answer 67

Observe warehouse department when receiving goods to understand level of checks being undertaken

Question 68

Test of controls for when there are insufficient copies of GRN?

Answer 68

Review file of copy GRNs held by purchase ordering department and review evidence that GRNs are matched to orders

Question 69

Test of controls for when inventory using out-of-date standard costs?

Answer 69

Obtain copy of standard costs used in inventory valuation, assess when review was last undertaken

Question 70

Tests of control for when GRNs aren’t sent to accounts department frequently?

Answer 70

Enquire accounts clerk as it frequency of when GRNs are received to assess if being sent properly

Question 71

Tests of control for when GRN is only sent to accounts department?

Answer 71

Review GRNs held by purchase ordering clerk and review evidence these are matched to orders and flagged as completed

Question 72

Direct control for invoices raised from GDN. Ensures actual quantity and type of goods despatched rather than order may be different?

Answer 72

Reduces risk of customers being invoice incorrectly goods not received which will result in misstatement of revenue

Question 73

Tests of control for invoices raised from GDN. Ensures actual quantity and type of goods despatched rather than order may be different?

Answer 73

For sample of invoices, agree quantity and type of goods to GDN. Inspect GDN for evidfence of being matched to invoices

Question 74

Direct control for inventory levels checked on a regular basis to purchase of raw materials?

Answer 74

Reduces risk of inappropriate levels of stock being maintained, causing overstatement if not valued appropriately at lower of cost and NRV

Question 75

Tests control control for inventory levels checked on a regular basis to purchase of raw materials?

Answer 75

Observe weekly stock check process is being performed by the factorry supervisors

Question 76

Tests of control for warehouse department agrees the receipt of goods from suppliers to a copy of the purchase order

Answer 76

Review a sample of GRNs held in the warehouse department for signature, as evidence of checks being undertaken on receipt of goods.

Question 77

Control risk if GRNs are not processed regularly?

Answer 77

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

Question 78

Control recommendation if GRNs are not processed regularly?

Answer 78

A copy of the GRNs should be sent to the accounts department on a more regular basis, such as daily

Question 79

Tests of control if GRNs are not processed regularly?

Answer 79

Enquire of the accounts clerk as to the frequency of when GRNs are received to assess if they are being sent promptly.

Question 80

Direct control if sales invoices are raised from GDN?

Answer 80

This ensures the invoice relates to the actual quantity and type of goods despatched rather than the order which may be different

Question 81

Tests of control if sales invoices are raised from GDN?

Answer 81

Inspect the GDN for evidence of being matched to invoices to ensure the control has been performed.

Question 82

Control deficiency is when company values iots inventory using standard costs, whicha re kept up-to-date?

Answer 82

If standard costs reviewed a long time ago, risk costs are misstated since changes in raw materials may not have been accounted for

Question 83

Control recommendation when company values iots inventory using standard costs, whicha re kept up-to-date?

Answer 83

Review of all standard costs should be undertaken bu a senior manager in production costs to determine if any adjustments need to be made

Question 84

Tests of control when company values iots inventory using standard costs, whicha re kept up-to-date?

Answer 84

Obtain copy of the standard costs used for inventory valuation, assess when review was last undertaken and inspect evidence of review by production director

Question 85

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

Answer 85

Not recording liabilities which are related to paying for goods of an inferior quality

Question 86

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

Answer 86

Review sample GRNs held in the warehouse department for signature, as evidence of checks being undertaken on receipt of goods