Specific Audit Areas - Inventory

Question 1

Relevant AICPA Guidance

Audit Evidence—Specific Considerations for Selected Items. Part of this standard focuses specifically on inventory, which is summarized here. The standard states that the auditor’s objective is to obtain sufficient appropriate audit evidence about the existence and condition of inventory.

Related to the Existence Assertion​ - auditor participates in the client’s physical count of inventory (the observation of inventory):

1. Internal control objectives - Auditor study the client written procedures and instruction given to employees to determine the adequacy of these procedures in design this procedures to successfully do accurate physical count. Focus is on assessing control risk related to inventory reporting.
2. Substantive audit objectives - auditor should take a sample of inventory items and verify the physical existence of quantities reflected in the client’s detailed records supporting the ending inventory;
   
   1. focus here is assessing the fairness of the reported inventory.

To test existence for inventory - auditor should select items from the client final inventory listing, which is essentially the subsidiary ledger for adjusted general ledger balance.

To test completeness for inventory - auditor should select items from the underlying inventory count tags (including the auditor’s own count sheets) and agree those to the client’s inventory listing to establish that there were no omissions from the client’s inventory listing.

Question 2

Related to Audit Procedures—Emphasizing quantities:

1. Auditor’s attendance at physical inventory counting—

• inspecting the inventory to ascertain its existence and evaluate its condition
• b) observing compliance with management’s instructions and the performance of procedures for recording and controlling the results of the physical count;
• obtaining audit evidence about the reliability of management’s count procedures

1. Review the client’s written inventory-taking procedures to determine that the physical count will be complete and accurate (regarding dates, locations, personnel involved, and instructions about accounting for the prenumbered inventory tags, cutoff procedures, and error resolution procedures)
2. Assessing the accuracy of the client’s reported inventory quantities.
3. Focus on the client’s prenumbered inventory tags. Determine that all tags have been properly accounted for
4. The auditor should be alert for and inquire about obsolete or damaged items

If the physical count of inventory occurs on a date other than the date of the financial statements =

• auditor should perform audit procedures to determine whether changes in inventory between those dates are properly recorded.

If the auditor is unable to attend physical inventory counting due to unforeseen circumstances,

• auditor should make some physical counts on an alternative date and perform audit procedures on intervening transactions.

If attendance at physical inventory counting is impracticable,

• = auditor should perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory.
• If that is not possible, then the auditor should appropriately modify the auditor’s opinion.

If there is a material amount of inventory stored in a public warehouse,

• =auditor can confirm such inventory with the custodian (or could consider physical observation).

Question 3

Related to the Valuation Assertion

Price Tests—Regarding the unit costs (NOT selling prices!) attributed to inventory items: