Testing Inventory

Question 1

What internal controls should a client establish related to inventory?

Answer 1

Physical controls to prevent theft.
Separation of duties between access to inventory and accounting records.
Periodic reconciliations between physical quantities and accounting records.

Question 2

What procedures should a client establish to ensure an accurate physical inventory count?

Answer 2

Procedures to prevent double-counting.
Procedures to ensure all items are counted.
Stock identification procedures.
Procedures to check counts.
Procedures to control movement of goods.

Question 3

What audit procedures should an auditor perform while observing a client’s physical inventory count?

Answer 3

Select sample of tags; locate and count items.
Confirm inventory held by third parties.
Make test counts and compare to tags.
Examine descriptions on tags.
Look for damaged/obsolete items.

Question 4

What substantive audit procedures are used to test the existence of inventory?

Answer 4

Select a sample from the inventory summary.

- Trace items to count tags or test counts.

Question 5

What substantive audit procedures are used to test the completeness of inventory?

Answer 5

Trace test counts to the inventory summary.

Question 6

What substantive audit procedures are used to test the valuation of inventory?

Answer 6

Trace unit costs to vendor invoices.

Recompute extensions and footing.

Question 7

What substantive audit procedures are used to test the rights & obligations of inventory?

Answer 7

Inquire about consignment inventory.

Question 8

What substantive audit procedures are used to test the presentation & disclosure of inventory?

Answer 8

Make sure notes include necessary disclosures:

• cost flow assumption
• replacement cost (if using LIFO)
• raw materials/WIP/finished goods

Question 9

What procedures should an auditor perform to identify obsolete or slow-moving inventory?

Answer 9

Inquire of sales and warehouse employees.
Look for rust/dust/damage.
Examine scrap sales in subsequent period.
Compare inventory turnover to prior periods and industry.
Review perpetual records.

Question 10

What analytical procedures are commonly used to test a client’s inventory and cost of goods sold?

Answer 10

Compare balance with prior years.
Compare changes in inventory to changes in accounts payable.
Compare gross profit percentage with prior years.
Compare inventory turnover to prior years and industry average.