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AUDIT OF INVENTORYCYCLE

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AUDIT OF INVENTORY CYCLE

INTRODUCTION

Factors affecting the complexity and audit of inventory

include:

Often major item in the balance sheet & make up

largest item in the working capital.

Located at different locations

Diversity of items create difficulties; jewels, chemicals

etc

Difficulties in valuation; factors like obsolescence.

Methods of valuation may differ

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CLASSIFICATION OF

INVENTORY

Depends on the nature of business

Eg. Retail/ wholesalemerchandise on hand Eg. Servicing (hospital)- food, medicines and med.

Supplies.

Eg. ManufacturingRaw Material, WIP, Finished

goods.

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BUSINESS FUNCTIONS & FLOW

OF DOCUMENTS

Flow of Inventory & Costs

Refer to Figure 21-1 p.633

Functions in the inventory & warehousing cycle Refer to Figure 21-2 p.634

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Audit of Inventory Refer to Figure 21-3, p.636

Price and compile

inventory

Internally transfer

assets and costs

Ship goods and record

revenue and costs

Physically observe

inventory

Acquire and record

raw materials, labor

and overhead

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MAJOR CONTROLS & AUDIT

PROCEDURES

Analytical Proceduresp.640

Balance related audit objectives & Test of Detail

of Balances for Physical Inventory ObservationsTable 21-2, p.644.

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AUDIT TESTS TO SATISFY THE

OBJECTIVES ON INVENTORY

Valuation

1. Test the additions and extensions of the final stock sheet

2. Ascertain the method used for valuing stock and considerwhether It has been correctly applied

It is an acceptable basis of valuation under FRS 102

It is consistent with previous years & co.s acc policy

3. Review WIP and ensure that Costs have been recorded correctly

Review any profit taken in the light of work carried out (i.e. stage ofcompletion), costs to date, expected costs to complete & contractvalue

Adequate prov. has been made for any anticipated losses

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AUDIT TESTS TO SATISFY THE

OBJECTIVES ON INVENTORY

Provisions

Obtain details of the basis for making provisions &

determine whether it is both adequate & consistent Review the stock sheets & ensure that any items

identified as damaged, slow moving / obsolete have been

correctly written down

Review all items of stock & WIP & consider whether anyfurther provision is necessary

Select a sample of stock items and compare costs to the

selling price less expenditure necessary for realization

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AUDIT TESTS TO SATISFY THE

OBJECTIVES ON INVENTORY

Cut-off Review the results of the tests on cut-off carried out on debtors &

creditors (since this is related to the movement of inventories)

Ensure they p.v. adequate assurance as to the accuracy of the yearend cut off

Disclosure Accounting policies & cost formulas for measuring inventories

Classification of inventories Purchases from related parties

Inventories carried at NRV

Inventories pledged as security

COGS

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STOCK-TAKE ATTENDANCE

Before the stock-take

1. Record the following details

Location (s) being counted

Date (s) of count & attendance Types of stock held at location

Brief description of the procedures adopted

Name of client staff counting the stock

Name of audit staff taking part

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STOCK-TAKE ATTENDANCE

Before the stock-take

2. Ascertain & note whether The stock-take teams were briefed prior to commencing

the count

The teams only include people who are not responsible forstoring & recording of stock & WIP

Stock was counted by teams of two (one person counting,another person records)

The teams were asked to identify damaged, slow-moving /obsolete stock

The teams were made aware of any stocks held on behalfof 3rdparties & these were excluded from the count

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STOCK-TAKE ATTENDANCE

During the stock-take

1. Determine whether The teams were counting & recording correctly

The counts were being controlled to ensure that all stockwas counted and only once

There was adequate control over stock sheets that theyare all accounted for (e.g. pre-numbered)

2. If serially numbered sheets are used, record the

numbers of all sheets used at the end of the count 3. Select a sample of items from completed stock

sheets and check to ensure that the number hasbeen recorded correctly

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STOCK-TAKE ATTENDANCE

During the stock-take 4. Count a sample of stock items & ensure that they have been recorded

properly on the final stock sheets.

5. Extract or copy details of a sample of rough sheets for checking at thefinal audit

6. Ascertain whether any stock is held on behalf of 3rdparty. If there is,make sure it has been identified & excluded from the count

7. Note any old / damaged stock during the count. Ensure it is markedas such on the final stock sheets.

CUT-OFF Ensure no movement of stock

Record details of the last goods dispatch number and the GRN

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STOCK-TAKE ATTENDANCE

After the stock take

1. Write a report on the stock take, concluding:

The accuracy of the count and, The extent of reliability of the stock count

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Price Test

Inventory price test: all tests of the clients unit

prices to determine whether they are correct.

Inventory compilation tests: all tests of the

summarization of the physical quantities, theextension of price times qty, footing the inventory

summary and tracing the total to GL.