2. Inventory
The most significant figure in the SFP
The most problematic item in the SFP
Closing stock affect profit and assets
Diverse items with diverse measurements
WIP is subjective
Verification of existence needs
attendance
3. Provision for obsolence is subjective
Different locations and inventories
held by third part makes things worse
Different valuation methods are
allowed under IAS 2
4. The four elements of inventory Auditing
1. Existence
Physical count and test of cut off
2. Completeness
Observing physical count, correct processing of AP
3. Valuation
Comparing costs with NRV and testing whether lower
of the two is used
4. Rights and obligations (Ownership)
Checking invoice prices, legal documents and duties
and taxes can prove ownership
5. Regulatory aspects of inventory
IAS 2 Inventories
ISA 501 Audit evidence- Specific
considerations for selected items which
relates to attendance at the inventory
count
6. IAS 2 inventories
Cost : compromising all costs of purchase
and other costs incurred in bringing
inventories to their present location and
condition
NRV: Estimated selling price in the ordinary
course of a business, less the estimated
costs of completion and the estimated costs
necessary to make the sale
7. The physical inventory count
Management
Ensure inventory figure in the
accounts
represents inventory that exists
Includes all inventory owned
Ensure accounting records include
statement of physical inventory count
8. The physical inventory count
Auditors
Obtain sufficient audit evidence about
inventory figure from
Inventory records
Inventory control systems
Results of physical inventory counts
Test counts by auditors
Attend physical inventory count
9. Methods of inventory count
1. Physical inventory count at the end of the
financial year
Auditors most preferred method
2. Physical inventory count before or after the end of
the financial year
3. Perpetual inventory records exist
Inventory counted at least once a year
Maintain adequate inventory records
Satisfactory procedures
Investigate and correct material differences
12. Planning inventory count
Assess key factors
Nature and volume of inventory
Risk
Method of accounting
Locations
Internal control and accounting systems
Internal audit involvement
13. Planning inventory count
Plan procedures
Ensure representative selection of
locations, inventory and procedures
Attention to high value items
Obtain third parties confirmation
14. REVIEW OF COUNT INSTRUCTIONS
Organization of count
Supervision
Tidying and marking
Restriction and control of
movement
Identifying damaged, obsolete,
slow-moving, third part and
15. REVIEW OF COUNT INSTRUCTIONS
Counting
Systematic counting
Team of two counters
16. REVIEW OF COUNT INSTRUCTIONS
Recording
Serial numbering, control and return of
inventory sheet
Location, identity, count units, quantity
counted and conditions tested
Reconciliation with inventory records and
correcting and explaining differences
17. During the count
Observe client staff obedience
Make test counts
Ensure the procedures for dealing with unusual
inventory
Ensure inventory held on behalf of third parts
Conclude whether the count has been properly
done
Consider whether amendment is required
18. After the count
Trace items to final sheets
Check all count records have been included in final
inventory sheets
Check that final inventory sheets are supported by
inventory counts
Confirm cut-off
Check third part replies about inventory held for
them
Confirm correct valuation
Follow up queries and notify problems
19. cut-off
Auditors should check cut-off by
noting the serial numbers of GRNs
and GDNs received and dispatched
just before and after the end of
financial year and subsequently
checking that they have been
included in the correct period
20. The importance of cut-off
Cut-off is most critical to the accurate
recording of transactions
The point of purchase and receipt of goods
and services
The requisition of raw materials
the transfer of completed WIP to finished
goods
The sales and dispatch of finished goods
22. Sales cut-off
Generally more straightforward to
achieve correctly than purchase
cut-off
Invoices for goods dispatched after
the count should not be recognized
as revenue of current year.
23. Audit procedures on cut-off
Record all movement notes relating to the period
Observe whether correct cut-off procedures are
being followed in the dispatch and receiving areas
Discuss procedures with company staff performing
the count to ensure understanding
Ensure that no goods finished on the day of the
count are transferred to the warehouse
24. Use of the cut-off info
Match up GRNs with PI and ensure liability
has been created in the correct period
Match up GDNs to SI to insure the income
has been recorded in the correct period
Match up RN to WIP figures for the
receiving department to ensure correct
recording
26. Valuation of raw materials and brought
in components
Check that correct prices have been used to
value raw materials referring supplier invoices
Reference to invoice also ensures ownership
If standard costs are used, auditors should
check basis of standards, compare standard
costs with actual costs and confirm the
treatment of variances
27. Valuation of WIP and FG
Cost comprises the cost of purchase and the costs of
conversion
Cost of conversion comprises
Costs specifically attributable to unites of production
Production overheads
Other overheads attributable to bringing the product to its
present location and condition
28. Audit procedures (wip and fg)
Auditors should check the
reasonableness of the valuation of
FG and WIP.
Analytical procedures may assist
by comparing different years
29. Cost attributable to production
Materials
Check the valuation of raw materials to invoices and price
lists
Confirm appropriate base of valuation (e.g. FIFO)
Confirm correct quantities in RM, WIP & FG
Labor
Check labor costs to wage records
Review standard labour costs with actual costs
Check labour hours with time summaries
30. Cost vs nrv
Auditors should compare cost and NRV for each
item of inventory
NRV is likely to be less than cost when there has
been
An increase in costs or fall in selling prices
Physical deterioration
Obsolescence of products
A marketing decision to sell products at loss
Errors in production and purchasing
31. Cost vs NRV
Review and test the client system for identify
slow-moving, obsolete or damaged inventory
Check whether the client established provision for
these items
Examine inventory records to identify slow-
moving items
Examine the prices the price of FG
Review quantities of goods sold after the year
end.