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Chapter 4
This document discusses inventory auditing. It covers the key elements of inventory auditing including existence, completeness, valuation, and ownership. It describes regulatory requirements under IAS 2 and ISA 501. The document outlines procedures for planning, attending, and following up on the physical inventory count. It also discusses important audit procedures for inventory cut-off, valuation of raw materials, work-in-progress, and finished goods, as well as comparing inventory costs to net realizable value.
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Chapter 4
- 1. Chapter 4: InventoryAuditing
- 2. Inventory The most significantfigure 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 obsolenceis subjective Different locations and inventories held by third part makes things worse Different valuation methods are allowed under IAS 2
- 4. The four elementsof 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 ofinventory 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 inventorycount 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 inventorycount 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 inventorycount 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
- 10. Work-in-progress Existence Attending physical inventory count Reviewingmanagement controls
- 11. Planning inventory count Gainunderstanding Review previous arrangement Perform analytical procedures Discuss with management
- 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 Planprocedures Ensure representative selection of locations, inventory and procedures Attention to high value items Obtain third parties confirmation
- 14. REVIEW OF COUNTINSTRUCTIONS Organization of count Supervision Tidying and marking Restriction and control of movement Identifying damaged, obsolete, slow-moving, third part and
- 15. REVIEW OF COUNTINSTRUCTIONS Counting Systematic counting Team of two counters
- 16. REVIEW OF COUNTINSTRUCTIONS 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 checkcut-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 ofcut-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
- 21. Purchase cut-off Should berecorded as liability if goods were received prior to the inventory count
- 22. Sales cut-off Generally morestraightforward 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 oncut-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 thecut-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
- 25. Inventory valuation procedures Confirmingthat all overheads have absorbed (adjusted) Confirm that inventory is stated at Lower of cost and NRV
- 26. Valuation of rawmaterials 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 WIPand 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 (wipand fg) Auditors should check the reasonableness of the valuation of FG and WIP. Analytical procedures may assist by comparing different years
- 29. Cost attributable toproduction 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.