Audit procedure of inventory

Audit Program For Inventory

AUDIT PROGRAM FOR INVENTORY

Risks Inventory records may not be complete Inventory transactions may be processed in the wrong period Inventory items may not exist Inventory carrying values may not be realizable

Steps

1) Observe physical inventory

To an extent based on materiality and inherent risk, perform the following:

a) Inspect the premises to determine whether:

The arrangement of inventory is such that an accurate count is possible. The inventory is in good condition with adequate storage space, and whether

items are properly packed or binned in a convenient manner for counting. Scrape, obsolete, and damaged goods are adequately identified and

segregated. Inventory owned by third parties is adequately identified and segregated. Inventories appear to adequately safeguard against access by unauthorized

persons and protected against deterioration.

b) In observing physical inventory counts, determine whether:

The counts are carried out under proper supervision. Determine whether this official is independent of the custody and recording of inventory. Observe whether persons supervising the inventory make test counts in all areas and review all areas where inventory are kept to ensure that they have all been counted and the count are recorded.

Appropriate procedures are employed to control inventory movements (e.g., transfers, stock picking, etc.) during the count.

Quantities and description are properly entered on the inventory tags or sheets. The methods used to determine quantities are reasonably accurate. There are adequate procedures for determining quantities of goods not

susceptible to direct physical counting (e.g., screws, nails). Counts total are adequately checked by persons other than the original

counters. There are adequate procedures to ensure that all inventory (other than that on

the company’s premises owned by others) is counted and that no inventory is counted more than once.

Anees Khan Page 1 12-Apr-2023


Inventory on the company’s premises owned by others has been appropriately identified and counted.

Tags or count sheets are signed by individuals carrying out the count, or other suitable means of identifying individuals carrying out the count have been established, such as assigning tags or count sheets to count teams.

c) Test the counting of inventory items by selecting items from the inventory tags or sheets and perform an independent count. Perform other counts of inventories and compare the results with those recorded on the inventory tags or sheets by company personnel. Follow up any differences noted in the counts. Record selected items counted or subsequent comparison with priced inventory listings. (Existence/Occurrence, Accuracy)

d) Determine that procedures for accounting for all inventory tags and count sheets are followed and that all such tags and sheets have been accounted for, including used and unused tags and sheets, and that they are secured against alteration. Obtain details of records in order to test later for suppression, manipulation, addition or substitution of records after the physical inventory count (e.g., take copies of some or the entire count sheet) (Completeness).

e) Determine whether slow-moving, obsolete, and damaged items are identified and recorded by the count teams

f) Consider the procedures established for determining cutoff, visit the receiving and shipping departments and note the last receiving and shipping documents numbers before the count if the client procedures are not based on pre-numbered documents, and then prepare a list of shipping and receiving documents for a period immediately before and after the end of the period. Include documents for returns to suppliers and from customers, if different documents are used.

g) If appropriate, involve an expert to provide assistance in evaluating the appropriateness of the value assigned.

2) Examine receiving and issuing activity

Test, to obtain a moderate to low level of assurance, the cutoff of inventory by using information obtained at the physical inventory observation and data from cutoff procedures and the search for unrecorded liabilities. Perform the following:

a) Examine issues transactions and supporting documentation for a period before the balance sheet date and determine that goods issued before the balance sheet date have been excluded from raw materials inventory, and that goods included in raw materials inventory are not included in work in progress, finished goods, sales and cost of sales.



b) Select receiving reports for goods received before the balance sheet date and determine that all goods received before the inventory have been included in inventory and liabilities.

c) Review supporting documentation for goods not included in the physical count but included in the general ledger inventory control account (e.g., inventory in transit, duty and freight, returns) and determines that the goods are properly included in inventory and the related liability has been recorded.

d) Examine purchase and issues transactions and detailed supporting documents for the period after the balance sheet date to determine that they have been reflected in the proper period. Where pre-numbered documents are used, ensure that documents have been used in sequence and earlier numbers are included in and later numbers excluded from transactions in the period.

e) Review records of returned goods and claims against suppliers and related debit/(credit) memoranda for periods before and after the cutoff date to determine to that returns and claims against suppliers made after the cutoff date have been entered in the appropriate period.

3) Test obsolete, slow-moving, scrapped or damaged listing

Test, to an extent based upon materiality and inherent risk, the schedules of slow-moving, obsolete, scrapped or damaged items used to determine the net realizable value of inventory by performing the following:

a) Determine whether slow-making , obsolete, scrapped or damaged items have been adequately identified by:

Obtaining and reviewing a schedule of items that have shown little or no recent movement;

Tracing information obtained during the observation of the physical inventory to management reports of slow-moving, obsolete, scrapped of damaged item;

Reviewing detailed inventory records, bin cards, etc.; Reviewing periodic reports to management concerning such information; Discussing with management quantities held in the light of current production

requirements, sales order received and future marketing forecasts; examine documentation, including, where appropriate, aged listings of inventory balances, substantiating the information obtained; and

Discussing with management whether any substantial inventory amounts may not be realizable because of major delays or disputes, defective work, marketing difficulties, etc.

b) Review the pricing of such inventory and determine whether is priced in excess of net realizable value.

4) Test client’s costing of inventory detail



Test the costing of the detailed priced raw materials inventory listings to obtain a moderate to low level of assurance that accuracy is achieved by performing the following:

a) Obtain and document and understanding of methods procedures for costing inventory;

b) Performs audit procedures to ensure that the inventory costs are appropriate, e.g., trace unit costs of inventory items to and from suppliers’ invoices or standard costing information;

c) Determine whether the method of inventory pricing is consistent with the prior year; and

d) If appropriate, involve an expert to provide assistance in evaluating the appropriateness of the value assigned.


Business

Audit procedure of inventory