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:

i) the arrangement of inventory is such that an accurate count is possible.

ii) the inventory is in good condition with adequate storage space, and whether
items are properly packed or binned in a convenient manner for counting.
iii) scrap, obsolete, and damaged goods are adequately identified and
segregated.
iv) inventory owned by third parties is adequately identified and segregated.
v) inventories appear to be adequately safeguarded against access by
unauthorized persons and protected against deterioration.

b) in observing physical inventory counts, determine whether:

i) 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 counts are recorded.
ii) appropriate procedures are employed to control inventory movements (e.g.,
transfers, stock picking, etc.) during the count.
iii) quantities and descriptions are properly entered on the inventory tags or
sheets.
iv) the methods used to determine quantities are reasonably accurate.
v) there are adequate procedures for determining quantities of goods not
susceptible to direct physical counting (e.g., screws, nails).
vi) count totals are adequately checked by persons other than the original
counters.
vii) 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.
viii) inventory on the company's premises owned by others has been appropriately
identified and counted.
ix) 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 for 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 all of the count sheets) (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 document numbers
before the count. If the client's procedures are not based on prenumbered
documents, 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.

b) 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 determine that the goods are properly included in
inventory and the related liability has been recorded.

c) 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.
d) review records of returned goods and claims against suppliers and related debit
(credit) memoranda for periods before and after the cutoff date to determine 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-moving, obsolete, scrapped or damaged items have been

adequately identified by:

i) obtaining and reviewing a schedule of items that have shown little or no

recent movement;
ii) tracing information obtained during the observation of the physical inventory
to management reports of slow-moving, obsolete, scrapped or damaged
items;
iii) reviewing detailed inventory records, bin cards, etc.;
iv) reviewing periodic reports to management concerning such information;
v) discussing with management quantities held in the light of current production
requirements, sales orders received and future marketing forecasts; examine
documentation, including, where appropriate, aged listings of inventory
balances, substantiating the information obtained; and
vi) 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 it 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 an understanding of methods and procedures for costing

inventory;

b) perform 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
c) if appropriate, involve an expert to provide assistance in evaluating the
appropriateness of the value assigned.