AUDIT OF INVENTORIES

Reasons why auditing Inventory is important

1. Inventory constitute the largest current asset value of an
enterprise and very susceptible to errors and irregularities
2. Inventory is in different locations, making physical control and
counting difficult
3. Numerous alternative methods for costing and valuation of
inventory
4. Inventory value directly affects cost of goods sold and impacts net
income
5. Inventory valuation is complex and difficult
Audit Objectives - Inventories
1. Internal Control Consideration
2. Recorded inventories are valid (EXISTENCE and RIGHTS)
3. All inventory is recorded (COMPLETENESS)
4. Inventory records and supporting schedules are
mathematically correct and agree with general ledger
accounts (ACCURACY)
5. Inventories approximate the LCNRV (VALUATION)
6. Presentation and Disclosure of inventory is adequate
Audit Objectives – Cost of Goods Sold
1. Cost of goods sold represent cost of goods shipped (sold) during
the period (EXISTENCE or OCCURRENCE)
2. Cost of goods sold includes the effects of all sales transactions
during the period (COMPLETENESS)
3. Cost of goods sold is based on the consistent application of
acceptable cost flow method or methods (VALUATION or
ALLOCATION)
4. Cost of goods sold is properly classified in the income statement,
and the cost flow method or methods used are disclosed
(PRESENTATION & DISCLOSURE)
Internal Control over Inventories and Cost of
Goods Sold
1. Purchasing
2. Receiving
3. Storing
4. Issuing
5. Production
6. Shipping
7. Cost Accounting System
8. Perpetual Inventory System
Audit Working Papers
1. Top or lead schedule for inventories
2. Schedule of listings of inventory
3. Inventory observation
4. Comments on observation of physical inventory taking
5. Working paper for inventory test counts
6. Working paper for test of pricing of inventories
7. Working paper for test of extensions
8. Working paper for purchase and sales cut-off test
Audit Procedures for Inventory
Presentation and Disclosure
1. Review purchase and sale commitment
2. Determine whether any inventory has been pledged
3. Evaluate financial statements presentation of inventories and cost
of goods sold

Existence or Occurrence
1. Observe physical count
2. Vouch a sample of additions to perpetual inventory to supporting
receiving reports
Audit Procedures for Inventory
Rights and Obligations
1. Vouch a sample of inventory requisitions to customer or department order
2. Review purchases and sales cut-offs
3. Review inventory on consignment
4. Confirm inventory held at public warehouses and with third parties

Completeness
1. Account for the numerical sequence of inventory purchase requisitions
2. Trace a sample of receiving reports for inventory to the perpetual inventory
records
3. Perform analytical procedures
4. Account for inventory tags and count sheets
Audit Procedures for Inventory
Valuation
1. Test pricing method used by the client
2. Apply lower-of-cost or net-realizable-value rule
3. Perform analytical procedures
4. Test cost accumulation process
5. Review the overhead allocation and rates
The end. 