Audit procedure of inventory - Document Transcript

1. 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 15-Aug-2010

2. Audit Program For Inventory • 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. Anees Khan Page 2 15-Aug-2010

3. Audit Program For Inventory 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 Anees Khan Page 3 15-Aug-2010

4. Audit Program For Inventory 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. Anees Khan Page 4 15-Aug-2010