audit of inventory cycle
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AUDIT OF INVENTORYCYCLE
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AUDIT OF INVENTORY CYCLE
INTRODUCTION
Factors affecting the complexity and audit of inventory
include:
Often major item in the balance sheet & make up
largest item in the working capital.
Located at different locations
Diversity of items create difficulties; jewels, chemicals
etc
Difficulties in valuation; factors like obsolescence.
Methods of valuation may differ
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CLASSIFICATION OF
INVENTORY
Depends on the nature of business
Eg. Retail/ wholesalemerchandise on hand Eg. Servicing (hospital)- food, medicines and med.
Supplies.
Eg. ManufacturingRaw Material, WIP, Finished
goods.
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BUSINESS FUNCTIONS & FLOW
OF DOCUMENTS
Flow of Inventory & Costs
Refer to Figure 21-1 p.633
Functions in the inventory & warehousing cycle Refer to Figure 21-2 p.634
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Audit of Inventory Refer to Figure 21-3, p.636
Price and compile
inventory
Internally transfer
assets and costs
Ship goods and record
revenue and costs
Physically observe
inventory
Acquire and record
raw materials, labor
and overhead
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MAJOR CONTROLS & AUDIT
PROCEDURES
Analytical Proceduresp.640
Balance related audit objectives & Test of Detail
of Balances for Physical Inventory ObservationsTable 21-2, p.644.
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AUDIT TESTS TO SATISFY THE
OBJECTIVES ON INVENTORY
Valuation
1. Test the additions and extensions of the final stock sheet
2. Ascertain the method used for valuing stock and considerwhether It has been correctly applied
It is an acceptable basis of valuation under FRS 102
It is consistent with previous years & co.s acc policy
3. Review WIP and ensure that Costs have been recorded correctly
Review any profit taken in the light of work carried out (i.e. stage ofcompletion), costs to date, expected costs to complete & contractvalue
Adequate prov. has been made for any anticipated losses
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AUDIT TESTS TO SATISFY THE
OBJECTIVES ON INVENTORY
Provisions
Obtain details of the basis for making provisions &
determine whether it is both adequate & consistent Review the stock sheets & ensure that any items
identified as damaged, slow moving / obsolete have been
correctly written down
Review all items of stock & WIP & consider whether anyfurther provision is necessary
Select a sample of stock items and compare costs to the
selling price less expenditure necessary for realization
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AUDIT TESTS TO SATISFY THE
OBJECTIVES ON INVENTORY
Cut-off Review the results of the tests on cut-off carried out on debtors &
creditors (since this is related to the movement of inventories)
Ensure they p.v. adequate assurance as to the accuracy of the yearend cut off
Disclosure Accounting policies & cost formulas for measuring inventories
Classification of inventories Purchases from related parties
Inventories carried at NRV
Inventories pledged as security
COGS
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STOCK-TAKE ATTENDANCE
Before the stock-take
1. Record the following details
Location (s) being counted
Date (s) of count & attendance Types of stock held at location
Brief description of the procedures adopted
Name of client staff counting the stock
Name of audit staff taking part
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STOCK-TAKE ATTENDANCE
Before the stock-take
2. Ascertain & note whether The stock-take teams were briefed prior to commencing
the count
The teams only include people who are not responsible forstoring & recording of stock & WIP
Stock was counted by teams of two (one person counting,another person records)
The teams were asked to identify damaged, slow-moving /obsolete stock
The teams were made aware of any stocks held on behalfof 3rdparties & these were excluded from the count
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STOCK-TAKE ATTENDANCE
During the stock-take
1. Determine whether The teams were counting & recording correctly
The counts were being controlled to ensure that all stockwas counted and only once
There was adequate control over stock sheets that theyare all accounted for (e.g. pre-numbered)
2. If serially numbered sheets are used, record the
numbers of all sheets used at the end of the count 3. Select a sample of items from completed stock
sheets and check to ensure that the number hasbeen recorded correctly
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STOCK-TAKE ATTENDANCE
During the stock-take 4. Count a sample of stock items & ensure that they have been recorded
properly on the final stock sheets.
5. Extract or copy details of a sample of rough sheets for checking at thefinal audit
6. Ascertain whether any stock is held on behalf of 3rdparty. If there is,make sure it has been identified & excluded from the count
7. Note any old / damaged stock during the count. Ensure it is markedas such on the final stock sheets.
CUT-OFF Ensure no movement of stock
Record details of the last goods dispatch number and the GRN
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STOCK-TAKE ATTENDANCE
After the stock take
1. Write a report on the stock take, concluding:
The accuracy of the count and, The extent of reliability of the stock count
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Price Test
Inventory price test: all tests of the clients unit
prices to determine whether they are correct.
Inventory compilation tests: all tests of the
summarization of the physical quantities, theextension of price times qty, footing the inventory
summary and tracing the total to GL.