 Overview

 Parts of the Audit of Inventory

a. Transfer assets and costs

b. Physically observe inventory
c. Price and compile inventory
 Analytical Procedures

 Audit Procedures per Assertion

• Inventory is often the largest account in the balance
sheet.
• It is often in different locations, making
physical control and counting difficult.
• Diverse inventory items.

• Several acceptable inventory valuation

methods.
 OVERVIEW
Flow of Inventory
1. Process purchase order
2. Receive raw material
3. Put raw material in storage
4. Put material into production
5. Store the finished goods
6. Ship to customers
Related Documentation
 Purchase requisition
 Purchase order
 Receiving report
 Sales Invoice
 Raw material inventory perpetual
master file
 Raw material requisition form
 Cost accounting record
 FG perpetual inventory master
file
 Shipping document
 FG perpetual inventory master
file
PARTS OF THE AUDIT OF INVENTORY

a. Transfer assets and costs

b. Physically observe inventory

c. Price and compile inventory

AUDIT OF COST
ACCOUNTING
Cost accounting controls
– process affecting the physical inventory and
tracking of related cost from the time raw
materials are requested to the completion of
manufactured product and its transfer to storage.
The auditor is concerned with four aspects of cost
accounting:

Physical Documents and Perpetual Unit cost

controls over records for inventory records
inventory transferring master files Accounting for
Physically inventory Reliability of DM, DL, MOH
segregate and Verify the transfer perpetual must be accurate
restrict access to of inventory from inventory for the fair
storage areas one location to affects timing presentation of
for raw material, another, all and extent of raw material,
WIP and transfer exist, the audit. WIP and
finished goods to quantity and finished goods.
control the description are
movement of accurate.
inventory.
 PHYSICAL
OBSERVATION OF
INVENTORY
Start by touring of the client’s inventory
facilities including receiving, storage,
production, planning and record-
keeping areas to gain understanding.

Assess the client’s risk of material

misstatement.

Determines performance materiality

and assesses inherent risk for
inventory.
AUDITING STANDARDS

1. Be present at the time the client counts its

inventory.
2. Observe the client’s counting procedures.
3. Make inquiries of client personnel about their
counting procedures.
4. Make own independent tests of the physical count.
AUDIT OF PRICING
AND
COMPILATION
Inventory price tests
- include tests of the client’s unit prices to determine
whether they are correct.

Inventory compilation tests

- include testing the client’s summarization of
the inventory counts, recalculating price times quantity,
footing the inventory summary and tracing totals to the
general ledger.
 SUBSTANTIVE ANALYTICAL
PROCEDURES IN INVENTORY

Analytical Procedures
- study of relationship/data between various
figures such as ratios, vertical or horizontal
analysis and so on.
Compare gross margin percentage
with that of previous years.
• Over or understatement of inventory or COGS.

Compare inventory turnover with that

of previous years.
• Over or understatement of inventory .

Compare unit costs of inventory value

with that of previous years.
• Over or understatement of unit costs which affect
inventory and COGS.
 Common tests of details of
balances audit procedures for
physical inventory observation
 Cut – off
Completeness
Occurrence Information is
Trace a sample of
Vouch sample of obtained to
receiving reports
inventory to receiving make sure
to inventory
reports and purchase purchases are
records.
requisition. recorded on
proper period.

Classification
Accuracy Presentation
Examine a sample
 Recompute the Review
of inventory chechs
mathematical disclosure
for correct
accuracy checklist and
classification into
Audit standard cost related
proper expense
or method used in disclosures for
accounts
pricing the inventory relevance and
completeness.