A company inventory undergoes an annual audit and in order for auditors to test the company assertions about inventory PDF

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Question: Auditing is a systematic process, an identical and repetitive process. Explain the detailed process of auditing the inventory account....

Description

Question: Auditing is a systematic process, an identical and repetitive processes. Explain the detailed process of auditing the inventory account.

Sample answers: A company inventory undergoes an annual audit and for auditors to test the company assertions about inventory, they need to conduct many inventory audit procedures. The assertions to be tested are existence and rights and obligation, completeness, accuracy, valuation, and presentation and disclosure. The first thing to do is for the auditors to understand the business and one of the considerations is the effectivity of the internal controls the company has over its inventories. They should gather much information to have an informed opinion about whether everything is going as it should. Auditor should also consider the review and assessment of fraud risks related to inventories as it f r equent l yhappenst omos toft heent i t y’ si nvent or i es. After this, the auditor will perform procedures to verify the assertions such as reviewing the ownership of inventories, confirming its existence, assessing the value of inventories, and reviewing the cut off. Since inventory is an essential asset of the company, auditing it is a must to locate fraud, to test the assertions and to take measures for the company to secure and efficiently use its inventories.

Auditing an inventory is an activity of checking financial records with physical inventory and records. It is the process of verifying if the inventory records of an entity are accurate and fairly presented. 

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According to what I have read, the first step in auditing the inventory account is to observe physical inventory counts. This is to make sure that the recorded number of stocks match up with the physical stocks. Next is to obtain confirmation of inventories at locations outside the entity by asking for confirmations of inventory from the custodian of any public warehouse where the entity is storing inventory. They also need to reconcile the inventory count to the general ledger to verify that the counted balance was carried forward into the entity’s accounting records. If there are items in the inventory that are of unusually high value, auditors should spend extra time in auditing them to ensure that they are valued correctly. The auditor should also test the inventory in transit because there is a risk that there are inventories in transit from one storage to another at the time of the physical count. It is done by reviewing the transfer documentation.

The auditor should test the item costs and review freight costs to determine that the inventories are properly stated at lower of cost and net realizable value, and if they are properly described and classified in the financial statements with adequate disclosures.  If a significant proportion of the inventory valuation is comprised of finished goods, then the auditors will want to review the bill of materials for a selection of finished goods items and test them to see if they show an accurate compilation of the components in the finished goods items, as well as correct costs.  If direct labor is included in the cost of inventory, then the auditors will want to trace the labor charged during production on timecards or labor routings to the cost of the inventory. They will also investigate whether the labor costs listed in the valuation are supported by payroll records.  If an entity has a significant amount of WIP inventory, the auditors should test how the entity determine the percentage of completion for WIP items to determine that inventories are properly described and classified in the financial statements.  The auditors should also review the inventory ownership by reviewing the purchase records to ensure that the inventory in the warehouse is owned by the entity. Existing/Occurrence 

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This assertion the auditor can confirm whether the inventories that are recorded by the entity in the balance sheet really exist. Physical verification is one of the procedures that auditor use to confirm that these inventories really exist. The auditor may consider joining the observation of a client’s year-end inventories count or perform their own sampling. Auditor might want to test whether inventories that purchases and sold during the year have really occurred.

Completeness   

Test whether inventories are completely recording in the list as well as financial statements. Reconcile the inventory balance in ledger with physical count. Review whether the inventories record are properly cut off. . Example, inventories that should be recorded in 2016 were recorded in 2016 and the inventories that should be recorded in 2017 were recorded in 2017.

Right and Obligation   

It is important to review the ownership of inventories that records in the financial statements and store in the entity’s warehouse. Check whether the entity has the right to manage the inventories. Review the Contracts, Quotation, Invoices, and Delivery Noted. Term and Condition in the contract are very important for ownership verification.

Valuation 

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The measurement of the inventories should be at the lowest of cost and net realizable value wherein the cost of acquisition, cost of conversion, and others related cost that bring inventories into their present location and condition are included in the cost of the inventories. Auditor should review the costing method and accounting policy that uses by the entity to value its inventories and if there any other costs that not related to inventories or not allow by IAS 2 are included in the cost of inventories. Check whether inventories amount, and value are correctly calculated in the financial statements.

Presentation and Disclosure 

In this assertion the auditor determine that the inventories are presented and classified in the financial statements in accordance with PAS/PFRS....