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Audit of Inventories - Objectives & Procedures

The audit objectives are to determine that: 1) Inventories physically exist, 2) Inventories are held for sale or used in production, and 3) The company owns the inventory. The audit procedures include observing physical counts, confirming outside inventory, analyzing records, and examining documentation to ensure inventories are properly reported at the lower of cost or net realizable value and adequately disclosed.

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Chinee Castillo
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191 views1 page

Audit of Inventories - Objectives & Procedures

The audit objectives are to determine that: 1) Inventories physically exist, 2) Inventories are held for sale or used in production, and 3) The company owns the inventory. The audit procedures include observing physical counts, confirming outside inventory, analyzing records, and examining documentation to ensure inventories are properly reported at the lower of cost or net realizable value and adequately disclosed.

Uploaded by

Chinee Castillo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Audit of Inventories

Audit Objectives:

To determine that:
1) Inventories included in the statement of financial position physically exist
2) Inventories represent items held for sale in the ordinary course of the business, in process of
production, or in the form of materials or supplies to be used in the production process or in
the rendering of services
3) Inventory quantities include products, materials and supplies owned by the company (on
hand, in transit or stored at outside location).
4) The entity has legal title or similar rights of ownership to the inventories
5) Inventories are properly stated at the lower of cost and net realizable value.
6) Inventories are properly described and classified in the financial statements and disclosures
are adequate.

Audit Procedures:

1) Observe physical inventory counts.


a) Test shipping and receiving cutoff procedures
b) Account for all inventory tags and count sheet used in recording the physical inventory
counts
c) Test the clerical accuracy of inventory listings
d) Trace test counts recorded during the physical inventory observation to the inventory
listing
e) Reconcile physical counts to perpetual records and general ledger balances and
investigate significant variations
f) Test inventory transactions between a preliminary physical inventory date and the end
of the reporting period.
2) Obtain confirmation of inventories at location outside the entity.
3) Review perpetual inventory records, production records, and purchasing records for
indications of current activities.
4) Analytical review the relationship of inventory balances to recent purchasing, production,
and sales activities, and to anticipated sales volume
5) Examined paid vendors’ invoices, consignment agreements, and contracts.
6) Review direct labor rate
7) Test the computation of standard overhead rates
8) Examine analysis of purchasing and manufacturing standards cost variances
9) Examine inventory turnover analysis
10) Review industry experience and trends
11) Tour the plant. Inquire of production and sales personnel concerning possible excess or
obsolete inventory items.
12) Examine sales after year-end and open purchase order commitments
13) Obtain confirmation of inventories pledged under loan agreements
14) Review drafts of the financial statements
15) Compare the disclosures made in the financial statements to the requirements of PFRS.

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