Learning Objectives

1
Learning Objectives

• LO4 Explain the importance of the completeness
  assertion for auditing the accounts payable
  liabilities, and the procedures used to search
  for unrecorded liabilities.
• LO5 Identify audit considerations for observing
  the physical inventory count.
• LO6 Explain the main auditing procedures used for
  property, plant, and equipment and intangible
  assets.

2
Special NotePhysical Inventory Observation

• The auditing procedures for inventory and related
  sales accounts frequently are extensive in an
  audit engagement.
• A material error or irregularity in inventory has
  a pervasive effect on the financial statement.
• Auditing standards require that the auditor
  observe the inventory taking and make test
  counts. They seldom take or count the entire
  inventory.

3
Auditors Observation of Inventory

• First task is to review clients inventory-taking
  instructions.
• This is a test of controls.
• If count procedures are sound, auditor can rely
  on count to produce good results.
• Auditor will also perform test counts.
• Testing of counts will be a dual-direction test.
• The physical observation procedures are designed
  to audit for existence, completeness, and
  valuation.

4
Special NotesPhysical Inventory Observation

• Physical inventory not on year-end date
• The inventory on the count date is reconciled to
  the year-end inventory and auditing procedures
  are performed on inventory additions and issues
  for the intervening period.
• Cycle inventory counting
• Company does not take a complete count on a
  single date, but rather in cycles or uses
  statistical counting plan. Accuracy of perpetual
  records must be determined.

5
Special Notes Physical Inventory Observation

• Auditors not present at clients inventory count
• The auditor must review the clients plans for
  the completed count.
• Some test counts of current inventory should be
  made and traced to current records to determine
  reliability of perpetual records.

6
Special Note Physical Inventory Observation

• Inventories located off the clients premises
• Determine the amount and location of the
  inventory off the clients premises.
• If amounts are material and controls are not
  strong, the auditor may wish to visit locations
  and conduct on-site test counts.
• If amounts are not material and control risk is
  low, direct confirmation with the custodian may
  be sufficient competent evidence.

7
Inventory Existence and Completeness

• In addition to the physical count of inventory,
  the auditor will also need to consider
• whether there are any consignment relationships
  in effect,
• any goods in transit that are the property of the
  client, and
• whether there are any goods on hand which have
  been sold but not yet delivered.