Inventory

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Inventory

• Chapter 12
• Juan M. Garcia Merced
• Cont 4017

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Sources and Nature of Inventory

• Includes goods on hand ready for sale, either the
  merchandise of a trading concern or the finished
  goods of a manufacturer.
• Goods in the process of production.
• Goods to be consumed in production.

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Auditors Objectives - Inventory

• Substantiate the existence of inventory.
• Establish the completeness of recorded inventory.
• Determine that the client has rights to recorded
  inventory.
• Determine that the valuation of inventory is
  appropriate.
• Determine that the presentation and disclosure
  are appropriate.

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Audit Time for Inventory

• Auditors devote a larger proportion of the total
  audit hours to inventory due to materiality and
  audit risk. Also
• Very susceptible to major errors and fraud.
• Numerous alternatives for valuation.
• Directly affects cost of goods sold.
• Quality, condition, and value is a more complex
  task.

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Audit Program Substantive Procedures for
Inventories
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Obtain analyses of inventory balances and trace
or reconcile them to the general ledger
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Observe the taking of Physical Inventory and make
test counts
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Review the Year End Cut-off of Purchases and
Sales Transactions
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Obtain a Copy of the Completed Physical
Inventory, Tests Its Clerical Accuracy, and Trace
Test Counts
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Evaluate the Bases and Methods of Inventory
Pricing
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Tests the Pricing of Inventories
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Perform Analytical Reviews
Gross profit margins percentages Gross profit by
store Inventory turnover Number of days in
inventory Inventory per square foot
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Determine Whether Any Inventories Have Been
Pledged and Review Purchase and Sales Commitments
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Evaluate proper financial statement presentation
and disclosure of cash
Classified among the current assets. Disclosure
of the inventory pricing method. Various
classifications of inventory. Deduction of
valuation allowance for inventories. Arrangements
relating to any pledged inventory. Existence and
terms of inventory purchase commitments.
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