chapter 13 inventory

8/10/2019 Chapter 13 Inventory

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Chapter 13

Inventory


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Inventory Remember that the inventory balance on the

statement of financial position is also the closinginventory figure on the statement of profit or loss. Assuch, Cut of is also a relevant assertion in addition tothe usual assertions for account balances.

The main source of evidence for inventory, is normallythe year end inventory count (although some clientsmay use continuous inventory counting, throughoutthe year).

ISA 501Audit evidence

specific considerations forselected items requires the auditor to attend thephysical inventory count (unless impracticable), ifinventory is material to the financial statements.


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Inventory

Inventory include :

Raw material

Work in progress

Finished goods


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Inventory

The inventory count is the responsibility of the

client. The auditor attends the count to help obtainsufficient appropriate evidence to form an opinion

as to whether inventory is free from material

misstatement.

In order to obtain sufficient appropriate evidence,

the auditor must perform procedures before, during

and after the inventory count during the final audit.


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Before inventory count1) Contact client to obtain a copy of the inventory count

instructions, to understand how the count will be conducted

and assess the effectiveness of the count process.2) Review prior year working papers to understand the

inventory count process and identify any issues that wouldneed to be taken into account this year.

3) Finalize audit staff to attend the inventory counts.

4) Ascertain whether any inventory is held by third parties,and if applicable determine how to gather sufficientappropriate evidence.

5) Consider the need for using an expert to assist in valuing theinventory being counted.

6) Send a letter requesting direct confirmation of inventorybalances held at year end from any third party warehouse

providers used regarding quantities and condition.


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During the inventory count1) Observation of stock count supervisor giving clear

instruction to counters.

2) Observe the count to ensure that the instructions arebeing followed.

3) Verify that counter are provided with pre-numberedinventory sheets.

4) Attend the inventory count (if one is to be performed)at the third party warehouses to review the controls inoperation: verifies completeness and existence.

5) Perform a two way test count: Select a sample of

items from the inventory count sheets and physicallyinspect the items in the warehouse: verifies existence.

6) Select a sample of physical items from the warehouseand trace to the inventory count sheets to ensure that

they are recorded accurately :verifies completeness.


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During the inventory count7) Ensure that goods held on behalf of third parties is

segregated and recorded separately: verifies rights

and obligations.

8) Inspect the inventory being counted for evidence ofdamage or obsolescence that may affect the net

realizable value: verifies valuation.9) Record details of the last deliveries prior to the year

end. This information will be used in final auditprocedures to ensure that no further amendments

have been made thereby overstating or understatinginventory: verifies cutoff.

10) Obtain copies of inventory count sheets at the end ofthe inventory count, ready for checking against final

inventory listing after the inventory count.


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After the inventory count1) Inspect purchase invoices for a sample of inventory

items to agree their cost and

2) Inspect post yearend sales invoices for a sample ofinventory items to determine if the net realizablevalue is reasonable. This will also assist in determiningif inventory is held at the lower of cost and net

realizable value has been used: verifies valuation.3) Inspect the ageing of inventory items to identify

old/slow moving amounts that may require provision,and discuss these with management: verifies

valuation.4) Calculate inventory turnover/days and compare this to

prior year, to assess whether inventory is being heldlonger and therefore requires greater provision:

verifies valuation.


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After the inventory count

7)Trace the goods received immediately prior to

the yearend to yearend payables and inventorybalances: verifies cutoff.

8)Trace goods dispatched immediately prior to the

yearend to the nominal ledgers to ensure the itemsare removed from inventory and a sale (and

receivable where relevant) has been recorded:

verifies cutoff.

9)Inspect any documentation in respect of third

party inventory.


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Valuation of inventory IAS 2 requires that all inventories must be valued at

the lower of cost and net realizable value (NRV).

Cost = Purchase cost of materials and labour, plusattributable production overheads (based onnormal level of activity)

NRV = Actual or estimated selling price, less allfurther costs to completion, and all costs to beincurred in marketing, selling and distributing the

product. Where a number of identical goods have been

purchased, a costing method such as FIFO oraverage cost may be used to determine the costs of

the items in inventory at the year-end.


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How to identify Problem stock

I would calculate stock days for individual stock

lines to highlights problem stock line. I would ask store supervisor Are you aware of any

damaged goods .

I would inspect the goods in the warehouse forconditions Looking for dust in particular.

I would observe the sales team reports and

investigate any stock they struggle to sell. I would recompute the inventory aged analysis and

investigate any old stock.


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Audit valuation of NRV

I would surf competitor website to get a feel for the

value of goods I would ask the production manager Do you think

damaged goods can be mended if not NRV is zero.

I would inspect sale team guidance to identify thesale price expected for problems goods.

I would recalculate the NRV.


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Valuation of inventory

Items must be written down to NRV if this is below

cost. Typical situations are:1) an increase in costs or a fall in selling price (e.g.,

computers)

2) physical deterioration (e.g., food going stale)3) obsolescence (e.g., clothes going out of fashion)

4) a decision to sell some items as loss leaders

5) errors in production or purchasing


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Definition Aging of inventory

As the name implies, the purpose of the InventoryAgingreport is to focus on inventory in stock that isstarting to get old.

An inventory itemhaving a slower rate of turnover

than the average turnover for the entire inventory.

Inventory turnover days

The days in the period can then be divided by the

inventory turnover formula to calculate the days ittakes to sell the inventory on hand or "inventoryturnover days."


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Assertions (ERCV) Financial statement assertions and inventory

substantive procedures for balances at the yearend.

(i) Existence

Assets, liabilities and equity interests exist.

Substantive procedures

During the inventory count select a sample of assetsrecorded in the inventory records and agree to the

warehouse to confirm the assets exist. Obtain a sample of pre year-end goods dispatch

notes and agree that these finished goods are

excluded from the inventory records.


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Assertions (ERCV)

(ii) Rights and obligations

The entity holds or controls the rights to assets, andliabilities are the obligations of the entity.


Confirm during the inventory count that any goodsbelonging to third parties are excluded from the

inventory records and count.

For year-end raw materials and finished goodsconfirm title belongs to the company by agreeing

goods to a recent purchase invoice in the company

name.


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Assertions (ERCV)

Completeness

All assets, liabilities and equity interests that shouldhave been recorded have been recorded.


Obtain a copy of the inventory listing and agree thetotal to the general ledger and the financial

statements. During the inventory count select a

sample of goods physically present in thewarehouse and confirm recorded in the inventory

records.


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Assertions (ERCV)

Valuation and allocation

Assets, liabilities and equity interests are included inthe financial statements at appropriate amounts and

any resulting valuation or allocation adjustments are

appropriately recorded.


Select a sample of goods in inventory at the year end,

agree the cost per the records to a recent purchase

invoice and ensure that the cost is correctly stated.

Select a sample of year-end goods and review post

year-end sales invoices to ascertain if net realisable

value is above cost or if an adjustment is required..


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CutOff I would select a sample of GRN Pre-yearend and

verify that the transaction is included in theinventory , purchase and payable.

I would select a number of GRN Post-yearendandverify that the transaction is excluded from

inventory , purchase and payable. I would select a sample of GDN Pre-yearendand

verify the transaction is recorded in sales andreceivables and excluded from inventory.

I would select a sample of GDN Post-yearendandverify that transaction is excluded from sale andreceivable but Included in the inventory.

chapter 13 inventory

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