Audit of Inventory and Warehousing Cycle

Audit of inventory and Warehousing cycle IAS 2 standard Documentation •

receiving bay to the warehouse, warehouse, the warehouse Goods received notes – On transfer from the receiving

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clerk will sign the goods received note which was issued when the supplier delivered the goods. Material requisition, material issue note  – Requests the warehouse to release material or

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components to the production section and issue note records the issued materials to the  production Costing schedule – Identify and quantify all cost which it is anticipated will be incurred in the

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manufacturing process productionmanufacturing department as Manufacturing or roduction schedules – Notifies the productionmanufacturing

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to what is to be produced !o" card – !racks stages of production for a specific "ob. #s costs are accumulated e.g. raw

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materials used, labor hours e$pended, they are recorded on the "ob card.  – %sed to record the result of production, output, and wastage loss. #roduction reort – %sed $ransfer $ransfer to finished goods note – Records the transfer of manufactured manufactured goods from

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manufacturing department into finished goods stores #ic%ing sli – %sed to select goods goods ordered from the stores inventory count. &ontains &ontains a description of inventory inventory,, its Inventory sheet – %sed during the inventory

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location in stores, and column into which the counted inventory can be entered cardboard tag, which is attached attached to different types types of Inventory tag – # numerically sequenced cardboard

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inventory before an inventory count. Inventory Ad&ustment form – Is a sequenced document which is used to record ad"ustments

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which must be made to correct the perpetual inventory records when actual inventory and theoretical inventory do not agree. Controls relating to the 'arehouse( Movement of goods and comonents and finished goods Controls

)is%s

 No movement of inventory inventory without

+oods received from the supplier are not

authori'ing document  No movement of inventory inventory should take

transferred timeously or at all Inventory stolen or lost Inventory deteriorates in value due to

 place without being recorded (henever there is movement between sections, both the deliver and the receiver should acknowledge the transfer e.g. signing after having checked the quantity and quality of the items being transferred against the source document )ocuments should be sequentially and numerically filed )ocuments must me sequenced checked and missing documents investigated *hysical controls

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inadequate controls or its nature  No record is made for removed inventory inventory Inventory shortages are concealed !oo much inventory produced !he goods or components issued are incorrect resulting in lost sale or  production delays

ntry and e$it – minimum entry and e$it point &ontrolled e$it and entry –-wipe cards, keycards, gate controls, security guards,  ray Restricted entry -ecure buildings – minimum windows and solid structure -urveillance – cameras over  production, receiving and dispatch Reconciliations  *hysical inventory is compared to

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theoretical inventory per the  perpetual inventory #ctual production is compares to

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manufacturing and production schedules #ctual production is compared to

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 budgets #ll material /ariances should be investigated

)emem"er for the audit of inventory *uantity – -tock counts and records +nit cost – -upplier invoices, price list, production records Calculations –  0$1 aluation – Net reali'able value IAS 2 Standard - Rights, cut off, presentation, classification and presentation Audit lan •

 Nature 

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!ime 

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!he above reasons will lead to substantive testing especially test of details (e will have to perform our substantive tests of detail for inventory as close to year end.

$tent  

-ample si'e 2ateriality

Analytical rocedures • • • • •

&ompare gross margin percentage with that of previous years &ompare inventory turnover with that of previous years &ompare unit cost with those of previous years &ompare e$tended inventory value with that of previous years &ompare current year manufacturing with those of last year 

Su"stantive rocedures Initial #rocedures      

!est the castings and calculations in the general ledger account Inspect the closing balance of last year is the opening balance of the current year  Inspect that the closing balance agrees to the amount in the trial balance and general ledger  Inspect the inventory account for an unusual amounts Obtain the management3s representation letter. 4ink to the scenario *erform analytical procedures and obtain reasons for fluctuations

.alance related audit #ost inventory count rocedures •

Assertion – right /the comany holds or controls the rights to inventory0  nquire from management as to whether there is any inventory held on consignment for  

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other parties nquire from management of any inventory billed but not delivered to customers Obtain a listing of imported inventory in transit at financial year end and inspect relevant

orders5contract as to whether the risk and rewards have passed to the client  stablish whether inventory has been pledged as security )iscussion with management o Inspection of bank confirmation o o Review directors3 minutes of meetings Review loan contracts o /iewing correspondents contracts with suppliers and credit suppliers o *rior working papers o  (hen performing pricing procedures inspect that they are made out to client Assertion – aluation and classification/inventory is in the financial statements at aroriate amount0  *ricing inventory purchased locally Recalculate the value of inventory by multiplying price with quantity using o o

&##!s and follow up on any discrepancies )iscuss with management, the process of allocating delivery costs to the value of 

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inventory *erform an independent recalculation of cost for a sample of inventory items and

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compare to management3s calculation to consider whether their cost is reasonable -elect a sample of inventory items6 !race to relevant suppliers invoices to establish whether the correct  

 purchase prices have been used in obtaining the cost unit !race to relevant invoice from transporters, establish that relevant

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carriage costs been included in unit cost calculation Inspect that allocation of the costs to the individual items purchased is

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reasonable and accurately performed Re7perform the weighted average calculation and compare results to the weighted average price used by management consider whether their cost is reasonable

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-elect a sample of inventory items, obtain all supporting documents such as

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original invoice and delivery costs and recalculate the unit cost )iscuss with client, the need for the write down ad"ustment to be processed in the

current year, and include the ad"ustment on the schedule of unad"usted misstatements *ricing imported inventory purchases Recalculate the value of inventory by multiplying price with quantity using o o

&##!s and follow up on any discrepancies )iscuss with management, the process of allocating delivery costs to the value of 

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inventory *erform an independent recalculation of cost for a sample of inventory items and

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compare to management3s calculation to consider whether their cost is reasonable Inspect the client3s translation calculation of foreign imports and compare the

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rate used to an independent source to ensure it is reasonable Re7perform the translation calculation to confirm it has been done accurately -elect a sample of imported inventory items, obtain invoices, shipping contracts and costing schedule  !race to relevant suppliers invoices to establish whether the correct 

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 purchase prices have been used in obtaining the cost unit !race to relevant invoice from transporters, establish that relevant

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carriage costs been included in unit cost calculation Inspect that appropriate import and custom duties and shipping charges

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where included in the unit cost calculation Inspect that allocation of the costs to the individual items purchased is

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reasonable and accurately performed -elect a sample of inventory items, obtain all supporting documents such as

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original invoice, customs and e$cise duty and delivery costs and recalculate the unit cost )iscuss with client, the need for the write down ad"ustment to be processed in the

current year, and include the ad"ustment on the schedule of unad"usted misstatements *ricing manufactured goods nquire from appropriate personnel and inspect documentation used in the o o

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costing e$ercise to gain understanding of the costing method used )etermine whether it is consistent with prior years and remains appropriate for the business (here standard costing is used  )etermine the appropriateness of the standard costing setting process by 

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discussion with management and inspection of records such as budgets valuate the treatment of variances at year7end to confirm the value of

inventory has not been appropriately increased 8y inspection of the costing schedule and supporting documentation  #gree description of materials used and prices used thereof   #gree labour costs to payroll costs  &onfirm that the allocation of overheads includes only fi$ed and  production overheads

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Is based on normal capacity  Is on systematic basis which is reasonable Inspect that costs that which do not qualify as conversion costs have not been

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included Inspect that the under and over recoveries of production overheads are correctly

treated in terms of I#- 1 Recalculate all casts and calculations o  Net reali'able value )etermine selling price with reference to price lists and recent sales invoices o )etermine sales e$penses through enquiry from management o 9or work in progress, determine cost to complete and sales e$penses and work o o

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 back to net reali'able value Inspect minutes of meetings to confirm that products are still be able to be sold

above their cost price and do not require any write down o Recalculate net reali'able value and compare it with cost price 9or inventory allowances,6 )iscuss with management o !he process used to determine their obsolescence allowance and evaluate    

o o

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have an impact on the write down #ny procedures in place for the approval of final allowance #ny specific inventory items which may already be obsolete and how

this has been recogni'ed in calculating the allowance for obsolescence Re7perform the aging of inventory by tracing back to source documents &ompare allowances raised in the previous years to actual write7off in

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subsequent year to determine accuracy #ssess indicators of obsolescence such as *erform analytical procedure to obtain a general overview as to the

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reasonableness of the by comparison of current year figures and previous year figures Review working papers form year7end test counts to ensure that inventory items

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identified as damaged5obsolete5slow moving have been included in the allowance Re7perform any calculations of inventory obsolescence allowance and discuss the

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the process for reasonableness and consistency with prior years #ny specific events which may have occurred during the year which may

reasonableness of the allowance in terms of evidence gathered Other points Request management to recalculate, ad"ust or correct error or misstatement. o Include the ad"ustment, difference or correction on the schedule of unad"usted o

misstatements o &onsider the use of an independent e$pert for this purpose Assertion – comleteness  !race selected items from the physical inventory to management3s records to inspect that  

they are recorded *erform test counts at all inventory locations Inspect the bank statement for any pa yments of inventory if they have been recorded

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 been recorded Inspect minutes of meeting of directors for an y planned inventory purchase Inspect inventory budgets for budgeted inventory budgets *erform analytics on cost of goods sold to determine if significant fluctuations e$ist that

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would necessitate an audit investigation Obtain a listing of imported inventory in transit at financial year end and inspect relevant

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orders5contract as to whether the ownership has passed to the client have been recorded nquire from management if there is inventory held at third party locations and Inspect

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that it is included in the year7end inventory If any, inspect that any inventory held at third party locations are included in the year7end

inventory Assertion – 1istence  !race a selected items from management3s count records to the physical inventory for  

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Inspect the supplier contact for any inventory purchase on monthly basis agreement if has

 physical e$istence If any, inspect that inventory billed and not delivered is not included in the year7end inventory figure If any, inspect that inventory held for third parties are not included in the year7end

inventory figure Assertion – #resentation and disclosure  Inspect the financial statements disclosures and consider6 o !hey are disclosed in accordance with I9R!hey are consistent with evidence gathered during the audit o !he wording of disclosure is clear and understandable o #ny classification of information is disclosed is appropriate o