Audit of Inventory and Warehousing Cycle

7/24/2019 Audit of Inventory and Warehousing Cycle

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Audit of inventory and Warehousing cycle

IAS 2 standard

Documentation

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

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

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

manufacturing process

Manufacturing or roduction schedules Notifies the productionmanufacturing department as

to what is to be produced

!o" card !racks stages of production for a specific "ob. #s costs are accumulated e.g. raw

materials used, labor hours e$pended, they are recorded on the "ob card.

#roduction reort%sed to record the result of production, output, and wastage loss.

$ransfer to finished goods note Records the transfer of manufactured goods from

manufacturing department into finished goods stores

#ic%ing sli %sed to select goods ordered from the stores

Inventory sheet %sed during the inventory count. &ontains a description of inventory, its

location in stores, and column into which the counted inventory can be entered

Inventory tag # numerically sequenced cardboard tag, which is attached to different types of

inventory before an inventory count.

Inventory Ad&ustment form Is a sequenced document which is used to record ad"ustments

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 comonents and finished goods

Controls

No movement of inventory without

authori'ing document

No movement of inventory should take

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

)is%s

+oods received from the supplier are not

transferred timeously or at all

Inventory stolen or lost

Inventory deteriorates in value due to

inadequate controls or its nature

No record is made for removed inventory

Inventory shortages are concealed

!oo much inventory produced

!he goods or components issued are

incorrect resulting in lost sale or

production delays


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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

theoretical inventory per the

perpetual inventory

#ctual production is compares to

manufacturing and productionschedules

#ctual production is compared to

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

!he above reasons will lead to substantive testing especially test of details

!ime

(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


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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 andgeneral 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 comany holds or controls the rights to inventory0

nquire from management as to whether there is any inventory held on consignment for

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

o )iscussion with management

o Inspection of bank confirmation

o Review directors3 minutes of meetings

o Review loan contracts

o /iewing correspondents contracts with suppliers and credit suppliers

o *rior working papers

(hen performing pricing procedures inspect that they are made out to client

Assertion aluation and classification/inventory is in the financial statements at

aroriate amount0

*ricing inventory purchased locally

o Recalculate the value of inventory by multiplying price with quantity using

#!s and follow up on any discrepancies

o )iscuss with management, the process of allocating delivery costs to the value of

inventory

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

compare to management3s calculation to consider whether their cost is reasonable

o -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

carriage costs been included in unit cost calculation

Inspect that allocation of the costs to the individual items purchased is

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

original invoice and delivery costs and recalculate the unit cost

o )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 purchaseso Recalculate the value of inventory by multiplying price with quantity using

#!s and follow up on any discrepancies

o )iscuss with management, the process of allocating delivery costs to the value of

inventory

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

compare to management3s calculation to consider whether their cost is reasonable

o Inspect the client3s translation calculation of foreign imports and compare the

rate used to an independent source to ensure it is reasonable

o Re7perform the translation calculation to confirm it has been done accurately

o -elect a sample of imported inventory items, obtain invoices, shipping contracts

and costing schedule !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

carriage costs been included in unit cost calculation

Inspect that appropriate import and custom duties and shipping charges

where included in the unit cost calculation

Inspect that allocation of the costs to the individual items purchased is

reasonable and accurately performed

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

original invoice, customs and e$cise duty and delivery costs and recalculate the

unit costo )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

o nquire from appropriate personnel and inspect documentation used in the

costing e$ercise to gain understanding of the costing method used

o )etermine whether it is consistent with prior years and remains appropriate for

the business

o (here standard costing is used

)etermine the appropriateness of the standard costing setting process by

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

o 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

o Inspect that costs that which do not qualify as conversion costs have not been

included

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

treated in terms of I#- 1o Recalculate all casts and calculations

Net reali'able value

o )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

back to net reali'able value

o 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

o

)iscuss with management !he process used to determine their obsolescence allowance and evaluate

the process for reasonableness and consistency with prior years

#ny specific events which may have occurred during the year which may

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

o Re7perform the aging of inventory by tracing back to source documents

o &ompare allowances raised in the previous years to actual write7off in

subsequent year to determine accuracy

o

#ssess indicators of obsolescence such aso *erform analytical procedure to obtain a general overview as to the

reasonableness of the by comparison of current year figures and previous year

figures

o Review working papers form year7end test counts to ensure that inventory items

identified as damaged5obsolete5slow moving have been included in the allowance

o Re7perform any calculations of inventory obsolescence allowance and discuss the

reasonableness of the allowance in terms of evidence gathered

Other points

o 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

misstatementso &onsider the use of an independent e$pert for this purpose

Assertion comleteness

!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 payments of inventory if they have been recorded


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

been recorded

Inspect minutes of meeting of directors for any 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

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

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

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 1istence

!race a selected items from management3s count records to the physical inventory for

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-

o !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

Documents

Audit of Inventory and Warehousing Cycle