Question

1. In auditing, What does “sheet to floor” procedures to test the existence of inventory. Discuss what is meant by a “sheet to floor” count and how it addresses the an assertion. Also discuss why it is important to address existence as part of the year-end inventory observation audit procedure.

2. discusses the use of “floor to sheet” procedures to test the completeness of inventory. Discuss what is meant by a “floor to sheet” count and how it addresses the completeness assertion. Also discuss why it is important to address completeness as part of the year-end inventory observation audit procedure.

Answer 1

1.Sheet to floor procedures:

Take the data from your system out into the warehouse and compare it to what you find.

Inventory Audit Test: Sheet-to-Floor

Our first inventory count test is called “sheet-to-floor.” For this test, we selected inventory items from the count sheets. Then we traced these sheets to the actual inventory on the floor, and recounted it. For inventory, auditors are most worried about the existence assertion: Does the inventory recorded on the books really exist?

Existence

When testing existence the auditor wants to ensure that the asset, liability or equity balance is genuine and not overstated. When testing for existence, the auditor will select a balance, and check whether it is genuine by obtaining evidence to support the entry, commonly known as testing from financial statement to source (more commonly referred to as Vouching). If there is no supporting evidence (source document), the figure is not valid.

2. Floor to sheet procedures:

Count everything you have in inventory, then compare that to what your system thinks you have.

Inventory Audit Test: Floor-to-Sheet

However, as auditors we are also making sure that they count was done well. We perform a second test called “floor-to-sheet” where we select an item of inventory out on the warehouse floor. We count the items, and then trace them to their count sheet to make sure that the client’s counters recorded to same number that we did. This tests for completeness: Is all the existing inventory recorded on the books?

In the case of fraud, it is much more likely that a company would overstate inventory, so existence is the most important test. However, counters can also make mistakes, and auditors are also checking for errors - in fact, most of the discrepancies we find as auditors are due to errors, not fraud.

Completeness

There is always the danger of omission of a significant asset, liability or equity balance from a company’s balance sheet. This could be deliberate (an attempt to present a misleading picture of the company’s position at the year end) or due to an error. Auditors are therefore primarily concerned with understatement of balances.When testing for completeness, source documents will be selected and then tested to ensure they have been included in the financial statement balance. This is usually referred to as Tracing.