Question

observation inventory is a general auditing procedure that will be performed whenever it possible
a) what part should be the auditor play in the planning phase of physical inventory
b) describe the procedures performed by the auditor during their observation of a client physical inventory

Answer 1

a.Review the client's planning of the physical inventory prior to the inventory count, the auditor will review the client’s proposed policies/procedures pertaining to the inventory count. Some of these policies typically include:

• There should be two-person count teams.
• Pre-numbered tags and proper sequencing is required.
• Halt the shipment and receiving of goods.
• Segregate goods based on consignment.

The auditor will also select a sample of items, in advanced, to test on the day of the count. The auditor will use both representative and specific item (stratification) testing when possible and make suggestions on improvement.

b

• whether the client is complying with the proposed procedures and policies for the counting has to be monitored by the Auditor.
• Auditor makes his own test and note the results and necessary adjustments must be followed.
• Inspect the inventory to determine its existence and condition to see if there any sign of Impairment or obsolescence, the quality and condition of the goods must be observed.
• Observe compliance with management's instructions for the count. Obtain audit evidence about the reliability of the count procedures.