Question

All financial statement audits will include an audit of the inventory cycle. You should plan for the audit by setting the audit objectives. For this assignment, write and submit 300–400 words that set specific internal controls that should be included to meet the following management assertions:

Existence

Completeness

Accuracy or valuation

Rights and obligations

Presentation and disclosure

Answer 1

An audit plan with respect to inventories in companies must verify the

management's assertions regarding inventory, as part of testing & satisfying about the company's internal control mechanisms ,in place.

In this process, the auditor should be convinced on the following aspects:

Existence:

that the inventory actually exist & the relevant transactions have actually taken place.

Any additions to inventory ,ie.purchases can be vouched with cross verifying with purchase requisitions and item received reports

Completeness

To ensure all the transactions with respect to inventory are complete, ie. Issues to production recorded are accounted in the process, and the final inventory balance as per books tally with that of physical -stock taking records.

so as to ensure the records are complete & correct.

Accuracy or valuation

To test that the valuation of inventory--ie issues to production as well as the ending inventory --are accurate & proper, so that the cost of goods sold in the Income statement is neither over nor under-stated-- ie. To give a clear picture about the costing methods followed.

Also, to ensure clarity about obsolete , slow-moving & non-moving items of inventory & their valuation methods adopted.

Rights and obligations

Inventory recorded must be adequately & fully supported by respective vendor's invoices & also matched with goods-received notes.

Presentation and disclosure

Inventory recorded must be adequately & properly classified, disclosed & presented at   fair value ,corroborated with the financial statements.

ie. Should ensure to present a perfect schedule for that given in the Income statement & balance sheet.