Question

Your audit team is preparing for your largest manufacturing client’s annual inventory observation. You have all first-year staff auditors on your team. Prepare a training presentation to discuss specific analytical procedures and substantive procedures that are required to ensure the results of the inventory observation will properly support your firm’s opinion that the inventory account meets all the client’s assertions. Be sure to include common errors that can be noted during the inventory observation and how these can be eliminated. Your presentation should meet the following criteria: Be 6-8 slides in length, not including the title and references slides. Demonstrate your comprehension of the course material. Use professional business language. Include slides that are neat and not too wordy. Include VoiceOver that is clear and has minimal background noise. (If you do not use the VoiceOver feature, you must provide detailed notes in the “Notes” area to support the information presented on your slides.)

Answer 1

For Inventory, the most important assertions to test are those where the risk of error or misstatement is greatest. As inventory is an asset, there is a chance that it can be overstated so as to boost total assets and increase profits by reducing cost of sales.

Following are the assertions generally made for inventory :

1. Existence :

Inventories are recorded in the accounts may not exist if they have been stolen (especially if they are small, high value items).

2. Accuracy/Valuation :

Inventories should be recorded at the lower of Cost or Net realizable value (NRV). In a manufacturing company ,cost will be made up of many elements - materials, labour and absorbed overheads - and this increases the chance of error. Net realizable value should be computed by considering the available market value.

3.Cut - Off :

Cut - off may be problem, especially where there are many goods movements around the year end.

Substantive Procedures for verifying Inventory :

1. Existence :

Attend a physical Inventory count and complete the inventory count audit program. the effectiveness of inventory counting procedures should be tested by direct observation, supported by inspection of documents and re-performed of test counts.

Take copies of inventory sheets and compare with final inventory figures to ensure that there have been no omissions or additions.

If inventory count is carried out before balance sheet date, perform a role for our calculation taking opening balance and movement during the period to arrive the expected closing balance.

2. Completeness:

Ensure that any inventory held by third parties on behalf of the client are included in the final inventory figure.

3. Final Audit Work Cutoff:

select the final goods dispatch notes of the year and trace the corresponding sales invoices to ensure they are recorded in a pre -year and sales.

Analytical procedures:

1. Quantitative reconciliation of opening inventories, purchases, production, sales and closing inventories

2. Comparison of closing inventory quantities and amount with those of previous years

3. Comparison of inventory turnover ratio of the current year with that of the previous year and with industry standards, if available.

4. Comparison of the relationship of current year quantities and amounts with current year sale and purchases, to the corresponding figures of previous years.

5. comparison of yield with the corresponding figure of previous year.

6. Comparison raw material yield/ wastage with previous year figures.