Question

Describe common substantive analytical procedures that would be used for account balances related to inventory.

Answer 1

The common substantive analytical procedures that are used for inventory account balances are:

1. Accounting of balances and disclosures: The valuation is described at the foot note in the financial statements: 1.Valuation of inventories like lower of cost or market, FIFO, LIFO or average method, 2.Pledged inventory, or 3.inventory on consignment basis, 4.Purchase terms and various commitments.
2. Allocation of inventories: 1. Correct choice of valuation ie. whether lower of cost or market value, 2. In case of full absorption costing the inventory valuation should be recalculated,3.technical quality check of various inventory accounts and their pricing, 4. The flow chart of inventory.
3. Checking and testing accounts: the verification and testing will requires: 1.cutoff test for purchases and sales and the related their returns, 2.perform tests for transactions,3.accuracy of clerical and mathematical calculation of inventory accounts,4. Reconciliation of physical inventory with the book records.
4. Client deliveries: the deliveries of inventory to client will amount for confirmation from the clients/customers and consignments dispatched to the clients and their confirmations.
5. Various obligations: like all the agreements of purchases, consignment agreements and major commitments, invoices for the transfer of ownership of inventories and various decisions taken by the BOD and management.
6. Verification of balances: The ending inventories accounts balances and quantities must be recalculated and verified.

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