Question

What are related areas that may be efficient to audit in concert with the inventory account?

Answer 1

Auditor should ensure that the following areas have been complied with:

1) Cost method (LIFO,FIFO,Weighted average) and valuation method (net realizable value or lower of cost or market)

2) Raw materials, work in process, and finished goods inventory

3) Conssigned inventory

4) Pleadged or assigned inventory

5) Significant losses from inventory write downs or purchase commitments

6) Warranty obligations

7) Auditor should read all inventory related disclosures to ensure that they are understandable. He should review inventory records for proper classification between raw materials, work in process and finished goods.

8) Examine vendor invoices,review direct labor rates,test the computation of standard overhead rates. These prices and rates can then be applied to a sample of inventory items to determine whether the inventory is valued appropriately.

9) Inquire about obsolete or damaged goods, scan the perpetual records for slow moving items. Test the mathematical accuracy of the inventory report.