Question

what are the auditor's objective when is comes to valuing inventory? What are the test thy should perform to accomplish these objectives?

Answer 1

Solution:

Q1: What is the auditor's objective when it comes to valuing inventory?

Solution: The auditor has a prime role to play in the examination and verification of one of the most deceptive items which lie on the balance sheet of the company i.e. Inventory. Sometimes, it exists in books but in actual it is not present, this is the reason it is deceptive in nature which changes the liquidity ratios data to the extreme extent as well as affects short-term solvency position of the company.

Some of the main objectives of the auditor in context to valuing inventory are given below:-

(a) Examination and verification of the physical count of inventory in the warehouse to ensure under-stocking and over-stocking issues which may be displayed in the books of accounts.

(b) The auditor must ensure the selection of large inventory samples out of the population for test purpose.

(c) The auditor also ensures the availability of documentation of reached inventory as well as the inventory which is a transit and have not reached.

(d) The auditor must ensure the risk and errors involved which selecting the sample of inventory in the warehouse as well as ensure data of past few years which can be used for relevance purpose.

(e) The valuation method of accounting for inventory also need a due care for examination because inventory display at cost or market value makes a hell of a difference. The auditor must ensure the valuation is made as per GAAP and accounting norms.

Q2: What are the test they should perform to accomplish these objectives?

Solution: Some of the key tests which can be performed are given below:-

(1) Analytical Procedures: The auditor can use the analytical procedure to examine the numerical relationship among the inventory data and make a comparison of the current year with past few years to see the variance and trends.

(2) Test of account details and balances: The auditor can ensure the nature of transactions and amount related to inventory are recorded accurately.