Question

Define and completely describe the effect that each of the following have on the audit of inventory

-- FOB

-- Consignment

Answer 1

FOB or Free on Board is a shipping term and used to indicate who will pay the shipping expenses. FOB can be FOB Shipping or FOB Destination and this help to shows who takes the legal responsibility for the shipped goods and at which point ownership is transferred.

FOB shipping point

-Buyer assumes ownership of the goods as soon as they leave the supplier’s location

-Buyer is responsible for cost of shipping

-Seller records sale and Buyer increase inventory when goods are shipped by seller

-For Goods damaged in transit, Buyer files claim with Insurance Company.

FOB Destination point

-Seller assumes ownership of goods until they arrive at their destination

-Seller is responsible for cost of shipping

-Seller records sale and Buyer increase inventory when goods are received at destination

-For Goods damaged in transit, Seller files claim with Insurance Company.

For auditing, above points should be kept it mind. Also, documentary evidence should be collected to establish the type of FOB and the place where ownership is getting transferred. Care should be taken with regards to when the inventory is increased. Also, care should be taken with regards to damaged goods and subsequent decrease of inventory.

Consignment is an arrangement when goods are sent by their owner or consignor to an agent or consignee, who then sell the goods.

-The consignor continues to be the owner of the goods until they are sold

-The goods appear as inventory of the consignor, not the consignee until they are sold.

-When goods are sent to consignee, change of location takes place. However, when goods are sold, consignor recognises the sale and decrease its inventory.

For auditing, above points should be kept it mind. Also, documentary evidence should be collected to establish the agreement of consignment and when the ownership is getting transferred. Care should be taken with regards to when the inventory is decreased.

Some general consideration –

-Vouching of documents such as requisition, purchase requisition, purchase order, receiving report, and purchase invoice

-Application of LIFO/FIFO

- Representation letter from management

-Cross verifying the process of inventory management