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Inventory
Inventory
Remember that the inventory balance on the
statement of financial position is also the closing
inventory figure on the statement of profit or loss. As
such, Cut of is also a relevant assertion in addition to
the usual assertions for account balances.
The main source of evidence for inventory, is normally
the year end inventory count (although some clients
may use continuous inventory counting, throughout
the year).
ISA 501 Audit evidence specific considerations for
selected items requires the auditor to attend the
physical inventory count (unless impracticable), if
inventory is material to the financial statements.
Inventory
Inventory include :
Raw material
Work in progress
Finished goods
Inventory
The inventory count is the responsibility of the
client. The auditor attends the count to help obtain
sufficient appropriate evidence to form an opinion
as to whether inventory is free from material
misstatement.
In order to obtain sufficient appropriate evidence,
the auditor must perform procedures before, during
and after the inventory count during the final audit.
Valuation of inventory
IAS 2 requires that all inventories must be valued at
the lower of cost and net realizable value (NRV).
Cost = Purchase cost of materials and labour, plus
attributable production overheads (based on
normal level of activity)
NRV = Actual or estimated selling price, less all
further costs to completion, and all costs to be
incurred in marketing, selling and distributing the
product.
Where a number of identical goods have been
purchased, a costing method such as FIFO or
average cost may be used to determine the costs of
the items in inventory at the year-end.
Valuation of inventory
Items must be written down to NRV if this is below
cost. Typical situations are:
1) an increase in costs or a fall in selling price (e.g.,
computers)
2) physical deterioration (e.g., food going stale)
3) obsolescence (e.g., clothes going out of fashion)
4) a decision to sell some items as loss leaders
5) errors in production or purchasing
Definition
Aging of inventory
As the name implies, the purpose of the Inventory
Aging report is to focus on inventory in stock that is
starting to get old.
An inventory item having a slower rate of turnover
than the average turnover for the entire inventory.
Inventory turnover days
The days in the period can then be divided by the
inventory turnover formula to calculate the days it
takes to sell the inventory on hand or "inventory
turnover days."
Assertions (ERCV)
Financial statement assertions and inventory
substantive procedures for balances at the year
end.
(i) Existence
Assets, liabilities and equity interests exist.
Substantive procedures
During the inventory count select a sample of assets
recorded in the inventory records and agree to the
warehouse to confirm the assets exist.
Obtain a sample of pre year-end goods dispatch
notes and agree that these finished goods are
excluded from the inventory records.
Assertions (ERCV)
(ii) Rights and obligations
The entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.
Substantive procedures
Confirm during the inventory count that any goods
belonging to third parties are excluded from the
inventory records and count.
For year-end raw materials and finished goods
confirm title belongs to the company by agreeing
goods to a recent purchase invoice in the company
name.
Assertions (ERCV)
Completeness
All assets, liabilities and equity interests that should
have been recorded have been recorded.
Substantive procedures
Obtain a copy of the inventory listing and agree the
total to the general ledger and the financial
statements. During the inventory count select a
sample of goods physically present in the
warehouse and confirm recorded in the inventory
records.
Assertions (ERCV)
Valuation and allocation
Assets, liabilities and equity interests are included in
the financial statements at appropriate amounts and
any resulting valuation or allocation adjustments are
appropriately recorded.
Substantive procedures
Select a sample of goods in inventory at the year end,
agree the cost per the records to a recent purchase
invoice and ensure that the cost is correctly stated.
Select a sample of year-end goods and review post
year-end sales invoices to ascertain if net realisable
value is above cost or if an adjustment is required..
Cut Off
I would select a sample of GRN Pre-yearend and
verify that the transaction is included in the
inventory , purchase and payable.
I would select a number of GRN Post-yearend and
verify that the transaction is excluded from
inventory , purchase and payable.
I would select a sample of GDN Pre-yearend and
verify the transaction is recorded in sales and
receivables and excluded from inventory.
I would select a sample of GDN Post-yearend and
verify that transaction is excluded from sale and
receivable but Included in the inventory.