AUDIT PROGRAM

INVENTORY-OBSERVATION

Audit Objectives:
The audit objectives are to ensure that:
1.

Inventories are subject to effective custodial accountability procedures and physical safeguards,
including periodic physical counts.

2.

Significant variances between physical inventory counts and perpetual records are brought to the
attention of management.

3.

All obsolete or unusable inventory has been written off.

4.

The inventories are valued on a consistent basis using an approved method of costing.

TESTING CONTROLS
Performed
By Date Reference
Physical Inventory Count
1.

Obtain and read written instructions

pertaining to the physical inventory
count. Evaluate adequacy of procedures.

2.

Prior to the inventory count, tour area

in which inventory is stored. Observe
whether:
o

Physical security appears adequate

with respect to the type and value
of the items in inventory

Stock is neatly arranged to

facilitate the count

Obsolete or unusable items are

segregated and adequately identified

Indicators (such as broken seals,

excessive dust, etc.) exist that
products, especially sterile goods,
may not be usable

3.

Discuss with personnel the procedures

followed to identify obsolete or
unusable stock.

4.

Observe personnel as they count the

inventory. Determine whether:
o

Written instructions are followed

All locations in which stock is

stored are covered

Movement of stock is stopped or

adequately controlled
o

Counts are verified to assure

accuracy

Personnel appear competent and

exercise due care

5.

Observe whether numerically controlled

tags or count sheets are used.
Observe whether preprinted count sheets
containing all product codes/types are
used.

6.

Examine receiving area. Determine

whether stock received after cut-off
is segregated and excluded from the
count. Determine whether receiving
logs or other documents include
receiving dates and descriptions of
items received immediately before and
after cutoff. On a test basis, select
from receiving documents and verify
that stock received immediately before
and after cutoff is properly included
or excluded from the count.

7.

Observe whether supervisory personnel:

o

Review counts for reasonableness

Investigate unusual quantities

recorded

Account for all numerically

controlled tags or count sheets

Verify counts on a test basis

Pricing
8.

Read written procedures for pricing

the physical inventory. Evaluate

adequacy of procedures.
9.

Determine whether source used for prices

is appropriate. Where prices are
obtained from the inventory system,
design and perform tests to determine
whether prices provided are accurate.

10.

Examine support for book value assigned

to obsolete or unusable merchandise.

11.

Determine through observation or other

methods whether accuracy of pricing is
adequately tested.

Reconciliation
12.

13.

Obtain the reconciliation of the

final, priced inventory to the general
ledger:
o

Note whether reconciliation was

reviewed and approved

Test mathematical accuracy of

reconciliation

Examine support for significant

reconciling items

Agree amounts on reconciliation for

priced inventory balance and for
general ledger balance to the
inventory listing and to the
general ledger

If the reconciliation at step #12

above indicates that an adjustment
to the general ledger is needed,
obtain journal entry and verify

accuracy of adjustment booked. Note

whether journal entry was reviewed
and approved.
VALIDATION TESTING
Physical Inventory Count
14.

Select items from the floor. Count

items and agree counts to those
recorded by count teams. Investigate
and resolve any.

15.

Select items for test counts from

count sheets. Consider
emphasizing high dollar value or
otherwise sensitive items. Locate
these items. Count items and agree
counts to those recorded by count
teams. Investigate and resolve any
differences.

16.

Obtain final, priced inventory. Trace

recorded test counts at steps #14 and
#15 above to listing. Investigate and
resolve any discrepancies.

Pricing
17.

Select items from the priced inventory.

Verify accuracy of pricing through
reference to supporting documentation.
Verify that inventory is priced on a
basis consistent with prior periods
and in accordance with G.A.A.P. Note
whether obsolete or unusable items
are accurately priced.

18.

Test mathematical accuracy of priced

inventory listing.

Reconciliation

19.

Determine whether items at step #6

above which were received immediately
before or after the cut-off date were
properly included or excluded from
the general ledger balance.

20.

Verify that any significant variance

between book value and the physical
inventory were reported to an
appropriate level of management.