AUDIT INVENTORY CYCLE

SHARIFAH RAHIMATUL HAMIZAH

SITI SHAHTIRA BINTI TALIP
NAJIBAH BINTI RABIHI

Introduction
Often most complex time consuming
as :
Often a major item in the balance sheet &
make up largest item of the working capital
Located at a different locations
Diversity of items create difficulties
factors affecting valuation
Method of valuation may differ

uments in the business proce

Purchase history
report
- Used to verify the purchase

price of inventory & it provides

amounts and prices of each
inventory purchase

Inventory
Counts Tags
- used during the

physical count to
record the
inventory amounts

Inventory Price File

- Used for veryfying the sales
price for inventory items to
determine the lower cost or
market valuation

Final the detail

to support the
final no. reported
on the balance
sheet ( includes
the final inventory
& cost assigned to
each inventory
item )

Adjusting journal
entry report
- Record of all
adjusting journal
entries made during a
specific time period
organized by monthend, quarter-end
&year-end.

POSSIBLE MISSTATEMENT IN THE INVENTORY

PROCESS

Inventory is suspectible to both errors & fraud,

so the auditor must design audit procedures to
search for errors ( unintentional misstatements )
and fraud ( intentional misstatements ) in the
inventory process.
misstatements in the inventory process can be
overstatement/ understatements.
Overstatements occur in the overstated
inventory process than understatement
misstatements. ( the cost of good sold is
understated, net income is overstated, and
inventory is overstated )

RELEVANT ASSERTIONS FOR THE

INVENTORY BUSINESS PROCESS
The auditor is
required to gather
audit evidence to
support relevant
assertions for
significant accounts
in the business
process

Linked to the risk in

the accounting
process

Because the most likely

misstatement in the inventory
process is an overstatement,
existence & valuation are often
identified as relevant assertions
for this process.

INTERNAL CONTROL
TESTING
Reflect inventory at the
beginning of the year &
all additions & deletions
to the inventory balance

Not accurate
- Auditor tests
inventory at
year- end

Perpetu
al
invento
ry files

Accuracy
- Determine
whether the
auditor can
perform the
physical
examination of
inventory b4 yearend

Accurate
- Auditor can test the
physical inventory b4 the
balance sheet date

SUBSTENTIVE TESTS FOR THE INVENTORY PROCESS

Analytical procedures
Play an important role in planning &
testing inventory and & cost of sales
inventory is complex & suspectible to
fraud, so analytical procedures are
important for assessing whether errors in
inventory are exist or not.
procedures :
- compare inventory balances
by category
- compute gross margin for the
current year
and the prior year
- compute inventory turnover

THE KEY SUBSTANTIVE TESTS OF BALANCE

Observation, inspection ( existence, valuation)

- select a sample of inventory items on the inventory listing
at year end
- perform test counts for the items selected
Observation, Inspection ( Completeness and valuation )
- select a sample of inventory items from the warehouse
shelves.
- perform tests counts for the items selected.
Inspection, reperformance (valuation )
- select a sample of inventory items on the final inventory
listing
- perform price tests to verify that the items are correctly
priced at
year end.

Inspection, reperformance (valuation )

- review the lower- of cost or market
adjustment made
by the client
- select a sample of inventory items & perform
price tests to determine whether the lower- of- costor- market cost is correct.
Inspection, reperformance (valuation )
- review the LIFO adjustment if appropriate to
determine
whether it is reasonable
- select a sample inventory items & perform
price tests to
determine whether the LIFO cost is correct.

PREPARATION FOR THE ATTENDING THE PHYSICAL

INVENTORY COUNT

o Identify the locations of the inventory & the amount

at each location to plan to test.
o Review the clients plan for taking the inventory
o Evaluate whether the involvement of specialists is
needed during the count
o Tour the clients warehouse & manufacturing facility
o Select a sample of inventory transactions for entering
& leaving the inventory process during the year.
o Review the overhead allocation reports and the cost
of production reports to determine how it
accumulated inventory costs,
o Determine how the client intends to identify obsolete/
slow- moving items during the count.