Audit and Assurance

Topics: Inventory, Balance sheet, Asset Pages: 7 (889 words) Published: February 2, 2014
ACFI3214 Audit and Assurance
Lecture 14 (Week 18): Audit Procedures to
Verify Inventories

Instructions 1

Read pages 1 and 2 of today’s
handout down to The Importance of
Inventory in Financial Statements (4
minutes)

2

ACFI3214 Lecture 14 (Week 18) Overheads

The Importance of Inventory in FS
Where year end inventory is incorrect:
 GP, operating profit and PBT all incorrect
 Profitability %s incorrect
 Tax charge incorrect
 EPS incorrect
 Current assets, total assets incorrect
 Current ratio incorrect
 Working capital incorrect
 Retained earnings incorrect: any impact on dividend
distribution?
Instructions 2: read page 3 on confirming the existence of
inventory and attendance at the stock count (2 minutes).
3

ACFI3214 Lecture 14 (Week 18) Overheads

Auditor Attendance at Y/E Inventory Count
Auditor will observe the stock count to ensure that:
 Client stock take instructions are followed
 All inventory is counted systematically
 All inventory is counted once and once only: no stock is omitted and no stock is counted twice
 There are no movements in and out of stock during the
inventory count: such movements will cause cut off errors
 Inventory counted is correctly classified into raw materials, WIP and finished goods
 The assessment of the degree of WIP completion is
reasonable
 Inventory exists: check contents of boxes, inspect inventory carefully
4

ACFI3214 Lecture 14 (Week 18) Overheads

Audit Procedures at the Stock Count
 Test counts by audit staff to ensure inventory counted

and recorded once and once only
 Test count inventory and check it is recorded accurately on stock sheets: this test tests for understatement of
inventory quantities
 Check items on stock sheets back to stock to ensure it
has been counted and recorded accurately: this test
tests for overstatement of inventory quantities
 Look out for and record damaged, slow moving or
obsolete stock
 Photocopy all stock count sheets for use at the final
audit stage: client may try to add or remove stock items
Instructions 3: Read pages 4 to 5 (3 minutes)
5

ACFI3214 Lecture 14 (Week 18) Overheads

Inventory Valuation: Cost: Audit Work
 Verify cost of items in inventory to the most recent








6

purchase invoices
Why most recent? Stocks are used up and sold on a
FIFO basis so the most recently purchased inventory is
held at the year end valued at the latest invoice price
Verify labour cost to wages and salaries records
Verify transport cost to purchase invoices
Verify other overheads to costing records
Ensure only overheads incurred at normal activity levels
are included so that no inefficiencies are carried forward
in inventory cost
ACFI3214 Lecture 14 (Week 18) Overheads

Inventory Valuation: NRV: Audit Work
 Select sample items from stock sheets, trace sales of

these items to post year end sales invoices
 Ensure selling price of goods on these post year end
sales invoices is > cost to justify valuation at cost
 Where selling price is close to, at or lower than cost,
calculate NRV valuation
 Further costs to completion from purchase invoices,
wages and salary records and overhead records
 Selling expenses checked to post year end costs from
purchase invoices and selling salaries
Instructions 4: Have a go at the inventory valuation
exercise on page 6 (4 minutes)
7

ACFI3214 Lecture 14 (Week 18) Overheads

Product
Product NRV
Inventory Valuation atACost orB Product C
£

£

£

28

42

50

Cost price per product

(22)

(32)

(40)

S&D costs per product

(5)

(8)

(12)

1

2

(2)

No

No

Yes

Selling price

Profit/(Loss) per product
Write down to NRV?

Product C overvalued by 100 units x £2 = £200. Extrapolate error across total value of inventory: material error? If so, conduct more tests to reduce error below materiality or to
determine the maximum error within the...
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