Audit and Assurance

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