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Key words: audit, inventory, procedures, accuracy.
Abstract: Businesses generally hold a certain amount of inventory for which there are strict policies to keep track of Sometimes mistakes are made or records are kept wrong and these have to be fixed. If the government believes that there are errors they may decide to have an audit done for tax purposes, but businesses also have them done for their own purposes. Whatever the reason, the auditors have very strict procedures to follow.
The overall objective in the audit of inventory is to determine mat raw materials, work in process, finished goods, and cost of goods sold are fairly stated in the financial statements.
The table below summarizes specific audit objectives related to financial statement assertions for inventory and identifies common substantive audit procedures mat accomplish mese objectives.
Inventory Observation
The observation of inventories is a mandatory generally accepted auditing procedure. The auditor observes and tests the count of the full physical inventory taken at year end or at an interim date. The inventory observation procedure can serve as a substantive procedure at year end to test the company's determination of the final inventory quantities or at an interim date to assess the accuracy of the client's perpetual records. The timing of the physical inventory is influenced by the company's operating cycle and by the quality of internal controls.
Companies that maintain perpetual inventory records may verify mem in cycles continually throughout the year, never taking a complete shutdown physical inventory. In mis case, the auditor should review the results of the company's cycle counts to make a preliminary assessment of the reliability of the system. If the system appears reliable, the auditor should test it. The auditor's tests will typically include a selection of items from the perpetual records for tracing to the physical inventory, and a selection from the physical inventory items for tracing to the perpetual records. These tests can be performed on either an interim or a year-end basis. If the system does not appear reliable, the company may have to take a full physical inventory at year end.
If the client desires to take the physical inventory prior to the balance-sheet date, the auditor should carefully consider whether effective substantive tests...