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Wednesday, October 14, 2015

Audit of Inventories: Internal Control Measures and Substantive Audit Procedures

Internal Control Measures

1. Authority and responsibility for controlling the inventories should be centralized in management and in one person.
2. There should be careful selection of inventory personnel and intensive training of such personnel in policies, objectives and system of inventory control.
3. Adequate physical facilities for handling and storage of inventory should be provided.
4. Adequate system of procedures, forms and reports related to the management of inventories should be developed and implemented.
5. Quantitative controls through perpetual inventory records; book quantities verified with physical counts at least once a year and differences being investigated, promptly adjusted and reported to higher authority should be implemented.
6. Deliveries of materials, finished stock and merchandise should be made only upon specific authorizations emanating at authorized levels.
7. Slow-moving, obsolete and damaged stock should be identified and reported following periodic reviews of physical and book records by qualified employees. Valuation on the basis of approved cost-mark-down methods should be reviewed.
8. Safeguards against that action of the element and inaccuracies in recording receipts and issues should be adopted. Example - Maintaining adequate insurance coverage.

Substantive Audit of Inventories

Inventory Balances

Existence: Recorded inventory exist
1. Before the client takes the physical inventory, review and approve the client's written plan for taking it.
2. Observe the client personnel physically counting inventory.
3. Confirm inventories on consignment and held in public warehouses.

Completeness: All inventory of the entity recorded
4. Obtain a copy of prenumbered inventory tags used by the client in taking inventory and reconcile the tags to the listing.
5. For selected items, trace from tags to listing.
6. Perform cutoff procedures. Obtain the receiving report number for the last shipment received prior to year-end and determine that the item is included in inventory. Also, identify the last shipping document and determine, based on shipping terms, whether the item was properly recorded in sales or inventory.
7. Perform analytical procedures.

Rights and obligations: Inventory is owned by the entity
8. Determine that consigned inventory has been excluded from inventory and that inventory pledged has been properly disclosed. Examine confirmations from financial institutions and read minutes of the board of directors' meetings.

Valuation and allocation: Recorded inventory is valued in accordance with GAAP
9. Considering the method the client uses for inventory valuation, examine invoices for inventory on hand or trace prior year's inventor/ listing to verify cost.
10. For selected items, determine net realizable value (NRV) of the inventory and apply the lower of cost or NRV.
11. Verify computations in the inventory listing.
12. Review the obsolescence of the inventory by:
      a. being alert while observing inventory being taken for damaged, slow-moving, or scrap
      b. Scanning perpetual records for slow-moving items and discussing their valuation with client.

Presentation and disclosure: Inventory is classified and disclosed in accordance with GAAP
13. Determine whether accounts are classified and disclosed in the financial statements in accordance with GAAP.


Completeness: Purchases that occurred are recorded
1. Trace a sequence of receiving reports to entries in the voucher register.
2. Test cutoff.
3. Account for a sequence of entries in the voucher register.

Occurrence: Recorded purchases are for items that were acquired
1. Examine underlying documents for authenticity and reasonableness.
2. Scan voucher register for large or unusual items.
3. Trace inventory purchased to perpetual records.
4. Scan voucher register for duplicate payments.

Classification: Purchase transactions have been recorded in the proper accounts
1. For a sample of entries in the purchases journal, verify the accuracy of account coding.

Accuracy (Valuation): Purchases are recorded at proper amounts
Recompute invoices and compare invoice price to purchase order.


Completeness: All production transactions that occurred are recorded
1. Account for a sequence for production reports.

Occurrence: Recorded production transactions occurred
1. For selected transactions, examine signed materials requisitions, approved labor tickets, and allocation of overhead.

Classification: Production transactions have been recorded in the proper accounts
1. For a sample of entries, verify the accuracy of account coding.

Accuracy (Valuation): Production transactions are recorded at proper amounts
1. Test cost records by tracing to underlying documents, such as bill of materials, labor tickets, authorized labor rates, and standard overhead rates.
2. Review variances.

Copyright 2015 @philcpareview


  1. The result of the October 2015 CPA Licensure Examination has been released. UP-Diliman is the No.1 School. Ralley Paragas of Colegio De Dagupan is the exam's 1st Placer.

  2. wow congrats po sa mga taga UP... :)


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