Auditing for Inventory Cycle

Auditing inventory is the process of cross-checking financial records with physical inventory
and records. It is important aspect of gathering evidence, especially for manufacturing or
retail-based businesses. It can represent a large balance of assets or capital.

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Production schedule

Production data information

Receiving report

Cost accumulation and variance report

Materials requisition

Inventory status report

Inventory master file

Shipping order

INHERENT RISK ASSESMENT

 Industry-Related Factors, indicate the presence of material misstatements in

inventory.
 Engagement and Operating Characteristics, it’s important bcs the type of product
sold by the entity can increase the potential for defalcation and inventory is often
difficult to audit, and its valuation may result in disagreements with the entity.

CONTROL RISK

 Understand and Document Internal Control

 Plan and Perform Tests of Controls
  Set and Document the Control Risk

CONTROL ACTIVIIES & TEST OF CONTROL – INV. TRANSACTION

 Occurrence, The major control activity for preventing fictitious inventory

transactions from being recorded is proper segregation of duties, in which the
inventory management and inventory stores functions are separated from the
departments responsible for inventory and cost-accounting records.
 Completeness, relate to recording inventory that has been received & contained
within the purchasing process.
 Authorization, The auditor’s concern with authorization in the inventory system is
with unauthorized purchase or production activity that may lead to excess levels of
certain types of finished goods
 Accuracy, applying the correct price to the actual quantity received
 Cutoff, Review the procedures and forms used to classify inventory
 Classification, can usually be accomplished by determining which departments in the
manufacturing process are included in raw materials, work in process, and finished
goods inventory.
 Presentation, important to properly allocate costs to appropriate classes of
inventory

Evaluating the Audit Findings—Inventory

When the auditor has completed the planned substantive tests of the inventory account, all
the identified misstatements should be aggregated. The auditor should again analyze the
misstatements discovered through the application of substantive procedures, because these
misstatements may provide additional evidence on the control risk for the inventory
management process.

If the auditor concludes that the audit risk is unacceptably high, additional audit procedures
should be performed, or the auditor must be satisfied that the entity has adjusted the
related financial statement accounts to an acceptable level.