Inventory

Moreover, inventory frequently addresses the most significant asset on the statement
of financial position. To audit the inventory of a company well, the company should conduct
audit procedures with the course of cross-checking monetary records with actual stock and
records to guarantee precise inventory accounting (Corporate Finance Institute, 2021).

First, an inventory audit can be as simple as just taking an actual count of stock and
inventory to confirm a match to the bookkeeping records. Therefore, the audit procedures of
inventory count are classified intro three stages which includes before the count, during the
count and after the count. In the beginning the auditor must plan to have inventory control
before an inventory count. In this case, the auditor should acquire understanding from the
organization by analysing preceding year’s plans and performing analytical procedures. This
is the way to a successful and productive audit as auditor comprehend the company’s internal
control and condition to evaluate risks of error easily as well as assist an auditor know the
client's business well and changes in the business. It is essential to assess the critical elements
of inventory control in order to have the planning procedures to ensure each factor has an
advance plan for what to do. During the count, the auditor whether the customer's staff are
adhering to directions. Stock count sheets also need to have inspection by the auditor to
guarantee that it is pre-numbered. To make sure strategies and internal controls are working
appropriately, test counts are required to perform by the auditors. The auditor ought to affirm
that inventory held in the name of third parties is independently recognized and accounted
for. After the count, items that were test counted to final inventory sheets must discovered by
the auditors and they should examine all count records have been covered in final inventory
sheets and final inventory sheets are upheld by count records.

On the other hand, cut-off analysis is also one of the audit strategies to control the
stock (Weatherwax, 2021). Before the count, the auditor needs to ensure there is suitable
frameworks of documenting the received of goods and despatches of merchandise and a
system for recording the materials requisitions are set up. Goods despatch notes, final good
received notes and materials requisition numbers are also required to be noted. To make sure
that the cut-off arrangement held by third parties is organized and satisfied, auditor should
make observation to the arrangement for inventories. Then, during the count, auditors should
record all movement notes relating to the period . For instance, all requisition numbers
between different departments, the last goods received notes(s) and despatch note(s) prior and
after the count. It is also important to see whether right cut-off procedures are gone in the
same direction in the despatch and receiving areas. Discussion with company staff about the
procedure of performing the count to ensure they are clearly understood. On the day of the
count, auditor should ensure that there is no finished good are shifted to the warehouse. At
the final audit, cut-off by noting the serial numbers of good received notes and good despatch
notes should be checked by auditors whether it is received and despatched before and after
the end of the financial year, and subsequently checking that they have been included in the
correct period. Match up all the goods received notes with purchase invoices, goods
despatched notes to sales invoices, requisition notes to the work in progress is necessary to
make certain the account are recorded in the correct amount with the correct period.

Furthermore, stock valuation is defined as cost related with an entity's inventory

toward the end of a reporting period (FreshBooks, 2021). In IAS 2, cost comprise all
purchase cost and conversion cost which include materials costs, labour costs and production
overheads. To analyse the valuation of raw materials, the auditors should check that the right
costs have been utilized by referring to suppliers' invoices. Proper basis of valuation ought to
be affirmed is being used in correct ways. When calculating raw material value in work in
progress and finished goods, the auditors should consider the age of the inventory held and
confirm correct amounts are being utilized Then, the valuation of labour costs should be
audited by investigating the labour costs to wage records, evaluate standard labour costs in
the view of actual costs and production as well as check work hours to time summaries. For
overhead allocation, the auditors should guarantee that the customer includes an extent of
overheads appropriate to carrying the stock to its current area and condition. The basis of
overhead allocation should be predictable with earlier years and determined on the normal
level of production activity. To allocate overhead effectively, the auditors should ensure
excluded all abnormal conversion costs. Where firm sales have been gone into for the
arrangement of design, advertising provision of goods or services to customer's specification,
and selling costs incurred before manufacture may be included. Overheads are categorized by
role when allocation occurred. The costs of general administration are excluded as it is not
directly linked to current production.