Inventory risk:

XYZ company maintain inventory very seriously based on their analysis but when you went to
physical count of stock then you have encountered stock physical record does not align with
system record.
Q : What are the risk and what will be the audit procedure

Ans. Encountering discrepancies between the physical count of stock and the system records
poses several risks to a company, including potential financial misstatements, operational
inefficiencies, and the risk of fraud. To address these issues, auditors would typically follow
specific risk and audit procedures:

Risk Audit procedure

1. Financial Misstatements:
o The primary risk is the
potential for financial
misstatements in the
company's financial
statements. If the physical
count and system records do
not align, it may lead to
inaccuracies in the reported
inventory value, impacting the
balance sheet and potentially
the income statement.
2. Operational Inefficiencies:
o Inventory discrepancies may
highlight operational
inefficiencies in the company's
inventory management
processes. This could include
errors in recording, inadequate
controls, or issues with the
accuracy of the tracking
system.
3. Increased Holding Costs:
o Inaccurate inventory records
may result in increased holding
costs. Excess inventory that is
not accurately reflected in the
system can lead to unnecessary
storage and carrying costs for
the company.
4. Stockouts or Overstock:
1. Identification of Discrepancies:
o Compare the physical count
with the system records to
identify the extent and nature
of discrepancies.
o Investigate the reasons behind
the differences, such as errors
in recording, theft, damage, or
obsolete inventory.
2. Risk Assessment:
o Assess the risk of material
misstatement in the financial
statements due to inventory
discrepancies.
o Evaluate the impact of
discrepancies on the
company's financial position,
performance, and cash flows.
3. Understanding Internal Controls:
o Evaluate the effectiveness of
internal controls over
inventory management and
record-keeping.
o Identify weaknesses in the
internal control system that
may have contributed to the
discrepancies.
4. Audit Sampling:
o Use statistical sampling
techniques to select a
representative sample of items
 o Discrepancies can lead to
stockouts or overstock
situations. Stockouts can result
in lost sales opportunities,
while overstock can lead to
increased holding costs,
potential obsolescence, and the
need for markdowns.
5. Customer Service Issues:
o Inaccurate inventory records
can lead to customer service
issues, such as delayed order
fulfilment or the inability to
meet customer demand. This
can harm the company's
reputation and customer
relationships.
6. Obsolete Inventory:
o If the system records indicate a
higher quantity of inventory
than physically present, there
may be obsolete or outdated
items in the stock. This poses a
risk of inventory obsolescence,
and the company may need to
write down the value of such
items.
7. Theft or Fraud:
o Inventory discrepancies may
be indicative of theft or
fraudulent activities within the
organization. Whether
intentional or due to weak
internal controls, discrepancies
can highlight vulnerabilities
that could be exploited.
8. Regulatory Compliance Risks:
o Inaccurate inventory records
may lead to non-compliance
with regulatory requirements,
affecting financial reporting
and potentially leading to legal
and regulatory consequences.
9. Supply Chain Disruptions:
o If the inventory records are not
accurate, it can lead to
for physical count verification.
o Examine the sampled items for
accuracy in both physical
count and system records.
5. Documentation Review:
o Review supporting
documentation for inventory
transactions, such as purchase
orders, sales invoices, and
shipping documents.
o Ensure that transactions are
accurately recorded and
classified in the system.
6. Observation of Physical Counts:
o Observe the client's physical
count procedures to ensure
they are conducted
systematically and accurately.
o Confirm that the counting team
is independent of the inventory
management process.
7. Analytical Procedures:
o Perform analytical procedures
to assess the reasonableness of
inventory balances in relation
to sales, production, and
industry benchmarks.
o Investigate any unusual
fluctuations or trends.
8. Subsequent Events Review:
o Review subsequent events and
transactions that occurred after
the physical count to identify
any adjustments or
discrepancies that might affect
the financial statements.
9. Management Inquiry:
o Interview management and
inventory personnel to gather
information on any known
issues or changes in the
inventory management
process.
10. Adjustments and Corrections:
o Recommend adjustments to the
inventory records based on the
 disruptions in the supply chain.
This may affect production
schedules, supplier
relationships, and the overall
stability of the supply chain.
10. Impact on Financial Ratios:
o Inaccuracies in inventory
valuation can impact financial
ratios, such as inventory
turnover and return on assets.
Investors and stakeholders may
use these ratios to assess a
company's financial health and
efficiency.
Addressing these risks requires a thorough
investigation into the causes of the
discrepancies and implementing corrective
measures to improve inventory management
processes and controls. Auditors play a crucial
role in identifying and mitigating these risks
during the audit process.
findings of the physical count
and audit procedures.
o Ensure that corrections are
appropriately reflected in the
financial statements.
11. Fraud Detection:
o Perform additional procedures
to assess the risk of fraud,
especially if there are
indications of intentional
misstatements or irregularities.
12. Management Representation:
o Obtain written representations
from management regarding
the accuracy and completeness
of the inventory records.
By following these audit procedures, auditors
can gain a comprehensive understanding of
the reasons behind inventory discrepancies
and work with the company to address any
issues identified.

Revenue Recognition:
XYZ company maintains and invoices all delivery note on time in system, but they are not aware
when goods is takeover by customer C&F due to invoice team and delivery team are different.
You encountered during your stock count revenue cut-off does not align.
Q : What are the risk and what will be the audit procedure
Ans. Encountering a revenue cut-off mismatch, where the delivery of goods to customers does
not align with the invoicing in the system, poses several risks. This discrepancy can lead to
financial misstatements and impact on the accuracy of the company's financial statements. Here
are some risks associated with revenue cut-off issues and suggested audit procedures:
Risk Audit procedure
1. Revenue Recognition 1. Inquiry and Observation:
Misstatements: o Interview personnel in the
o There is a risk of recognizing invoicing and delivery teams
revenue in the wrong period if to understand the processes
goods are delivered but not and controls in place for
 invoiced, leading to potential
overstatement or
understatement of revenue.
2. Inaccurate Financial Statements:
o Financial statements may not
accurately reflect the
company's financial
performance and position if
revenue cut-off issues are not
addressed, affecting key
financial ratios and metrics.
3. Potential for Fraud:
o Revenue cut-off discrepancies
could be indicative of
fraudulent activities, such as
intentional manipulation of
revenue recognition to meet
financial targets or inflate
financial performance.
4. Compliance and Regulatory Risks:
o Non-compliance with revenue
recognition standards and
regulations may result from
incorrect revenue cut-off,
exposing the company to
regulatory scrutiny and
potential legal consequences.
recording and recognizing
revenue.
o Observe the handover
procedures between the
delivery team and invoicing
team to identify potential gaps
or communication issues.
2. Cut-off Review:
o Select a sample of transactions
around the period-end and
examine supporting
documents, such as delivery
notes and sales invoices, to
verify the accuracy of the
revenue cut-off.
o Ensure that goods delivered
are matched with the
corresponding invoices and
that revenue is recognized in
the correct accounting period.
3. Analytical Procedures:
o Perform analytical procedures
to compare revenue trends,
sales orders, and delivery notes
with corresponding invoices
for reasonableness and
consistency.
o Investigate any unusual
fluctuations or patterns that
may indicate revenue cut-off
issues.
4. Subsequent Events Review:
o Review subsequent events and
transactions occurring after the
period-end to identify any
shipments or sales that should
be included in the current
period but were recorded in the
subsequent period.
5. Internal Control Evaluation:
o Assess the effectiveness of
internal controls related to
revenue recognition, focusing
on the segregation of duties
between the delivery and
invoicing teams.
 oIdentify and test controls that
ensure timely and accurate
recording of revenue
transactions.
6. Documentation Examination:
o Examine documentation, such
as shipping records, delivery
confirmations, and customer
acceptance documents, to
ensure that revenue is
recognized when the risks and
rewards of ownership have
transferred to the customer.
7. Management Representation:
o Obtain written representations
from management regarding
the completeness and accuracy
of revenue cut-off procedures
and the related financial
statements.
8. Fraud Risk Assessment:
o Assess the risk of fraud related
to revenue recognition,
considering factors such as
management incentives and the
control environment.

By conducting these audit procedures, auditors can gain assurance about the accuracy of revenue
recognition and help mitigate the risks associated with revenue cut-off discrepancies. Addressing
these issues is essential for maintaining the integrity and reliability of the financial statements.