Guidance Nofe onauaieontnventorles ries are tangible property held Meaning of Inven- Inventot a @ forsale in the ordinary course of business, or ¢ inthe process of production for such sale, or {for consumption in the production of goods or services for sale, 4 ¢ including maintenance supplies and consumable stores and spare parts meant for replacement in the normal course. Inventories normally comprise raw materials including components, WIP, finished goods including by-products, maintenance supplies, stores and spare parts, and loose tools. Featuresofinvento-| () Rapid Turnover. ries having impact| (jj) Highly susceptible to obsolescence and spoilage. s onauditprocedures | (i Movable in nature. (iv) Located at different places such as factories and warehouses, or with third parties such as selling agents. (0) Significarit proportion of total assets and current assets of manufacturing, trading and certain service entities. (vi) Different stages of completion of different inventories. (vif) _Estimations for valuation of inventories. [AuditProcedures es RC z Re e LSI ~ Tnternal Control] 1. The auditor should study and evaluate the system of internal control relating to Evaluation inventories, to determine the NTE of his other audit procedures. 2. He should particularly review the following: «Control procedures providing segregation ofincompatible unctions}forexample, persons undertaking | the physical verification of stocks should be differentfrom those responsible for store-keeping in respect of those stocks. Use of pre-numbered standardized forms. ‘@ Systemofcross-checking the data generated by different operating departments. . 3. The auditor should also review specific controls over receipts, issues, physical inventories, and inventory records. Management ‘® The responsibility for properly determining the quantity and value of inventories Verification rests with the management of the entity. # Themanagementsatisfies this responsibility by carrying outappropriate procedures which will normally include verification of al items of inventory atleast once inevery financial year, eaGUIDANCE NOTES Beene gaa] qaluated by ay. itor * Thisresponsin of invent ble tain reasonal 'nany auditing station, {heauaitoremploysappropriate procedures aia assurance to Sorroborate the management's assertions regarding the Existence - th, - t hnysical count ty is not reduced even where the auditor attends any phy: ‘ories in order to ‘obtain audit evidence. at all recorded inventories exist as at the year-end. Ownership - Il recorded . that all inventories owned by the entity are recorded and that a inventories are owned by the entity. Valuation - that the stated ri ropri \d properl; tated basis of valuation of inventories is appropriate ant ly applied, and that —-—_] ‘auditor's proce- dures for verifica- tion the condition of inventories is recognised in their valuation. Verification of inv ‘entories may be carried out by employing the following procedures: examination of records; attendance at stock-taking; obtaining confirmations from t d parties; ©xamination of valuation and disclosure; and analytical review procedures, of the auditor, Examination of Re- | Auditor should examine the stock records with reference to the cords relevant basic documents like goods received notes, inspection Teports, material issue notes, bin cards, etc, If the entity does not maintain detailed stock records, the auditor would have to suitably extend the extent of application of other 7 audit procedures, Attendance at Stock-Taking (a) The physical verification of stock is the inanagement. Theauditor may find itappropriatetoattend the stock taking, ifthe inventory value is material in his opinion, (2) The extent of participation in i responsibility of the inventory taking depends upon the internal control system prevailing, results of examination of inventory records and analytical review procedures, (2) When auditor attend inventory taking, he ensure that the instructions given for inventory taking is followed, ‘ (@) He test checks few items by himself for their existence and Quantum. He selects to test high value items importantly. (©), The physical conditions of Stock - like its age, deterioration, obsolescence etc, are looked into by auditor : O) The auditor reviews store: discrepancies for reconcili ‘i ° Where significantstoc “mations That Parties the auditor should ex: ro with whom it is not proper that the stocks of the entity are held, ere Ge clue held in cet iaTAXMANN®. Special Considers fren tee cretr | Examination of Valuation and Disclosure > The audtorshould also directly obtan from the third parage written confirmation of the stocks held, # Arrangements should be made with the entity for for confirmation to such third part should satisfy himself that the valuau is in accordance with the AS 2, “Vatua Sending ion of inventories tion of Inventories 4 The auditor should examine the evidence supportn the assessment of NRV, In this regard, the auditor shoulg particularly examine whetherappropriate allowancehasheen made for defective, damaged and obsolete and slow-mo, ving in determining the NRV. inventorit + ‘The auditor should satisfy himself that the inventories have been disclosed properly in the financial statements. Where the relevant statute lays down any disclosure requirements in this behalf, the auditor should examine whether the same have been complied with. Analytical Review Procedures ‘Auditor may also apply following analytical review procedures so as to obtain audit evidence regarding the various assertions: (0 Reconciliation of quantities of opening stocks, purchases, production, sales and closing stocks; (i) Comparison of closing stock quantities and amounts with those of the previous year; (ii) Comparison oftherelationship ofcurrentyear stock quantities and amounts with the current year sales and purchases, with the corresponding figures for the previous year; ()_ Comparison of the composition of the closing stock (eg, raw materials as a percentage of total stocks, WIP as a percentage oftotal stocks) with the corresponding figures for theprevious year; () Comparison of current year gross profit ratio with the gross Profit ratio for the previous year; wa Comparison of actual stock, purchase and sales figures with the corresponding budgeted figures, if available; (i. Comparison of yield with the cor Previous year; (if, Comparison ofsigntticantratiosrelatingtoinventorieswiththe similar ratios for other firmsin the same industry, ifavailable; () Comparison of si ‘responding figure for the ignificant ratios relating to inventories with the industry norms, if available, ationsincaseorwip385 ————_ GutDaNce woTES asison M physical reater emph Management nepresentations Documentation i 7 td lay 8 Ascer a “tilication of WIP is impracticable, the auditor shou! cae attalning whether the system, rom which the WIP is ascertained. Fei Ho ratement de> 1 fulton odin rom he manage Fe en NE in detail the following: + the location of inventories, written st . methods and procedures of physical verification and * valuation of inventories. * Theauditorshould maintainadequate workingpapersregardingauditofinventories * The management representation letter concerning inventories should also be | _ maintained on the succes 2 Guid Bs ance Not on Audit ofebiors,veandana Advances Internal Control Bvaluation Debtors The amounts due to an entity * for goods sold or + services rendered oF + in respect of other similar contractual obligations, . but do not include the amounts which are in the nature of loans or advances. Loans An important feature of debtors, loans and advances which has a significant effect on the related audit proceduresisthat theseassetsare represented only by documentary evidence (invoice, loan documents etc): they have no physical existence. Inrespect ofdebt- | (i) The credit limits fixed in respect of individual customers ors should be approved by an official independent of the sales department. These limits should be checked before orders are accepted from the customers. (i) The procedure should ensure prompt recording of debts and realizations, (i) Agingschedule of debtors shouldbereviewed byaresponsible official and necessary action initiated in respect of overdue accounts. (iv) Statements ofaccount should be prepared and despatched by a person independent of the ledger-keeper. (0), The debtors should be requested to confirm the balances as per the statements with reference to their own records. - (0) All material adjustments in debtors’ accounts, particularly thoseTrelatingto rebates, allowances, commissionsetc. should Tequire approval of the competent authority. (vif) There should bea system of periodic reconciliation of various debtor balances with related control accounts. “sNNYINXYL- ud