Describe substantive procedures the auditor should perform to obtain

sufficient and appropriate audit evidence in relation to:-

- Inventory

Inventory:-

Substantive Procedures – 8 1 By:- Haris Hanif

Substantive Procedures – 8 2 By:- Haris Hanif
ISA 501 Audit evidence – specific considerations for selected items provides guidance for auditors on
attending the physical inventory count to obtain evidence regarding the existence and condition of
inventory.

Before the inventory counts

 Identifying risk of material misstatements
 Nature of internal controls relating to inventory
 Existence of adequate procedures established and proper instructions given to personal
involved in stock count at client end
 Timing of counts
 Location of inventory count
 Need for an expert

During the inventory counts

 Auditor would observe stock count and would carry out test counts
 Observe whether stock count instructions are being properly followed by the stock counters
 In performing test counts the auditor would follow a two-way test approach to ensure
completeness
 Records to floor testing
 Floor to record testing
 Retention of any stock documents for further procedures
 Cut-off procedures before and after the counts to ensure that entire inventory movements
pertaining to the year has been tracked / obtaining the last documents such as goods
received notes and gods dispatched notes
 Where any inventory is in the third party control, the auditor should sent confirmation for
inventory. However if the auditor consider that the inventory items are material he could.
 Test the integrity of management
 Observe the third party counts by himself or by some other auditors
 Obtaining the order auditor report on stock counts
 Inspecting document of inventories held by third parties

After the inventory counts

Once the auditor has planned and performed the inventory count, the auditor would perform
procedure to finalized inventory for accounts purpose such as:
 Ensure that, inventory has been properly valued based on stock counts sheets available with
the auditor.
 Ensure proper rate for inventory valuation has been picked up on the basis of FIFO or
Weighted average cost method
 Ensure that all stock variance if the entity operates standard inventory system has been
closed out
 Ensure that all working papers pertaining to inventory has been properly signed by auditor
and client personal available at stock
 Ensure all adjustments identified by the auditors is reflected in the financial statements
 Ensure proper inventory control sheet and inventory physical observation report has been
filed in audit wok papers

Substantive Procedures – 8 3 By:- Haris Hanif

Question (from DEC – 2014 exam of ACCA)

Jackdaw motors, a car manufacturing company has year-end 31st January 2015.

Work in progress

Jackdaw undertakes continuous production of cars, 24 hours a day, seven days a week. An inventory
count is to be undertaken at the year end and Puffin & Co will attend. You are responsible for the
audit of work in progress (WIP) and will be part of the team attending the count as well as the final
audit. WIP constitutes the partly assembled cars at the year end and this balance is likely to be
material. Jackdaw values WIP according to percentage of completion, and standard costs are then
applied to these percentages.

Describe the substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to:

Valuation of Work in progress (4 marks)

ANSWER:-

Substantive Procedures – 8 4 By:- Haris Hanif