Substantive Test of

Inventories and Cost of

Sales
Learning Objectives
• Identify the audit objectives for inventories, cost of sales and
related accounts.

• Describe the primary substantive audit procedures for

inventories, cost of sales and related accounts.

• Identify assertions addressed by audit procedures for

inventories, cost of sales and related accounts.
Inventories – audit considerations
• They often represent a very substantial portion of current assets.

• Numerous valuation methods are used for inventories.

• The valuation of inventories directly affects cost of goods sold; and

• The determination of inventory quality, condition, and value is

inherently complex.
Audit Objectives
• Existence or Occurrence – all inventories included on the statement of
financial position are held by the entity or by others for the entity and
purchases (cost of sales) have really occurred and pertain to the entity

• Completeness – all inventories owned by the entity at the reporting

date are included on the statement of financial position and all cost of
sales is included in the statement of comprehensive income.
Audit Objectives
• Cut-off – purchases (cost of sales) have been recorded in the proper
accounting period.

• Valuation and allocation – inventories are carried at a lower of cost

and NRV.

• Rights and obligations – the entity owns, or has a legal right to, all the
inventories reported on the statement of financial position.
Audit Objectives
• Presentation and disclosure & classification – inventories are
classified, described and disclosed in the financial statements
including notes, in accordance with the applicable PFRSs.

• Pledged inventories are properly disclosed.

Audit procedures for inventories and cost
of sales
• Observing inventory count and performing test counts;

• Confirming inventories held by others;

• Reconciling inventory summary sheet with general ledger;

• Performing purchases and inventory cut-off;

Audit procedures for inventories and cost
of sales
• Checking appropriate valuation in accordance with accounting
policies;

• Performing lower of cost or NRV test;

• Determining whether any inventories have been pledged and

reviewing purchase commitment; and

• Performing analytical procedures