How an auditor can rely upon the internal control system of inventory accounting?

Auditing and Assurance Revision Questions and Answers

Internal control over inventory accounting plays a vital role in accounting system. An auditor cannot verify each and every item of inventory purchased and issued for consumption. Thus, internal control system should be strong to ensure that inventory is properly accounted and recorded.

Test and sampling audit are based on effective internal control system within the organization. In case of inventory, it should be ensured that accounting is made as and when it is received. Inventory items should be procured on receipt of demand from concerned department. Likewise, issue of inventory items should be made only based on requisition slip. All procurement and issues should be made on approval of competent authority. It should be ensured that all items are physically verified and tallied with the store records.

Similarly, accounting is based on the uniform accounting practice using the method specified the Nepal Accounting Standard. It should be confirmed that issue of inventory items for capital works are accounted as work in progress and capitalized thereafter. Items issued for consumption should be charged to expenses.

Inventory items of semi-finished goods or finished goods should also be valued applying best accounting practice and provision of set standards. Since, these items has direct impact over the profitability of the organization, the internal control system to value should be transparent and justifiable.

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