The Inventory System

Procurement and Audit notes revision

Inventory controls are designed to ensure safe custody. Such controls include restriction of access, documentation and authorization of movements, regular independent inventory counting and review of inventory condition.
The inventory system can be very important in an audit because of the high value of inventory or the complexity of its audit. It is closely connected with the sales and purchases systems covered in the previous sections.
There are three possible approaches to the audit of inventory and the approach chosen depends on the control in system in place over inventory.
(a) If the entity has a perpetual inventory system in place where inventory is counted continuously throughout the year, and therefore a year-end count is not undertaken, a controls-based approach can be taken if control risk has been assessed as low.
(b) If an inventory count is to be undertaken near the year-end and adjusted perpetual inventory records for the year-end value, this approach also requires control risk to be assessed as low.
(c) If inventory quantities will be determined an inventory count at the year- end date, a substantive approach is taken and no reliance is placed on controls.

Control objectives, controls and tests of controls
Most of the controls testing relating to inventory has been covered in the purchase and sales testing outlined in sections 1 and 2. Auditors will primarily be concerned at this stage with ensuring that the business keeps track of inventory.

Assertion Control

objectives

Controls Tests of controls
Occurrence and existence All inventory movements are authorized and recorded. ·         Prenumbered documentation such as GDNs and GRNs in use.

·         Reconciliations of inventory records with general ledger.

·         Segregation of duties

·         Review documentation in use.

·         Review a sample of reconciliations to confirm they are performed and then reviewed an independent person.

·         Observe and evaluate proper segregation of

duties.

 

Completeness All purchases and sales of inventory have been recorded

in the procurement system.

·         Procedures in place to include inventory held at third parties and exclude inventory held on consignment for third parties.

·         Reconciliations of procurement records with physical

inventory

·         Review entity’s procedures relating to consignment inventory.

·         Review reconciliations performed and whether reviewed independent person.

Rights and Obligations ·         Inventory records       only include     items that belong to the entity. ·         Procedures in place to include inventory held at third parties and exclude inventory held

on consignment for

third parties.

·         Review entity’s procedures relating to consignment inventory.
Accuracy, classification and valuation Inventory quantities have been accurately determined. ·         Periodic or annual comparison of inventory with amounts

shown in continuous (perpetual) inventory records.

·         Review and test entity’s procedures for taking physical inventory.

·         Standard costs reviewed management.

·         Review of cost accumulation and variance reports.

·         Review and test entity’s procedures for developing standard costs.

·         Inspect variance

reports produced.

 

Cut-off All purchases and sales of inventory are recorded in the correct procurement period. ·         All dispatch documents processed daily to record the dispatch of finished goods.

·         All goods inwards reports processed daily to record the receipt of inventory.

·         Reconciliations of inventory records with

general ledger.

·         Inspect documentation to confirm daily processing.

·         Inspect documentation to confirm daily processing.

·         Review reconciliations performed.

Source: BPP. (2009). Auditing Assurance, ACCA study text

Procurement and Audit notes revision

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