Substantive audit procedures during an inventory count
- Confirm whether inventory count instructions are being followed correctly
- Confirm the procedures for identifying and segregating damaged items are operating correctly
- Select a sample and perform test counts from inventory sheets to warehouse aisle and warehouse aisle to inventory sheets
- Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up testing on the final audit
- Observe the procedures for movements of inventory during the count to confirm that no raw materials or finished goods have been omitted or counted twice
- Identify and make note of the last GRN and GDN for July 31 in order to perform cut off procedures
- Discuss with he warehouse manager how he estimated the raw materials. To the extent that it is possible, reperform the procedures adopted by the warehouse manager.
- Observe the warehouse procedures carried out by the warehouse manager in assessing the level of work in progress and consider the reasonableness of any assumptions used
- Select a sample of damaged items as noted in the inventory sheets and inspect these windows to confirm whether the level of damage is correctly noted
Benefits of using ATT’s
- Audit efficiency and time saving as the audit team will be able to test a large volume of inventory data accurately and quickly
- Test data can be used to test program controls within the inventory system as well as general IT controls eg. passwords
- They reduce the level of human error in testing and provide a better quality of audit evidence
- The use of ATT’S frees up audit team members to focus on judgmental and high risk areas rather than routine tasks
- The audit team can test the actual inventory system and records directly rather than rely on printouts from the inventory system which could be incorrect
Challenges of using ATT
Significant set up costs and it will also be time consuming
Team may require training to be deployed
Risk that algorithms or models used may produce incorrect results or interpretations
Risk that auditors may become overly dependent on the technology and neglect professional judgment and skepticsm. Over reliance can lead to overlooking issues that may not be captured by the automated processes.
If a particular system like inventory or cash is not compatible with the firm’s ATT’s bespoke ATT’s may be required which will increase audit costs
Audit procedures and ATT’s used
Check accuracy of totals - Excel
Test 100% of transactions -data analytics software
Cast a listing to confirm completeness and accuracy - excel
Recalculate cost and NRV for inventory items
Reperform bank rec - excel
Sign off on leadsheets and documentation - audit software eg. caseware
Produce and inventory aged analysis to identify slow moving goods which may require write down or an allowance
Calculate inventory holding period to compare against prior year to identify whether inventory is turning over more slowly as this may indicate overstatement
Verify cut off on purchase transactions by testing whether the dates of the last GRN’s recorded relate to pre year end purchases and any date of 1 August 2025 onwards have been excluded
What can data analytic tools be used for
to analyse the entire population of adjustments. These tools can quickly identify patters, outliers and discrepancies helping the auditor focus on whether high risk items have been correctly updated in the final inventory records
