Inventory

Question 1

How to test completeness?

Answer 1

1. Trace counts to the detailed inventory listing
2. Where inventory is held in third party locations, physically inspect this inventory or review confirmations received from the third parties and match to the general ledger
3. Compare the gross profit % to the previous year or industry data, and investigate any unexpected variations

Question 2

How to test existence?

Answer 2

Observe the physical inventory count

Question 3

How to test rights and obligations?

Answer 3

1. Verify that any inventory held for third parties is not included in the year end inventory figure by being appropriately segregated during the inventory count
2. For any ‘bill and hold’ inventory, ensure it is segregated from the final count, so it is not included in the year end figure
3. Confirm that any inventory held at third party locations is included in the year end figure by reviewing the inventory listing

Question 4

How to test accuracy, valuation and allocation?

Answer 4

1. Obtain a copy of the inventory listing and agree to the the nominal ledger
2. Cast the inventory listing to ensure its mathematically correct
3. Vouch a sample of inventory items to supplier invoices to ensure it’s correctly valued
4. Where standard costing is used, obtain a copy of the standard cost card and vouch to supplier invoices/ labour rates etc, to ensure the standard cost card is correctly valued
5. For materials, agree the valuation of raw materials to invoices and price lists
6. Confirm the basis of valuation is appropriate by discussing this with management
7. Agree labour costs to payroll records
8. Review standard labour costs in the light of actual costs and production
9. Reconcile labour costs to time summaries
10. Compare results to the previous year and industry comparatives

Question 5

How to test cut off?

Answer 5

Note the numbers of the last GDN and GRN before the year end, and the first GDN and GRN after the year end and check that these have been included in the correct financial year

Question 6

How to test classification?

Answer 6

1. Review the inventory listing to ensure that inventory has been properly classified between raw materials, work in progress and finished goods
2. Read the notes to the accounts relating to inventory to ensure they are understandable

Question 7

How to test presentation?

Answer 7

1. Complete the disclosure checklist to ensure that all the disclosures relevant to inventory has been made
2. Review the financial statements to confirm whether the cost method to value inventory is accurately disclosed
3. Read the notes to the financial statements to ensure that the information is accurate and properly presented at the appropriate amounts