Inventory

Question 1

Identify a few audit procedures that might address the valuation assertion for inventory.

Answer 1

1. )Perform price tests (to evaluate the appropriateness of the inventory’s cost/unit — agree unit costs to a recent supplier’s invoice).
2. )Test the extensions (quantity times cost/unit) and foot the total.
3. )Perform lower of cost or market analysis. Might calculate the inventory turnover ratio to identify slow-moving inventory.

Question 2

How might the auditor address the rights and obligations assertion for inventory?

Answer 2

Inquire of management about any inventory held on consignment or pledged as collateral. The auditor might also read the entity’s debt agreements for any discussion of collateral, such as inventory.

Question 3

Describe how the auditor might address the completeness assertion for inventory.

Answer 3

1. )Test sales cutoff (regarding cost of goods sold, decreases to inventory)
2. )Test purchases cutoff (regarding purchases of inventory).

Question 4

Describe the basic steps associated with the auditor’s participation in an entity’s physical count of inventory.

Answer 4

1. )Review and evaluate the entity’s written counting procedures.
2. )Perform test counts for selected count tags to compare to client counts.
3. )Determine that all inventory tags are properly accounted for
4. )Be alert for and inquire about any obsolete or damaged items.

Question 5

Describe how the auditor might address the existence assertion of for inventory in the entity’s possession.

Answer 5

Participate in the client’s count of inventory, and perform test counts of selected inventory tags to verify the accuracy of the entity’s counts. (Select a sample of items on the entity’s inventory listing and agree them to the auditor’s test counts.)