Inventory Cycle

Question 1

General Audit Procedures over Inventory Accrual

Answer 1

• Obtain a schedule of the accrual account and the Inventory in transit account. Cast and cross cast to ensure it is mathematically accurate. (ACCURACY)
• Agree the opening balance for the accrual and Inventory in transit account to the closing balance in last year’s working papers. (COMPLETENESS AND ACCURACY)
• Trace the amount per the schedule to the trial balance to ensure it is complete and accurate. (COMPLETENESS AND ACCURACY)

Question 2

Audit Procedures for Accrual for settlement discounts:

Answer 2

1. Select a sample of open accruals (not yet reversed due to paylent)
   - Agreement the terms for the debtor to whom they relatr to the discount agreement. (EXISTENCE)
   - Inspect the agreement to ensure it has been signed by both parties. (EXISTENCE)
   - Agree the details per the agreement to the discounts captured in the debtor’s masterfile. (COMPLETENESS)
   - Obtain the invoice on which the accrual has been calculated and recalculate the value of the discount. (VALUATION). Then agree this to the amount recored and follow up on any differences obtaining corroborate evidence to support any explanations.
2. Trace the value for the accrual to the financial statements to ensure that the amount is offset against the trade receivables balance and NOT SHOWN as an accrual liability. (CLASSIFICATION)
3. Obtain a sample of debits to the accrual accounts and:
   - Agree the settlement of the invoice to the bank statement.
   - The difference between the cash received and invoice value should equal the amount of the debit. (VALUATION)
   - If this is not so follow up on such differences obtaining corroborative evidence to support ant explanations.

Question 3

Audit Procedures over Inventory in transit:

Answer 3

1. Obtain the Inventory in transit age analysis to identify any slow moving Inventory in transit. Obtain reasons as to why it has taken so long for the Inventory to be delivered and obtain corrobartive evidence to support any such reasons. (VALUATION, COMPLETENESS AND EXISTENCE)
2. During the stock count for the year, the existence of this Inventory should be confirmed by counting the Inventory in transit as part of the stock count procedures. (EXISTENCE)
3. Inspect the account post financial year end to ensure that all inventories in transit have been cleared as Inventory been delivered. This will ensure the transaction is recorded in the correct period. (COMPLETENESS)

Question 4

Describe the audit approach to audit Inventory making use of nature:

Answer 4

• Due to the nature of Inventory being complex as it is produced from complicated manufacturing process, there is an increased inherent risk of errors.

NATURE
1. The manufacturing process is highly automated with a highly automated accounting system. As a result there is the necessity to rely on application controls due to such automation.
2. As the automated system appears to have controls at regular intervals there is the possibility to rely on controls.
3. Based on volume. If the volume of transactions around Inventory is high, it increases the necessity to rely on controls as high volumes of transactions CANNOT BE TESTED SUBSTANTIVELY without causing a significant constraint on resourcing and the sufficiency and appropriateness of the audit evidence obtained. CAATS can be made use of in order to substantively test a greater sample of the population.
4. As reliance on controls that operate effectively reduces the sample sizes and substantive audit work that is required to be performed, there is always the desirability to test controls over Inventory.
5. Discuss the design and state if it is designed appropriately.
6. Always mention findings as per the working paper such as:
- abnormal losses being incorrectly capitalized by the Inventory management system.
- Payroll variances are not allocated to the cost of Inventory and such error is not reported by the system.
- The system does not assess the reasonability of the nature of overheads being allocated.

Question 5

Describe the audit approach to audit Inventory making use of timing:

Answer 5

• The substantive tests related to he valuation of Inventory will attract large sample sizes as controls cannot be relied upon.
• Audit deadline is tight and a large sample size will require that tests of details over the assertion will need to be performed before year end.
• A roll forward of testing will be performed for the remaining months to financial year end. This will ensure that sufficient time is provided to obtain sufficient and appropriate audit evidence.
• With regard to the existence and completeness of inventory,
  the stock count at financial year end will need to be attended. This will confirm the existence and completeness of the inventory balances at financial year end.

Question 6

Describe the audit approach to audit Inventory making use of extent:

Answer 6

With regard to the valuation of inventory, as the nature of
procedures is purely substantive, the sample sizes for tests of
details will be large.

With regard to existence and completeness of inventory, as
controls can be relied upon, this will reduce the sample sizes
for tests of details with regard to these assertions.

Question 7

RoMM for existence, completeness and rights to inventory:

Answer 7

EXISTENCE
1. There is a risk of misappropriation of inventory (due to theft by warehouse staff/external parties) which may result in inventory being overstated.

2. There is a risk that inventory is fraudulently overstated to increase the asset balance as management may have an incentive to present a more favourable position to meet shareholder expectations given the negative performance of the business.
3. Inventory in transit from foreign suppliers may be incorrectly accounted for as risks and rewards may not yet have transferred to the entity resulting in an overstatement of inventory.
4. There is a risk that inventory is fraudulently overstated as there are new auditors and management may have an opportunity to overstate the asset balance (Because the auditors are not up to date with the clients’ controls
   system) to have a more favourable financial position.

RIGHTS
There is a risk that inventory is pledged as collateral against loans or advances and that entity does not hold the right to that stock.

There is a risk that stock held on consignment is inappropriately recorded as part of the entity’s inventory balance or that the red sticker is removed, and the stock is scanned into the system and inappropriately recorded despite the entity not having the rights to the stock which overstates the inventory balance.

INVENTORY (Completeness)

Risk that all costs are not included when importing resulting in inventory being understated (completeness).

There may also be items in transit which are not accounted for resulting in inventory not being complete (completeness)

Risk that as the entity’s manufactures items, not all costs attributed to the production process are capitalised.

Question 8

Test of Control for
Warehouse staff can only gain entry through turnstiles using their staff cards.

Answer 8

1. Attempt to access the warehouse with a non-warehouse staff member card and ensure that the turnstiles do not allow entry without a valid access card.
2. Obtain an access report of all entries into the warehouse and extract a log of all unauthorized access or access with inappropriate credentials and follow up with management on these discrepancies.

Question 9

Test of Control for
The warehouse clerk will inspect the quality and quality of items received and the clerk will then sign the delivery note.

Answer 9

1. Select a sample of delivery notes and inspect that they have been appropriately signed by the warehouse clerk.
2. Observe the warehouse clerk at the different times in the year checking the quantity and quality of items .

Question 10

Test of Control for
A person compares the details per the signed delivery note to the details scanned to identify any discrepancies and signs as evidence of review.

Answer 10

Select a sample of delivery notes and compare this to the items scanned for the applicable delivery note and if there are any differences inspect that it was followed up on the difference and it has been resolved in a week.

Question 11

Test of Control for
The system automatically calculates the weighted average cost of stock and updates the costing of stock recorded in the general ledger.

Answer 11

Using test data process are transaction and confirm that thr weighted cost of the system is updated.

Question 12

Test of Control for
The weighted average cost is reviewed once a month by the financial director.

Answer 12

Select a sample of months and inspect that the Financial Manager reviewed the weighted cost and signed as evidence of review.

Question 13

Test of Control for
The system produces a stock aging provision report and a NAV assessment report on a monthly basis which is reviewed and actioned by the Financial Director.

Answer 13

Select a sample of stock ageing/NTV Reports and confirm that this has been appropriately reviewed by the financial director.

Question 14

Test of Control for
Stock on consignmenthas a red sticker placed on the arcade to ensure consignment stock is separately recorded on the system at a value of NIL.

Answer 14

Obtain a sample of consignment stock and inspect for a red sticker on the barcode to ensure it has been identified as consignment stock and trave to the system to confirm it is recorded as Nil.

Question 15

Payroll Testing
Discuss Nature:

Answer 15

Nature of testing:
- It is not clear why the decision to follow a fully substantive approach was followed as this is not evident from the working paper.

Question 16

List the documents used in the inventory cycle:

Answer 16

• goods received note
• materials requisition, material issue note
• manufacturing or production schedule
• job cards
• production report
• costing schedule
• transfer to finished goods notes
• picking slip and delivery note
• inventory sheet
• inventory tag
• inventory adjustment form

Question 17

Why do a year-end inventory count?

Answer 17

For companies who do not operate perpetual inventory systems, the only way of ascertaining a closing inventory figure is to physically count the inventory and the to price it.

Question 18

What is required in order to have a successful count?

Answer 18

Planning and Preparation
This must take place timeously and should cover:
- date and time of count
- supervision
- preparation of warehouse
- locating all locations and categories of inventory

Design of stationery
- inventory sheets should be adjustment forms

Written instructions
- method of counting used as well as counting teams and designated counting areas.
- identification of slow moving or damaged inventory as well as any goods on consignment.

Question 19

When should cycle counts take place?

Answer 19

Every three months including year end and possibly on weekends in order to have no distractions or interference such as deliveries and dispatches.

Question 20

What Accounting standard is applicable to inventory?

Answer 20

IAS 2 and ensure that inventory is measured at the lower of cost or net realisable value.

Question 21

Fraud in the inventory cycle:

Answer 21

• includes fictitious inventory (EXISTENCE) This would increase profits and improve related ratios.
• understate the write-downs of inventory for obsolescence, damage, etc. (VALUATION)
• exclude inventory that should have been in ludee or overstate inventory wrote-downs (EXISTENCE and VALUATION) This has the opposite affect and will only occur when the directors are trying to make the company look less valuable.

Question 22

How to alter inventory counts:

Answer 22

• include empty containers in the count
• hollow stacking
• attaching an empty container to the shelf to make it appear heavy
• packing bricks into empty containers or packaging.
• repacking defective or second hand goods to look like new inventory.
• borrowing inventory from related party just for the stock count.
• including consignment inventory which belongs to others as yours.
• manipulating year end “cut-offs” of purchases and sales.

Question 23

Substantive procedures over Inventory count:

Answer 23

• observe inventory taking procedures to ensure that the clients written instructions are adhered to.
• walk through the warehouse and identify inventory that is damaged or obsolete. The inventory number, description, location and quantity should be recorded on a workplace and traced to the inventory sheets to confirm that items have been marked as such.
• resolve discrepancies in test counts before conclusion of the count by recounting with th3 client staff and confirming the ammendments are made to the inventory sheets where necessary.

-inspect the inventory sheets to confirm that:
1. Lines have been drawn through blank spaces.
2. All corrections have been signed.
3. Inventory sheet have been signed by the counters responsible.

Compile a list of goods received notes that have not been matched to supplier invoices.

Question 24

Substantive procedures to audit the value of finished goods

Answer 24

Inventory count sheets

Recalculate the value of individual items on the final inventory list
by multiplying the quantity with the unit price, cast the final inventory list.

Agree the total of the final inventory list (audited) to the balance of the inventory control account in the general ledger and the trial
balance.

Perform standard analytical tests, including comparisons with
previous years’ figures and calculating the inventory turnover and gross profit percentages. Obtain acceptable explanations for
deviations identified.

Perform an analytical procedure to identify slow moving stock by comparing this year’s monthly purchases with this year’s monthly sales and in the months where the movement of purchases does not correlate similar movement in sales, perform a detailed analysis thereof to compare the selling price on the approved price list with cost price on the inventory list to identify instances where the cost price is higher than the selling price.

Determine through enquiries from management and the sales staff, as well as by inspection of the minutes and correspondence files, whether any of the inventory items are subject to special sales conditions/offers.

Confirm the selling prices by inspecting a number of sales invoices before year end with the selling prices on invoices after year end to determine that the selling prices did not drop.

Where selling prices are lower than cost prices, request management to make the required adjustment to net realisable value (if material).

Confirm through inspection of the previous year’s financial statements that the accounting policy with regard to inventory is applied consist

Obtain the production records and the formula for the finished goods. Match the formula with that of the previous year for consistency and obtain explanations for deviations.

Cast the formula costing records and agree the unit price of a trailer to the cost price reflected on the finished goods inventory list.

Perform the following test on the formula costing records:
Raw material component:
⁃ Compare the component codes and unit prices as reflected in the formula costing records with the codes and unit prices reflected in the raw material inventory list to ensure that they are the same.

Trace unit price to the relevant supplier’s invoices to establish whether the correct prices have been used in terms of the FIFO cost formula.

Labour component
Confirm the allocated labour costs with the approved wages
information received from the wages department.

= Agree the hourly rate in the formula costing records with the hourly wage rate
in the wage records and actually paid.

Question 25

Substantive procedures over finished goods (overheads)

Answer 25

⁃ Confirm the allocated manufacturing overheads with the approved allocation basis and the use of accurate information pertaining to normal operating capacity. ⁃ Evaluate the manufacturing overheads allocation basis, includ- ing the periodic changes to this basis, for reasonableness and discuss with the financial manager if required. Inspect the inventory count sheets and the inventory records for possible obsolete inventory. Discuss with management the possibility of a provision for obsolete inventory. Obtain a management representation letter with regard to the inventory value as at year end

Question 26

Substantive procedures over finished goods (overheads)

Answer 26

⁃ Confirm the allocated manufacturing overheads with the approved allocation basis and the use of accurate information pertaining to normal operating capacity. ⁃ Evaluate the manufacturing overheads allocation basis, including the periodic changes to this basis, for reasonableness and discuss with the financial manager if required. Inspect the inventory count sheets and the inventory records for possible obsolete inventory. Discuss with management the possibility of a provision for obsolete inventory. Obtain a management representation letter with regard to the inventory value as at year end

Question 27

Which source documents are required for warehousing?

Answer 27

1. Goods received note Created to confirm that the ordered items have been received. They may include details such as date received, quantity received, recipient's signature, and the condition of the goods. 2. Raw material transfer note This records when inventory is moved from one location to another for instance the movement from the warehouse to production. 3. Picking slip In the event where customers are purchasing goods, a picking slip may be created as part of the ordering process. The picking slip is then sent to the warehousing department, with a copy of the internal sales order, so that goods can be prepared for shipping. Refer to revenue and receivables cycle.

Question 28

Which source documentsbare required for production?

Answer 28

1. Production schedule The schedule is used to inform the production/manufacturing department as to what is to be produced. 2. Raw material transfer note: This records when inventory is moved from one location to another for instance the movement from the warehouse to production. 3. Transfer to finished goods note: This document records the transfer of manufactured goods from the production department into the finished goods stores. 4. Costing Schedules A costing schedule is used to identify and quantify all the costs which it is anticipated will be incurred in manufacturing the company’s products.

Question 29

Which source documents are used in the finished goods storage?

Answer 29

Transfer to finished goods note: This document records the transfer of manufactured goods from the production department into the finished goods stores.

Question 30

Controls over the risk of theft of inventory:

Answer 30

Cameras should be placed in the warehouse to deter theft from occurring. Routine inventory counts should be performed to identify missing inventories. Physical access controls should be implemented in the warehouse to prevent unauthorised access. The raw materials storage area should have access controls only allowing certain warehouse staff access to the area.

Question 31

Controls over the risk of theft of inventory:

Answer 31

Cameras should be placed in the warehouse to deter theft from occurring. Routine inventory counts should be performed to identify missing inventories. Physical access controls should be implemented in the warehouse to prevent unauthorised access. The raw materials storage area should have access controls only allowing certain warehouse staff access to the area.

Question 32

Controls over damaged inventory:

Answer 32

Physical access controls that would prevent inventory from getting damaged such as anti-moisture controls or fire extinguishers should be present to ensure inventory does not get damaged.

Question 33

Controls over raw materials being transferred at incorrect quantities.

Answer 33

The company should have an approved inventory production schedule specifying the quantity of raw materials required to be released into production. A raw materials transfer note should be prepared off the back of the production schedule specifying the quantity of goods transferred. Before the goods are moved from the raw materials storage area the quantity picked should be agreed to the physical quantity to be transferred and the transfer note signed as evidence of such review. The quality of the raw materials should also be checked.

Question 34

Controls over the transfer of raw materials may not be accurately recorded in the accounting system:

Answer 34

Once raw materials are transferred into production the signed raw materials note should be given to the inventory clerk so that the transfer is recorded correct.

Question 35

Define the financial reporting objectives:

Answer 35

Cost Variance Control - Regularly monitor and analyse cost variances, investigate discrepancies, and implement corrective actions to stay within budgeted costs. Operational Budget Adherence - Monitor expenditures, control costs, and adjust production plans as needed to align with budgetary constraints. Product Costing Accuracy - Ensure accurate and reliable product costing for better decision-making and accurate financial reporting.

Question 36

Controls over excess production of goods:

Answer 36

The company will have a production schedule established based on some form of scientific method for manufacturing goods. This could include EOQ (Economic order quantity) considerations or consumer demand expectations.

Question 37

Controls over insufficient production of goods:

Answer 37

The company will have a production schedule established based on some form of scientific method for manufacturing goods. This could include EOQ (Economic order quantity) considerations or consumer demand expectations.

Question 38

Controls over failure to monitor actual versus budgeted costs

Answer 38

On a monthly basis the financial manager and production monitor should perform a variance budget to analyse the differences in spending. Such variance report should be analysed by senior management and signed as evidence of review.

Question 39

Controls over the incorrect mix of raw materials could be used in the production process

Answer 39

The production schedule should specify the correct quantities to be used in the production process. Before production commences, the production staff should agree the quantities of raw materials received to the production schedule to ensure the correct mix of raw materials is used.

Question 40

Controls over Incorrect allocation of costs (overheads and labour)

Answer 40

The production manager should prepare monthly production cost allocation schedules and review whether the labour and overheads allocated are accurate and valid. In instances where the allocations are not valid the manager should remove such cost allocation from the schedule. A reconciliation should be prepared on a monthly basis by the inventory clerk the production cost allocation schedule to the budgeted production schedule to ensure that correct and valid allocations have occurred. The financial manager should review such reconciliation and sign as evidence of review.

Question 41

Controls over Transfers from raw materials to WIP and WIP to finished goods may not be recorded

Answer 41

Once raw materials are transferred into finished goods the transfer note should be given to the inventory clerk so that the transfer is recorded correctly.

Question 42

Controls over risks of stolen finished goods

Answer 42

Cameras should be placed in the warehouse to deter theft from occurring. Routine inventory counts should be performed to identify missing inventories. Physical access controls should be implemented in the warehouse to prevent unauthorised access. The finished goods storage area should have access controls only allowing certain warehouse staff access to the area.

Question 43

Controls over finished goods being damaged

Answer 43

Physical access controls that would prevent inventory from getting damaged such as anti-moisture controls or fire extinguishers should be present to ensure inventory does not get damaged.

Question 44

Controls over Finished goods transferred out of production’s movement is not recorded in the accounting system.

Answer 44

A finished goods transfer note should be prepared when goods are transferred out of production by production staff. This document should be given to the inventory clerk who will process the journal entry specifying the goods transferred to finished goods.

Question 45

Inherent risks which may occur to inventory:

Answer 45

Risk that inventory is stolen and is still recorded as inventory resulting in inventory being overstated. Risk that inventory gets damaged and loses value and is not written down resulting in inventory being overstated The raw materials/ finished goods transferred may not be recorded or accurately recorded resulting in inventory categories being recorded at the incorrect amounts. The incorrect mix of raw materials could be used in the production process this may result in inferior quality products and if inventory is not correctly written down it will be overstated. Incorrect allocation of costs (overheads and labour) - This could result in incorrect costing of products which may result in inventory being recorded at incorrect amounts. (VALUATION, ALLOCATION AND ACCURACY) Excess production of goods. - This could result in a build of inventories for which there is no demand leading to inventory that needs to be written down. If inventory is not written down it will be result in overstatement. (VALUATION, ALLOCATION AND ACCURACY) Risk that inventory that is imported is recorded at the incorrect rate resulting in inventory being overstated. (VALUATION, ALLOCATION AND ACCURACY) Risk that not all costs related to inventory are included per IAS 2 which may result in inventory being understated. (COMPLETENESS)

Question 46

Examples of Control risks:

Answer 46

Warehousing – Routine inventory counts over raw materials on hand. Warehousing – Discrepancies are recorded in the accounting records so that the physical quantities reconcile to stock in the system. Production and costing – Raw materials are automatically allocated to production on the accounting system (Dr: WIP/Cr: Raw materials). Finished goods storage – Physical access controls restricting unauthorised access.

Question 47

What to do prior to inventory count:

Answer 47

Prior to the inventory count Prior to the inventory count the auditor should do the following: Liaise with the client about date and times of the inventory count. Confirm all locations at which the client holds inventory (by enquiry, reference to prior year workpapers) and if necessary, visit the locations. Perform administrative planning, for example organise with the staff planner for audit staff to attend. Obtain and review a copy of the written instructions given to the client’s count teams – ISA 501 para 4(a)(i). Enquire as to whether the client has any inventory which should not be included in the count, for example consignment inventory, inventory already invoiced but not yet delivered or collected. Establish how this inventory is physically identified by the client. Have a meeting with the audit staff allocated to the count and explain their responsibilities.

Question 48

What to do during the inventory count:

Answer 48

During the inventory count, the following needs to be implemented: Observe inventory-taking procedures to ensure that the client’s written instructions are adhered to. ISA 501 para 4(a)(ii). Walk through the warehouse and identify inventory that is obsolete or damaged or appears to be slow-moving, for example dusty, old, broken packaging, etc. ISA 501 para 4(a)(iii) The inventory number, description, location and quantity should be recorded on a workpaper and traced to the inventory sheets to confirm that these items have been marked as damaged/obsolete. Conduct test counts on the inventory in the warehouse in both directions, making sure all sections and categories are tested as follows ISA 501 para 4(a)(iv): from inventory sheets to physical inventory (existence) from physical inventory to inventory sheets (completeness). Resolve discrepancies in test counts before the conclusion of the count by recounting with the client staff and confirming that amendments are made to the inventory sheets where necessary. Confirm by enquiry of the client’s inventory counters and inspection of the inventory sheets that inventory, which should not be included in the client’s inventory, has been excluded e.g: consignment inventory and inventory already invoiced but not yet delivered or collected.

Question 49

What to do when concluding the count:

Answer 49

At the conclusion of the inventory count, the auditor should do the following: Inspect inventory sheets to confirm that: lines have been drawn through blank spaces (so that items cannot be added) alterations/corrections have been signed and inventory sheets have been signed by the client's responsible counters Create audit working papers in respect of the inventory count attendance by: taking copies of all inventory sheets (hardcopy or electronic) recording the client’s count procedures by observing these procedures recording results of all test counts performed by the audit team recording any damaged, obsolete or slow-moving inventory Record cut-off numbers for all documents used in the inventory and production cycle. Compile a list of goods received notes which have not been matched to supplier invoices.

Question 50

What to do when concluding the count:

Answer 50

At the conclusion of the inventory count, the auditor should do the following: Inspect inventory sheets to confirm that: lines have been drawn through blank spaces (so that items cannot be added) alterations/corrections have been signed and inventory sheets have been signed by the client's responsible counters Create audit working papers in respect of the inventory count attendance by: taking copies of all inventory sheets (hardcopy or electronic) recording the client’s count procedures by observing these procedures recording results of all test counts performed by the audit team recording any damaged, obsolete or slow-moving inventory Record cut-off numbers for all documents used in the inventory and production cycle. Compile a list of goods received notes which have not been matched to supplier invoices.

Question 51

Substantive procedures over rights:

Answer 51

Obtain a listing/schedule of inventory of goods(inventory) in transit at the financial year-end and inspect relevant orders/ contracts to determine whether ownership has passed to the client by inspection and investigation of the terms of purchase, for example: Free On Board (FOB), Cost Insurance and Freight (CIF). Establish whether inventory is in any way encumbered (e.g. offered/held as security) by: inspection of bank confirmations review of directors’ minutes of meetings review of correspondence/contracts/documentation with suppliers and credit providers.

Question 52

Accuracy, Valuation and allocation examples

Answer 52

Accuracy, valuation and allocation *General procedures* Obtain the inventory schedule and cast and cross-cast the schedule to confirm mathematical accuracy. Compare the opening balance to prior year’s audited AFS to confirm the balances agree. Compare the closing balance to the trial balance to confirm the balances agree. ATT’s can be used for the following: Extract a report of any negative prices or quantities to identify inventory incorrectly recorded. Test the arithmetical accuracy of the inventory schedule by using to reperform all extensions (quantity x cost) and to cast the extension column (total inventory value) and compare to management amount to identify variances *NRV testing* Extract a report where cost > NRV to identify inventory that may need to be written down. Compare the selling price to sales list and recent sales invoice to ensure the NRV used is appropriate. Local inventory purchases Using a sample selected for inventory items Trace to relevant suppliers invoices to establish whether the correct purchase prices have been used Reperform the weighted average calculation (assuming this basis is used by the client) and compare result to the weighted average price used by the client. Inspect that the costs included are those allowed per IAS 2 and do not relate to for instance costs not related to production. Inspect that VAT has been excluded from the cost of inventory. Imported inventory purchases For a sample of imported items: Obtain the exchange rate from a reputable institution e.g. bank. Recalculate the conversion by taking the foreign amount * exchange rate. Compare to management calculation to identify any differences. Inspect the shipping agent documents and inspect that the appropriate import and customs duties and shipping charges were included. Imported inventory purchases For a sample of imported items: Obtain the exchange rate from a reputable institution e.g. bank. Recalculate the conversion by taking the foreign amount * exchange rate. Compare to management calculation to identify any differences. Inspect the shipping agent documents and inspect that the appropriate import and customs duties and shipping charges were included Manufactured inventory Inspect documentation used in the costing process to gain an understanding of the costing method used and determine whether it is consistent with prior years and if the method is appropriate for the entity. By inspection of the costing schedules and supporting documentation: agree description of materials used and prices agree labour costs to payroll records (rates and hours charged) verify that the allocation of overheads includes only fixed and variable production overheads verify that the allocation of overheads is based on normal capacity verify that the allocation of overheads is on a systematic basis which is reasonable. verify that costs which do not qualify as costs of conversion have not been included e.g.: administration overheads, selling expenses, abnormal amounts of wasted material, labour or other production costs. Manufactured inventory Obtain an understanding of management’s process to determine the obsolescence allowance and evaluate the process for reasonableness and consistency with prior years. Complete the following analytics to understand if management’s allowance appears to be reasonable: the allowance as a percentage of the total inventory inventory turnover ratio days inventory on hand Compare allowances raised in prior years to actual write-offs in subsequent years (to determine the “accuracy” of management’s allowances. ATT’s can be used for the following: Extract a report of inventory that has an opening balance but no movement. Extract a report of inventory items which have a quantity on hand but where the “date of last sale” is prior to the last six months. Review working papers from year-end test counts to ensure that inventory items identified as damaged/obsolete have been included in the allowance. Reperform any calculations on the inventory obsolescence allowance and discuss the reasonableness of management’s allowances in terms of evidence gathered. *Completeness and existence* Refer to procedures covered under the inventory count. *Presentation and disclosure* The auditor must inspect the financial statements to confirm that: inventories appear as a separate line item under current assets on the face of the statement of financial position (net of impairments) the disclosure in the notes reflects inventories before and after impairment allowances, as well as any other required information, for example encumbrances accounting policy cost formula reversals of any previous inventory write-downs cost of inventories recognised as an expense and included in cost of sales. inventories have been correctly broken down into raw materials, WIP and finished goods (as applicable to the entity).