This means that they will discuss the counting procedure with you, observe counts as they are being done, test count some of the inventory themselves and trace their counts to the amounts recorded by the company's counters, and verify that all inventory count tags were accounted for.
If you have multiple inventory storage locations, they may test the inventory in those locations where there are significant amounts of inventory. They may also ask for confirmations of inventory from the custodian of any public warehouse where the company is storing inventory. Reconcile the inventory count to the general ledger. They will trace the valuation compiled from the physical inventory count to the company's general ledger , to verify that the counted balance was carried forward into the company's accounting records.
Test high-value items. If there are items in the inventory that are of unusually high value, the auditors will likely spend extra time counting them in inventory, ensuring that they are valued correctly, and tracing them into the valuation report that carries forward into the inventory balance in the general ledger.
Test error-prone items. If the auditors have noticed an error trend in prior years for specific inventory items, they will be more likely to test these items again.
Test inventory in transit. There is a risk that you have inventory in transit from one storage location to another at the time of the physical count. Auditors test for this by reviewing your transfer documentation. Test item costs. The auditors need to know where purchased costs in your accounting records come from, so they will compare the amounts in recent supplier invoices to the costs listed in your inventory valuation.
Review freight costs. You can either include freight costs in inventory or charge it to expense in the period incurred, but you need to be consistent in your treatment - so the auditors will trace a selection of freight invoices through your accounting system to see how they are handled.
Test for lower of cost or market. The auditors must follow the lower of cost or market rule , and will do so by comparing a selection of market prices to their recorded costs. Determine when and if the adjustments were capitalized or expensed and if they were approved. Examine supporting documentation for each item individually greater than 2. Obtain, review, and document policies and procedures surrounding cycle counts. Based solely on the work performed, document observations regarding the physical security of inventory.
Document procedures for developing current year standards raw material, labor, and overhead and the date of the most recent development. Recalculate based on available information 3.
On a sample basis, examine the method and accuracy of recording standard to actual variances. As of our audit date, obtain explanations for standard to actual variances greater than the budgeted amount. Examine entries to record variances and document whether the variances were capitalized or expensed.
For facilities not using a standard costing system, perform the following: 4. Document procedures for developing current year labor and overhead amounts. Examine minimum of 30 recent invoices supporting raw materials, and the raw material component of WIP and FG. Document results by quantifying unit cost variances and extrapolating to population. Recalculate labor and overhead calculations and compare to amounts capitalized.
Document limitations in ability to recalculate. Inventory Reserves 1. Based on ACL reports, document inventory greater than , , and days.
Document method for estimating reserve for excess and obsolete inventory. Agree significant components to supporting documentation. Document inconsistencies, if any, between the calculation and aging analysis. Ensure authorized persons adequately approve provisions or write-offs.
Review for evidence of approval of inventory write-offs before they are recorded. Consignment Inventory 1. Document policies and procedures for consigned inventory. Document compliance with Corporate Policy on consigned inventories. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy. To browse Academia. Log in with Facebook Log in with Google.
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