Substantive Testing Inventory

Basic Overview

1. Cost * Quantity

2. Cost procedures

– Agreeing cost to invoices/purchase agreements

– Applying the appropriate costing methology

– Valuation concerns

• Excess or

• Obsolete

3. Quantity procedures

– Cut-off testing (purchase and sales)

– Physical inventory observation

Inventory Observation: E / C

1. Validate the recorded inventory quantities

[existence]

2. Validate that all inventory on hand is recorded

[completeness]

Speaking w/ Management

1. Speak with senior understand:

– requirements for counting (boxes, rolls, tanks, etc.),

– necessary information to provide to corporate team

2. Obtain listing of inventory for the location

3. Tour the facility, observe quality and condition of inventory, and see all places to be counted.

4. Ask the tour guide about the inventory and company’s operations.

5. Also, insight into possible excess and obsolete inventory [valuation]

6. Observe and validate the client’s counting process [test of control]

7. Re-count a sample of inventory

– Sheet to floor – from client’s inventory records (sheet) to actual inventory (floor) – to validate the inventory really does exist

– Floor to sheet – from client’s actual inventory to their inventory records - to validate that the records are complete

8. Discuss any differences with senior and management

9. Obtain information (final listing) to validate cut-off and the final counts

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