INVENTORIES REVISED

What should the auditor review regarding the inventory count plan?

The auditor should review the entity's plan for performing the inventory count to ensure proper procedures are in place.

What should be ensured regarding consigned goods during an inventory audit?

Ensure that consigned goods are segregated from the entity's inventory.

Why should the auditor participate in the inventory count?

To observe the count process, verify adherence to the plan, and ensure proper tagging and supervision.

What should test counts by the auditor include?

Observing employee adherence to the plan; ensuring proper tagging and amounts on tags; reconciling test counts with tags and summary sheets; summarizing and agreeing on discrepancies with client personnel.

What precautions should the auditor take during the inventory count?

Stay alert for empty boxes, obsolete items, and ensure proper cut-off testing of shipping and receiving documents.

What should be done for inventory not on the entity's premises?

Confirm or investigate inventory held by third parties, particularly for goods involved in job work processes.

What should the auditor do about significant differences between physical stock and book records?

Investigate discrepancies and have stock count sheets signed by the entity's personnel to agree on variances.

When should a periodic inventory count be performed?

At the end of the reporting period.

What is the approach for perpetual inventory systems?

Inventory may be counted at interim dates, provided proper and adequate records are maintained.

What analytical procedures should the auditor perform to check inventory completeness?

Compute inventory turnover ratio (COGS/Average inventory); perform vertical analysis (inventory/total assets); compare budgetary expectations to actual results.

What non-financial information should the auditor examine for inventory completeness?

Weights, measurements, and other physical attributes of inventory.

What is the purpose of purchase and sales cut-off tests in inventory audit?

To ensure that inventory transactions are recorded in the correct accounting period.

How should the auditor check tagged inventory for completeness?

Test for omitted and invalid transactions related to tagged inventory.

What should the auditor verify in inventory listings?

Clerical and arithmetical accuracy.

How should physical inventory amounts be reconciled?

Reconcile physical counts with perpetual records and the general ledger.

What documents should the auditor vouch recorded purchases against?

Purchase requisition, purchase order, receiving report, vendor invoice, and payment file.

How should the auditor evaluate consigned goods?

Examine consignment and sales agreements to ensure ownership rights.

What should the auditor check in client correspondence and purchase documents?

Evidence of ownership and existence of collateral agreements.

What must invoices demonstrate for inventory ownership verification?

The invoices should be in the entity’s name.

What confirmation is required for third-party inventory?

Obtain a declaration from the third party on their letterhead, signed by authorized personnel, confirming inventory ownership and custody.

What agreements should the auditor review for inventory rights?

Consignment agreements and material purchase commitments.

What are the commonly used inventory valuation methods?

FIFO (First-In-First-Out) and Weighted Average. The auditor must ensure the method used is reasonable.

What cost elements should be included for raw materials and consumables?

Carriage inward, non-refundable duties, etc.

How should standard costs for raw materials be verified?

Understand the basis of standards, verify variances, and compare with actual costs.

How should cost prices for raw materials be checked?

Compare them against purchase invoices received prior to inventory counting.

How should damaged or obsolete raw materials be valued?

Establish a realistic net realizable value (NRV).

What should the auditor understand about WIP measurement?

The stages of production and the basis for any estimates.

What cost elements should be included in WIP?

Include overheads and compare with financial and costing data.

How should material costs in WIP be verified?

Exclude abnormal wastage.

What costs should be included for finished goods?

Ensure overheads are based on normal costs.

How should inventories be valued if the NRV is lower than the cost?

Inventories should be valued at net realizable value (NRV).

How should obsolete or damaged inventory be followed up?

Assess the realizable value and confirm adjustments in valuation.

What should be done to verify replacement costs for inventory?

Compare recorded costs with current replacement costs and vendor price lists.

How can inventory turnover ratio help identify obsolete inventory?

Low turnover ratios may indicate obsolete or slow-moving inventory.

What must be ensured regarding overhead allocation?

Ensure only direct labor, direct materials, and reasonable overheads are included.

How should the lower-of-cost-or-NRV principle be applied?

Verify that inventories are valued at the lower of cost or net realizable value.

What classifications are required under Schedule III of the Companies Act, 2013?

Inventories should be classified as Raw materials, Work-in-progress, Finished goods, Stock-in-trade, Stores and spares, Loose tools, Others (specify nature).

How should goods-in-transit be disclosed in inventory?

They should be disclosed separately under each sub-head of inventory.

What must be stated about the valuation of inventory?

The mode of valuation must be disclosed.