INVENTORIES REVISED

Here are the flashcards based on the existence of inventory audit procedures:

INVENTORIES REVISED

Verification of Inventory Existence

1. Q: What should the auditor review regarding the inventory count plan?
   A: The auditor should review the entity's plan for performing the inventory count to ensure proper procedures are in place.

2. Q: What should be ensured regarding consigned goods during an inventory audit?
   A: Ensure that consigned goods are segregated from the entity's inventory.

3. Q: Why should the auditor participate in the inventory count?
   A: To observe the count process, verify adherence to the plan, and ensure proper tagging and supervision.

4. Q: What should test counts by the auditor include?
   A:

   • 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.

5. Q: What precautions should the auditor take during the inventory count?
   A: Stay alert for empty boxes, obsolete items, and ensure proper cut-off testing of shipping and receiving documents.

6. Q: What should be done for inventory not on the entity's premises?
   A: Confirm or investigate inventory held by third parties, particularly for goods involved in job work processes.

7. Q: What should the auditor do about significant differences between physical stock and book records?
   A: Investigate discrepancies and have stock count sheets signed by the entity's personnel to agree on variances.

8. Q: When should a periodic inventory count be performed?
   A: At the end of the reporting period.

9. Q: What is the approach for perpetual inventory systems?
   A: Inventory may be counted at interim dates, provided proper and adequate records are maintained.

Here are the flashcards based on Completeness and Rights audit procedures for inventory:

Flashcards

Completeness of Inventory

1. Q: What analytical procedures should the auditor perform to check inventory completeness?
   A:

   • Compute inventory turnover ratio (COGS/Average inventory).

   • Perform vertical analysis (inventory/total assets).

   • Compare budgetary expectations to actual results.

2. Q: What non-financial information should the auditor examine for inventory completeness?
   A: Weights, measurements, and other physical attributes of inventory.

3. Q: What is the purpose of purchase and sales cut-off tests in inventory audit?
   A: To ensure that inventory transactions are recorded in the correct accounting period.

4. Q: How should the auditor check tagged inventory for completeness?
   A: Test for omitted and invalid transactions related to tagged inventory.

5. Q: What should the auditor verify in inventory listings?
   A: Clerical and arithmetical accuracy.

6. Q: How should physical inventory amounts be reconciled?
   A: Reconcile physical counts with perpetual records and the general ledger.

Rights of Inventory

7. Q: What documents should the auditor vouch recorded purchases against?
   A: Purchase requisition, purchase order, receiving report, vendor invoice, and payment file.

8. Q: How should the auditor evaluate consigned goods?
   A: Examine consignment and sales agreements to ensure ownership rights.

9. Q: What should the auditor check in client correspondence and purchase documents?
   A: Evidence of ownership and existence of collateral agreements.

10. Q: What must invoices demonstrate for inventory ownership verification?
    A: The invoices should be in the entity’s name.

11. Q: What confirmation is required for third-party inventory?
    A: Obtain a declaration from the third party on their letterhead, signed by authorized personnel, confirming inventory ownership and custody.

12. Q: What agreements should the auditor review for inventory rights?
    A: Consignment agreements and material purchase commitments.

Here are the flashcards based on the inventory valuation and audit procedures:

Flashcards

Inventory Valuation Methods

1. Q: What are the commonly used inventory valuation methods?
   A: FIFO (First-In-First-Out) and Weighted Average. The auditor must ensure the method used is reasonable.

Raw Materials and Consumables

2. Q: What cost elements should be included for raw materials and consumables?
   A: Carriage inward, non-refundable duties, etc.

3. Q: How should standard costs for raw materials be verified?
   A: Understand the basis of standards, verify variances, and compare with actual costs.

4. Q: How should cost prices for raw materials be checked?
   A: Compare them against purchase invoices received prior to inventory counting.

5. Q: How should damaged or obsolete raw materials be valued?
   A: Establish a realistic net realizable value (NRV).

Work in Progress (WIP)

6. Q: What should the auditor understand about WIP measurement?
   A: The stages of production and the basis for any estimates.

7. Q: What cost elements should be included in WIP?
   A: Include overheads and compare with financial and costing data.

8. Q: How should material costs in WIP be verified?
   A: Exclude abnormal wastage.

Finished Goods and Goods for Resale

9. Q: What costs should be included for finished goods?
   A: Ensure overheads are based on normal costs.

10. Q: How should inventories be valued if the NRV is lower than the cost?
    A: Inventories should be valued at net realizable value (NRV).

Obsolete/Damaged Inventory

11. Q: How should obsolete or damaged inventory be followed up?
    A: Assess the realizable value and confirm adjustments in valuation.

12. Q: What should be done to verify replacement costs for inventory?
    A: Compare recorded costs with current replacement costs and vendor price lists.

13. Q: How can inventory turnover ratio help identify obsolete inventory?
    A: Low turnover ratios may indicate obsolete or slow-moving inventory.

14. Q: What must be ensured regarding overhead allocation?
    A: Ensure only direct labor, direct materials, and reasonable overheads are included.

15. Q: How should the lower-of-cost-or-NRV principle be applied?
    A: Verify that inventories are valued at the lower of cost or net realizable value.

Disclosure Requirements for Inventory

16. Q: What classifications are required under Schedule III of the Companies Act, 2013?
    A: Inventories should be classified as:

    • Raw materials.

    • Work-in-progress.

    • Finished goods.

    • Stock-in-trade.

    • Stores and spares.

    • Loose tools.

    • Others (specify nature).

17. Q: How should goods-in-transit be disclosed in inventory?
    A: They should be disclosed separately under each sub-head of inventory.

18. Q: What must be stated about the valuation of inventory?
    A: The mode of valuation must be disclosed.