Audit Objectives - Inventory

The Auditors' Objectives in Audit of Inventories and Cost of Goods Sold are to:

1. Consider internal control over inventories and cost of goods sold.

2. Determine the existences of inventories and the occurrence of transactions affecting cost of goods sold.

3. Establish the completeness of inventories.

4. Establish that the client has rights to the recorded inventories.

5. Establish the clerical accuracy of records and supporting schedules for inventories and cost of goods sold

6. Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods.

7. Determine that the presentation and disclosure of inventories and cost of goods sold is adequate, including disclosure of classifications of inventories, accounting methods, and any inventories pledged as collateral loans.

Audit Program for Inventories and Cost of Goods Sold

Internal control over inventories and cost of goods sold

1. Obtain an understanding of internal control over inventories and cost of goods sold.

2. Assess control risk and design additional tests of controls for inventories and cost of goods sold.

3. Perform additional tests of controls for those controls which the auditors plan to consider supporting their planned assessed levels of control risk

a. Examine significant aspects of a sample of purchase transactions.

b. Test the cost accounting system.

4. Reassess control risk and modify substantive tests for inventories and cost of goods sold.

Objectives of Major Substantive Tests of Inventories and Cost of Gods Sold Transactions

Obtain listings of inventory and reconcile to ledgers.

Clerical accuracy

Evaluate the client's planning of physical inventory.

Existence and rights

Completeness

Valuation

Observe the taking of physical inventory and make test counts.

Existence and rights

Completeness

Valuation

Review the year -end cutoff of purchases and sales transactions

Existence and rights

Completeness

Clerical accuracy

Obtain a copy of the complete physical inventory, test its clerical accuracy, and trace test counts.

Existence and rights

Completeness

Clerical accuracy

Evaluate the bases and methods of inventory pricing.

Valuation

Test the pricing of inventories

Valuation

Perform analytical procedures.

Existence and rights

Completeness

Valuation

Determine whether any inventories have been pledged and review purchase and sales commitments.