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Log in through your institution journal article Examination in AuditingThe Accounting Review Vol. 40, No. 1 (Jan., 1965) , pp. 251-265 (15 pages) Published By: American Accounting Association https://www.jstor.org/stable/242648 Read and download Log in through your school or library Subscribe to JPASS Unlimited reading + 10 downloads Journal Information The Accounting Review is the premier journal for publishing articles reporting the results of accounting research and explaining and illustrating related research methodology. The scope of acceptable articles embraces any research methodology and any accounting-related subject. The primary criterion for publication in The Accounting Review is the significance of the contribution an article makes to the literature. Publisher Information The American Accounting Association is the world's largest association of accounting and business educators, researchers, and interested practitioners. A worldwide organization, the AAA promotes education, research, service, and interaction between education and practice. Formed in 1916 as the American Association of University Instructors in Accounting, the association began publishing the first of its ten journals, The Accounting Review, in 1925. Ten years later, in 1935, the association changed its name to become the American Accounting Association. The AAA now extends far beyond accounting, with 14 Sections addressing such issues as Information Systems, Artificial Intelligence/Expert Systems, Public Interest, Auditing, taxation (the American Taxation Association is a Section of the AAA), International Accounting, and Teaching and Curriculum. About 30% of AAA members live and work outside the United States. Rights & Usage This item is part of a JSTOR Collection. What are Inventory Audit Procedures?If your company records its inventory as an asset and it undergoes an annual audit, then the auditors will be conducting an audit of your inventory. Given the massive size of some inventories, they may engage in quite a large number of inventory audit procedures before they are comfortable that the valuation you have stated for the inventory asset is reasonable. Noted below are some of the inventory audit procedures that they may follow. The extent of the procedures employed will decline if inventory constitutes a relatively small proportion of the assets listed on a company's balance sheet. Analyze the CutoffThe auditors will examine your procedures for halting any further receiving into the warehouse or shipments from it at the time of the physical inventory count, so that extraneous inventory items are excluded. They typically test the last few receiving and shipping transactions prior to the physical count, as well as transactions immediately following it, to see if you are properly accounting for them. Observe the Physical Inventory CountThe auditors want to be comfortable with the procedures you use to count the inventory. 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. Observe Cycle CountsIf the company uses cycle counts instead of a physical count, the auditors can still use the procedures related to a physical count. They simply do so during one or more cycle counts, and can do so at any time; there is no need to only observe a cycle count that occurs at the end of the reporting period. Their tests may also evaluate the frequency of cycle counts, as well as the quality of the investigations conducted by counters into any variances found. Reconcile the Inventory Count to the General LedgerThey 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 ItemsIf 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 ItemsIf 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 TransitThere 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 CostsThe 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 CostsYou 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 MarketThe 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. Analyze Finished Goods CostsIf a significant proportion of the inventory valuation is comprised of finished goods, then the auditors will want to review the bill of materials for a selection of finished goods items, and test them to see if they show an accurate compilation of the components in the finished goods items, as well as correct costs. Analyze Direct LaborIf direct labor is included in the cost of inventory, then the auditors will want to trace the labor charged during production on time cards or labor routings to the cost of the inventory. They will also investigate whether the labor costs listed in the valuation are supported by payroll records. Analyze OverheadIf you apply overhead costs to the inventory valuation, then the auditors will verify that you are consistently using the same general ledger accounts as the source for your overhead costs, whether overhead includes any abnormal costs (which should be charged to expense as incurred), and test the validity and consistency of the method used to apply overhead costs to inventory. Test Work-in-ProcessIf you have a significant amount of work-in-process (WIP) inventory, the auditors will test how you determine the percentage of completion for WIP items. Review Inventory AllowancesThe auditors will determine whether the amounts you have recorded as allowances for obsolete inventory or scrap are adequate, based on your procedures for doing so, historical patterns, "where used" reports, and reports of inventory usage (as well as by physical observation during the physical count). If you do not have such allowances, they may require you to create them. Review Inventory OwnershipThe auditors will review purchase records to ensure that the inventory in your warehouse is actually owned by the company (as opposed to customer-owned inventory or inventory on consignment from suppliers). Review Inventory LayersIf you are using a FIFO or LIFO inventory valuation system, the auditors will test the inventory layers that you have recorded to verify that they are valid. How do you test if inventory exists?For inventory that is in the company's possession, the best way to test the existence assertion is to observe the company's physical inventory observation.
What is physical inventory observation?An inventory observation is the oversight of a client's inventory counting process by an outside auditor. This oversight work includes a number of tasks, including the following: Verifying that all inventory was counted. Testing a sample of the counts made by client employees.
Why do auditors attend physical inventory count?Inspecting inventory when attending physical inventory counting assists the auditor in ascertaining the existence of the inventory (though not necessarily its ownership), and in identifying, for example, obsolete, damaged or aging inventory.
Which of the following procedures carried out at an inventory count by an auditor is a test primarily for overstatement of inventory?7 Which of the following procedures carried out at an inventory count by an auditor is a test primarily for overstatement of inventory? A Ensure completeness of sequence of pre-numbered inventory sheets at the conclusion of the count.
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It is frequently possible to test the physical inventory prior to the balance sheet date when
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