Inventory is tangible goods held by a company to support production, support activities or for sale or customer service. They are comprised normally of parts, tools, maintenance supplies, raw materials, work in progress, finished goods and waste or by-products (Inventory, 2012). Inventory is often the main item in the current assets category, and must be accurately counted and valued at the end of the accounting period to ascertain a company's profit or loss. Organizations whose inventory items have a bigger unit cost often keep a daily record of changes in inventory (perpetual inventory method) to ensure accurate ...view middle of the document...
The existence assertion for the inventory balance is verified mainly by observation of the company's annual inventory count (Clikeman, 2004). This procedure involves an auditor's attendance at some or all of the company's inventory storage facilities during the count (Inventory Audit Procedures, 2012). Usually, the auditor will select items from the company's inventory records and verify their existence at the storage facility. Many times, the auditor will make selections of items that appear to be the most material to the company's account balance, but may also make selections at random. Also, verify that inventory held for third parties are not included in the year-end inventory figure (Clikeman, 2004)..
The rights assertion relates to whether or not the company has the right to show the inventory as part of the company's accounting records (Clikeman, 2004). Situations where the company may have physical possession of inventory, but may not satisfy the rights assertion, include consignment sales and bill and hold arrangements Audit procedures designed to test rights and obligations assertions often involve reading documents such as deeds, contracts, vendor invoices, and loan agreements to determine whether the organization has satisfactory title to its assets and whether the entity is obligated to pay the liabilities (Clikeman, 2004).
As required by ASC 330-10-35-1 inventory balances should be valued on the balance sheet at the cost or market price, whichever is lower (Section 3140: Inventory, 2012). The auditor tests this assertion by examining the price of inventory sold versus the cost of producing or purchasing the inventory and by conducting price testing. Auditors will also examine inventory for signs of obsolescence during the physical inventory observation (Clikeman, 2004). Inventory that appears old and shows unacceptable signs of spoilage or deterioration should be scrutinized further.
Auditors are able to test the completeness assertion during the inventory observation process. While performing test counts, the auditor will make selections from the inventory and verify quantities in the company's accounting records (Naveed, 2010). The auditor will also examine shipments coming into and out of the warehouse close to the period's end date to make sure that transaction were recorded in the proper period (Clikeman, 2004).
At the end of the financial reporting process, management and the auditors will review the financial statements and footnotes for proper presentation and disclosure of inventory balances and transactions. Methods of accounting for inventory, inventory classification and valuation methods are some of the required disclosures. The auditing of the presentation and disclosure assertion is usually accomplished by the use of a financial reporting checklist, as the requirements can be numerous and complicated (Naveed, 2010).
Inventory fraud can be committed by manipulating financial statements. This...