WHEN do you gather evidence about INVENTORY? Rolling forward or back

Summary

In this video, Amanda, an auditing expert, discusses the challenges auditors face when they can't perform inventory audits on the last day of the financial year. She highlights timing issues, such as weekends or multiple locations, that prevent a stock take on the year-end date. Amanda explains two methods to address this: the roll forward and roll back techniques. She emphasizes the importance of proximity to the year-end, strong internal controls, and verifying inventory's existence and valuation. These methods ensure accuracy even when stock take cannot be performed exactly on the year-end date.

Takeaways

• 😀 Auditing inventory at the end of the financial year is crucial for accuracy, but sometimes it's not possible to conduct the audit exactly on that day.
• 😀 The financial year-end in Australia is typically June 30, but timing issues can arise when the end of the year falls on a weekend or holiday.
• 😀 Multiple inventory locations or busy schedules can complicate the timing of inventory counts on the last day of the financial year.
• 😀 If auditing inventory at year-end isn't feasible, auditors can perform the stock count before or after the financial year-end, adjusting the data accordingly.
• 😀 The techniques 'roll forward' (for stock counts before year-end) and 'roll back' (for stock counts after year-end) help adjust the inventory count to the correct balance date.
• 😀 When conducting a 'roll forward' or 'roll back,' auditors use sales and inventory transactions to adjust inventory figures.
• 😀 Sales data is crucial for rolling inventory balances forward or backward, as inventory movements can be tracked through sales transactions and cost of goods sold.
• 😀 It's important to perform inventory counts as close to the end of the financial year as possible to minimize errors when rolling forward or backward.
• 😀 Strong internal controls are necessary when relying on 'roll forward' or 'roll back' techniques, as weak controls can lead to unreliable data and increased audit risks.
• 😀 The timing of inventory counts, whether before or after the financial year-end, must align with the company's internal control quality to ensure accurate audit results.

Q & A

Why is timing important when auditing inventory?

Timing is crucial because auditors need to verify the existence, rights, completeness, and valuation of inventory as of the balance sheet date, which may not always align with the actual physical stock take.

What challenges might auditors face when trying to audit inventory on the last day of the financial year?

Auditors may face challenges such as the financial year falling on a weekend, the need to visit multiple locations, or competing with other tasks like preparing annual results, which can make it difficult to conduct a stock take exactly on the last day.

What are the two techniques auditors can use when they can't audit inventory exactly on the last day of the financial year?

Auditors can use two techniques: the roll forward and the roll back. These methods adjust inventory data gathered before or after the end of the financial year to estimate the inventory at the balance sheet date.

What is the difference between a roll forward and a roll back in inventory auditing?

A roll forward adjusts evidence gathered before the end of the financial year by adding inventory movements (such as sales) to estimate the year-end balance. A roll back, on the other hand, adjusts evidence gathered after the financial year by subtracting inventory movements to estimate the inventory at year-end.

What types of information can be used to adjust inventory data when rolling forward or rolling back?

Auditors can use sales data, which involves debiting accounts like cash or receivables and crediting sales revenue, along with the cost of goods sold, to adjust inventory balances.

What is the importance of internal controls when using roll forward or roll back techniques?

Internal controls are critical because if the controls are weak, the data used for adjustments (such as sales and inventory movements) may be unreliable, leading to higher risk in the audit process.

How close should inventory counts be to the end of the financial year when using roll forward or roll back?

Ideally, inventory counts should be conducted within one to two months before or after the end of the financial year. The closer the count is to the balance sheet date, the more reliable the adjustments will be.

What should auditors do to ensure the accuracy of inventory counts, especially when using roll forward or roll back methods?

Auditors should test both the existence and completeness of inventory by performing test counts, verifying stock listings, and checking the accuracy of the stock take process, including observing management's procedures.

What are some of the caveats auditors should be aware of when using roll forward or roll back methods?

Auditors should be cautious about the timing of inventory counts, ensuring they are close to the financial year-end. Additionally, auditors must assess the quality of internal controls, as weak controls can affect the reliability of data used for adjustments.

How does the timing of the audit affect the risk of using roll forward or roll back methods?

The further away the inventory count is from the end of the financial year, the higher the risk that the adjustments will be inaccurate. To reduce risk, auditors should aim to conduct stock takes close to the financial year-end and ensure internal controls are strong.