Auditing INVENTORY - substantive procedures

Summary

In this video, Dr. Amanda explains the auditing process for inventory in wholesalers, focusing on key assertions like existence, completeness, accuracy, and valuation. She outlines practical procedures such as vouching, observing stock takes, and using substantive analytical procedures to validate inventory. Challenges like auditing remote locations are addressed, with solutions like component auditors and remote technologies such as live streaming. Dr. Amanda emphasizes customizing audit procedures based on the client and industry, noting how technology is evolving auditing practices, especially in light of situations like COVID-19. The video provides insightful tips for auditors to adapt their approach in diverse scenarios.

Takeaways

• 😀 Auditing inventory is essential for businesses that sell physical goods, particularly wholesalers who purchase products to resell.
• 😀 A key part of auditing inventory involves verifying the balance of inventory at the end of the financial year, rather than individual transactions.
• 😀 There are several balance assertions when auditing inventory: existence, completeness, accuracy, valuation, allocation, and rights & obligations.
• 😀 Existence is checked by vouching inventory records and matching them with physical items, such as barcoded products, to confirm they are really there.
• 😀 Completeness testing involves counting items and matching them to inventory records to ensure nothing has been omitted, preventing overstatement or understatement.
• 😀 Ownership of inventory should be confirmed, especially if goods are on consignment or in transit, to ensure proper rights and obligations are recognized.
• 😀 Valuation of inventory involves verifying that products are correctly valued using the appropriate inventory valuation method (e.g., FIFO, LIFO, weighted average).
• 😀 Inventory that is damaged, broken, or obsolete must be written off or reduced in value to reflect its lower realizable worth.
• 😀 A substantive analytical procedure, like comparing opening inventory, purchases, and sales to closing inventory, helps identify discrepancies or potential issues.
• 😀 Inventory turnover ratios or days in inventory can help auditors identify slow-moving inventory, assisting in the detection of potential issues with inventory management.
• 😀 Auditors must adjust their procedures to accommodate special circumstances like remote inventory locations, using strategies such as component auditors or remote inventory verification through live streaming.

Q & A

What is the primary focus of the audit procedures discussed in the video?

The primary focus is on auditing inventory, specifically for wholesalers. It involves verifying key assertions like existence, completeness, accuracy, and valuation of inventory items.

Why is observing inventory important during an audit?

Observing inventory ensures that the inventory recorded in the financial statements physically exists, thereby validating the 'existence' assertion. This also helps verify the accuracy and completeness of inventory data.

What is 'vouching' and how is it used in inventory audits?

Vouching is an audit procedure where auditors sample items from the inventory records and confirm their existence by matching them with actual physical inventory. It helps confirm the 'existence' assertion of inventory.

What challenges do auditors face when conducting inventory audits, especially with large companies or multiple locations?

Auditors face challenges such as being unable to physically visit all locations due to geographical barriers. In such cases, auditors may rely on testing internal controls or hire component auditors to gather evidence from remote locations.

How can auditors ensure the completeness of inventory in their audit procedures?

Auditors ensure completeness by verifying that all inventory items, including those in transit or on consignment, are properly recorded. This can involve stock takes, tracing items from records to physical inventory, or vice versa.

How do auditors verify the accuracy and valuation of inventory?

Auditors verify accuracy and valuation by checking the inventory valuation method (e.g., FIFO or weighted average) and recalculating the inventory's cost. They also assess whether damaged or obsolete items are written off and ensure proper inventory valuation practices.

What is the significance of inventory turnover ratios in audits?

Inventory turnover ratios help auditors identify slow-moving items, which could indicate problems with inventory valuation or existence. These ratios are essential for assessing the financial health and accuracy of the inventory reported.

How has the COVID-19 pandemic influenced inventory audits?

The COVID-19 pandemic led to the adoption of virtual tools like GoPros, live streaming, and FaceTime to observe inventory remotely, especially for locations that auditors couldn't physically visit. This approach helps maintain audit quality despite travel restrictions.

What role do component auditors play in inventory audits for remote locations?

Component auditors are hired to gather evidence from remote locations where the primary auditor cannot be present. They perform procedures like physical inventory checks and confirm the reliability of local data to ensure audit quality.

How can auditors customize their inventory audit procedures?

Auditors must customize their procedures based on factors such as the client's industry, the specific scenario, and even the year. For example, procedures may need to be adjusted due to changes in inventory systems or the impact of global events like the COVID-19 pandemic.