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Substantive procedures for inventory and production cycle
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The document contains a clear explanation on how to formulate substantive procedures for the inventory and production cycle and also their assertions.
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Inventory and production cycle substantive proceduresSubstantive procedures-inventory count attendance
Prior to inventory count
✓ Communicate with client about date and time of the inventory count
✓ Confirm all locations at which the client holds inventory and if necessary, visit the locations.
✓ Perform administrative planning, for example, organize audit stuff to attend
✓ Obtain and review a copy of the written instructions given to the clients count teams
✓ Inquire whether the client has any inventory that should not be included in the count. Establish
how this inventory is physically identified.
✓ Brief the audit staff allocated to the count on their responsibilities.
During the inventory count
✓ Observe inventory taking procedures to ensure that the client’s written instructions are adhered to.
✓ Walk through the warehouse and identify inventory that is obsolete or damaged or appears to be
slow moving. The inventory number, description, location and quantity should be recorded on a
workpaper and traced to the inventory sheets to confirm that these items have been marked as
damaged or obsolete.
✓ Conduct test counts on the inventory in the warehouse in both directions, making sure all
sections and categories are tested, that is:
- From inventory sheets to physical inventory(existence)
- From physical infantry to inventory sheets(completeness)
✓ Resolve the discrepancies in test counts before conclusion of the count by recounting with the
client's staff and confirming that amendments are made to the inventory sheets were necessary.
✓ Test the numerical sequence of the inventory sheets both before and at the conclusion of the
count to ensure that all inventory sheets are accounted for.
✓ Confirm by inquiry of inventory counters and inspection of the inventory sheets that inventory that
should not be included in the client's inventory has been excluded.
At the conclusion of the count
✓ Inspect inventory sheets to confirm that:
- Lines have been drawn through blank spaces
- Alterations or corrections have been signed; and
- Inventory sheets have been signed by the counters responsible
✓ Create audit records in respect of the inventory count attendance by:
- Taking copies of all inventory sheets
- Recording observations as to the client's count procedures
- Recording results of all test counts performed by the audit team, and
- Recording any damaged, obsolete or slow, moving inventory.
✓ Recording cut off numbers for all documents used in the inventory and production
✓ Compile a list of goods received notes that have not been matched to supplier invoices.
, Inventory and production cycle substantive procedures
Substantive procedures post inventory count
Rights- The company holds or controls the rights to the inventory
✓ Enquire of management as to whether any inventory is held on consignment parties.
✓ Obtain a listing of inventory of goods in transit at the financial year and inspect relevant orders or
contracts to determine whether ownership has passed to client by scrutiny of the terms of
purchase.
✓ Establish whether inventory is in any way encumbered by:
- Discussion with management
- Inspection of bank confirmations
- Review of direct minutes, and
- Review of correspondence or contracts with suppliers and credit providers.
✓ When performing the pricing procedures for the valuation assertion, inspect invoices to ensure
that they are made out to the client.
Accuracy, valuation and allocation- Inventory is included in the financial statements at
appropriate amounts
Arithmetic accuracy
✓ Compare the quantities of inventory items on the auditor’s copies of the inventory sheets to the
clients priced inventory sheets (to ensure there is no alteration in the quantities)
✓ Test the arithmetical accuracy of the inventory sheets by re-performing all extensions (quantity x
cost) and casting the extension column (total inventory value)
✓ Review inventory sheets for any "negative inventory item values".
✓ Compare the total inventory value per the inventory sheets to the general ledger and trial
balance.
Pricing inventory purchased locally
✓ Using the sample selected for invention items that were test counted at the inventory
count:
- Trace to relevant suppliers invoices to establish whether the correct purchase price has been
used in obtaining the cost in terms of the cost formula used by the company.
- Re-perform the weighted average calculation and compare results to the weighted average price
used by the client, and
- By enquiry of the cost clerk and inspection of invoices from transports established that relevant
carriage costs have been included in unit cost calculations.
Pricing imported inventory purchases
For sample of imported high value items, obtain the relevant suppliers invoices or shipping
contracts and costing schedule and re-perform the unit cost calculations for the sample of
imported items and verify that:
✓ The correct exchange rate was used to convert the foreign currency to rand
✓ The appropriate import and customs duties and shipping charges were included
✓ The allocation of the above cost to the individual inventory items purchased is reasonable and
accurately performed
Pricing manufactured goods
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