If 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. This includes all raw materials, supplies, inventory in transit when using Free on Board (FOB) shipping point, inventory … The primary reason auditors observe their client taking the physical inventory is to make sure the inventory reflected on the balance sheet actually exists and that the balance sheet includes all inventory owned by the company. 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. Inventory adjustments performed without evidence of approval prior to adjustment being made. The answer is to do cycle counts. Direct labor analysis. Cycle Counting is recommended to maximize the value of audit and minimize the pain in physical count. In the audit of inventory, existence or occurrence assertion tests whether the inventory on balance sheet... Completeness. An example of this procedure is inventory cycle count. Inventory allowances. Any errors found during these small incremental counts should result in an adjustment to the inventory … Inventory Analysis and Supply Chain optimization services included detailed problem solving, technical details & data, knowledge sharing, and detailed summary report. The goal of my keynotes is to motivate through inspiration and stories of transformation, with liberal doses of education. The 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). For practical reasons, the physical inventory counting may be conducted at a Cycle counting is a method of checks and balances by which companies confirm physical inventory counts match their inventory records. If the auditors have noticed an error trend in prior years for specific inventory items, they will be more likely to test these items again. Inventory layers. But Cycle Counting solves a number of these issues, as well as offering the following additional benefits: is a Manufacturing Operations, Procurement and Supply Chain leader from international multi-site manufacturing experience in Electrical, Hydraulics and Internet industries, The cycle counting procedure consists of 13 pages with the 3027-word count. Here are some of the inventory audit procedures that they may follow: Cutoff analysis. The Cycle of Cycle Counting Methods of Cycle Counting If you have multiple inventory storage locations, they may test the inventory in those locations where there are significant amounts of inventory. An auditor reviews the company's plans and procedures for counting inventory and often physically observes the actual counting methods to determine efficiency. Audit Procedures for Inventory Existence. The purpose of Cycle Counting is to account for discrepancies amongst the quantities found in stocks. 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. Cycle counting is a periodic analysis of inventory in a storage location which is conducted through the counting of samples instead of physically counting the entire inventory available, so as to quickly have an accurate estimate of the inventory available without causing a stop to the day to day working as is the case with physically counting … If you do not have such allowances, they may require you to create them. In shoe stores, in May we count … 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. Cycle Counts . These quantities are in fact physically present in warehouses. An auditor uses multiple analytical procedures to verify a company's inventory methods and confirm that the financial records match the physical counts. There are different procedures a business adapts to which fall under inventory management. An organization would normally close down during periods of stock-taking, to guarantee the process is completed within the shortest possible time. Test error-prone items. Here are some of the inventory audit procedures that they may follow: Cutoff analysis. AFTER THE INVENTORY COUNT After the count, the matters recorded in the auditors’ working papers at the time of the count should be followed up. If 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. Overview: There are many audit procedures and approach that auditors could use to perform during their detail testing the inventories that report by management in the financial statements.Before to go to detail on the procedure… The 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. This Cycle Counting Procedure would help define the major criteria, like counting frequency of high-valued items based on the item’s value, acceptable loss criteria, or the focus level of where inventory management issues have been identified. The issue is time and cost to do a complete physical inventory. The most obvious alternative may work if the client doesn’t have a looming deadline to have its audit report submitted by a certain date. Calculate and Repeat Audit inventory regularly and calculate the inventory accuracy percentage. Auditors test for this by reviewing your transfer documentation. There is a risk that you have inventory in transit from one storage location to another at the time of the physical count. Audit of inventory including controls and substantive testing Two inventory counting methods that help to maintain accurate inventory figures are physical counts of inventory and cycle counts. 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