Audit Program for Inventories

Here is an audit program for inventories which is very useful for auditors:

Audit Objectives:

To ascertain the physical existence of the items appearing in the balance sheet and to be satisfied of the reasonable accuracy of quantities
To ascertain whether all recorded procurements and utilization occurred during the current year.
To test whether the inventories are properly valued using the moving average method of costing.

Analytical Procedure:

Compare inventory balances to anticipated need as well as to last year’s inventory balances.
Test of details of transactions:

1. Vouch entries in inventory accounts to supporting documentation (e.g. invoices, requisition and issue slips, etc.)
2. Trace data from purchases, supply card, subsidiary ledgers to inventory accounts.
3. See if the asset method of accounting is applied.
4. Test cut-off of purchases and issuances.

Test of details of balances:

5. Observe agency’s physical count and verify inventory quantities:
review the client’s inventory instructions, if any, Determine whether the procedures outlined will result in reasonably accurate inventory.
- Observe the inventory-taking and make sufficient test counts to determine whether inventory instructions are carried out, counts are accurate and properly recorded, and quality and condition of goods are considered
- Obtain proper cut-off
- Note existence of obsolete, slow-moving or damaged goods
- Test check extension and footings of Inventory List
- Check against Memorandum Receipts
- Assist in the inventory-taking personally or by representative
- Conduct inquiry/personal observation to satisfy oneself as to
effectiveness of methods of inventory-taking and as to reliability of
client’s representations
- Prepare reports as to results of inventory-taking observed
Obtain copy of final inventory lists, trace test of inventory
quantities
- compare final inventory list with the inventory balances
appearing in the Supplies Ledger cards maintained by the
Accounting Division as well as the inventory balances indicated
in the stock cards of the Supply Office. Note down differences.

6. Verify inventory valuation-test check basis of prices from
purchase orders/delivery receipts. See whether ending balances were arrived at using the moving average method of valuation.
Reconcile inventory report balances with balances appearing in
the balance sheet