![]() The auditors need to know where purchased costs in your accounting records come from, so they will compare the amounts in recent supplier invoices to the costs listed in your inventory valuation. 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. 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. If there are items in the inventory that are of unusually high value, the auditors will likely spend extra time counting them in inventory, ensuring that they are valued correctly, and tracing them into the valuation report that carries forward into the inventory balance in the general ledger. They will trace the valuation compiled from the physical inventory count to the company's general ledger, to verify that the counted balance was carried forward into the company's accounting records. Reconcile the Inventory Count to the General Ledger 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. They simply do so during one or more cycle counts, and can do so at any time there is no need to only observe a cycle count that occurs at the end of the reporting period. If the company uses cycle counts instead of a physical count, the auditors can still use the procedures related to a physical count. They may also ask for confirmations of inventory from the custodian of any public warehouse where the company is storing inventory. If you have multiple inventory storage locations, they may test the inventory in those locations where there are significant amounts of inventory. This means that they will discuss the counting procedure with you, observe counts as they are being done, test count some of the inventory themselves and trace their counts to the amounts recorded by the company's counters, and verify that all inventory count tags were accounted for. The auditors want to be comfortable with the procedures you use to count the inventory. They typically test the last few receiving and shipping transactions prior to the physical count, as well as transactions immediately following it, to see if you are properly accounting for them. The auditors will examine your procedures for halting any further receiving into the warehouse or shipments from it at the time of the physical inventory count, so that extraneous inventory items are excluded. 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. ![]() Noted below are some of the inventory audit procedures that they may follow. 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. If your company records its inventory as an asset and it undergoes an annual audit, then the auditors will be conducting an audit of your inventory.
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