In this article, we will learn about audit procedures for inventory and how we can prepare a stock audit checklist by understanding the environment of the entity and audit techniques to be levied. Auditing is a dynamic concept, we cannot use the same checklist for each and every client.
Every client operates in a different environment. So, instead of downloading a fixed checklist. Learn to develop it on your own knowledge. We will go through the inventory processes in a company, and at each stage, we will learn about the risk associated and audit procedures to be levied.
So, we categorize the whole blog post into three stages.
Stage 1 Understanding the Process of the company
Stage 2 Risk associated with the process
Stage 3 Designing the Audit procedures
Beginning with our first process.
Always remember assertions In Inventory Audit – ” Existence” and “Condition”.
Read about Purchase Process Auditing Procedure
The first and foremost process management should undertake is to reconcile the material lying at the factory with the inventory records. Most of the factories outsource some process like electroplating which we call job work. The goods sent on job work must be received within the prescribed time.
Risk Associated with the process.
What are the various risks associated if material reconciliation is not prepared by the management? We will discuss each and every one.
Audit Procedures to be levied
How Auditors should implement their procedures while ascertaining the existence and condition of inventory?
Moving on to the second process.
Why there is a need to identify slow or non-moving items. Use your analytical mind, Why? The slow-moving items increase the inventory carrying cost plus get obsolete over time. What we can do for them? We can establish just in time purchasing system for those goods.
Risks Associated with slow-moving inventory
Audit procedures to be levied
Like Management, Auditor should first identify the slow-moving items then apply other audit procedures or techniques.
The next one is easy to understand but difficult to implement.
There are instances when the material is not received on time from the supplier. This results in production losses to the company, the nonavailability of material increases the idle time. This is the primary reason why large manufacturing companies have a long process of selecting the job worker or supplier.
Read about Vendor Selection Procedure
Understanding the Risk Associated
As I said it is going to be a little tough to identify and understand how production losses are actually happening. You need Costing knowledge to allocate the abnormal losses.
Instances where an accounting entry is directly passed into the system without particularly defining each and every item. However, most of the ERP’s don’t allow recording in such a way but old ERP’s like Tally would allow.
The Inventory audit questionnaire, plan or program can be designed using the above mentioned audit procedures. We can classify the process we are going to audit and then add on our audit procedure points.
We have discussed the risk associated above. The risk associated would become the base on which internal controls should be designed. This will mitigate the risks of any material misstatement.
Akash Arora is a Chartered Accountant by profession and the founder of this website. His expertise areas include compliance with Goods and Service tax and Direct taxes in India. He has written more than 70+ blogs on GST and Direct tax.
Connect with him at +918588918033 and firstname.lastname@example.org