INVENTORIES
Assertions Audit objectives
i. Existence/ To determine whether
occurrence inventories exist at year-end and
represent items held for sale in
the ordinary course of business
ii. Completeness To determine whether all
transactions related to inventory
are recorded in the proper
accounting period
To determine that inventory
listings are accurately compiled
and inventory quantities include
all items on hand and in transit.
iii. Rights and To determine whether the
obligations company has legal title or
ownership rights to inventory
items and inventories exclude
items billed to customers or
owned by others.
iv. Valuation and To determine whether the
allocation inventories are properly stated
with respect to
 Cost determined by an
acceptable method
consistently applied.
- Slow-moving, excess,
defective, and obsolete
items identified and
reduced to replacement
cost or net realizable
value if lower than cost.
v. Presentation and To determine that the
disclosure inventories and cost of goods
sold are presented and classified
in the financial statements in
accordance with PAS/PFRS.
Audit procedures
Obtain listings of inventory and
reconcile to ledgers
Observe the taking of physical
inventory and conduct lest counts.
Confirm inventories in public
warehouse and with consignees
Obtain final inventory from client:
A ) trace counts made during the
inventory observation to inventory
listing
B ) test the clerical accuracy of the
final inventory listing
Review the year end cut-off of
purchases and sales transactions
Test numerical sequence of inventory
purchases requisition
Review entries to cost of goods sold
Perform analytical review related o
inventories and cost of goods sold
Make inquiries of management
regarding inventory ownership and
examine consignment agreements
Evaluate the bases and methods of
inventory pricing.
Vouch and test inventory pricing
Check inventory for quality andlor
obsolescence.
Determine the existence of pledged
inventory
Evaluate financial statement
presentation of inventories and cost
of goods sold, including the adequacy
of disclosure.
  It is ownership that determines inventory inclusion/exclusion
 FOB Destination: ownership of goods upon receipt
 FOB SHIPPING POINT: ownership of goods upon shipment
 FREIGHT COLLECT: freight charge on goods shipped paid by BUYER
 FREIGHT PREPAID: Freight charge on goods shipped paid by SELLER

Freight and other

INCLUDIBLE IN INVENTORY handling cost are
 Goods owned and on hand part of cost of
 Goods in transit and sold FOB Destination goods consigned
 Goods in transit and purchased FOB SP
 Goods out on consignment
 Goods in the hands of salesman or agents
 Goods held by customers on approval or on trial

Example: purchase on account 10,000, 2/10, n/30

GROSS METHOD NET METHOD

Purchase on account Purchases 10,000 Purchases 9,800
Accounts payable 10,000 Accounts payable 9,800
Within discount period Accounts payable 10,000 Accounts payable 9,800
Cash 9,800 Cash 9,800
Purchase discount 200
Beyond discount period Accounts payable 10,000 Accounts payable 9,800
Cash 10,000 Purchase discount lost 200
Cash 10,00

Discount period expired/ no Purchase discount lost 200

payment is made Accounts payable 200

 Cost of conversion: DL + Fixed and variable production OH

o FOH – Based on NORMAL CAPACITY of production facilities (unallocated OH is expensed)
o VOH – based on ACTUAL USE of production facilities
 Excluded from cost of inventory and expensed in period when incurred
o Abnormal amounts of wasted materials, labor and other production costs
o Storage costs (except related to goods in process/ related to FG are expensed)
 o Administrative OH that do not contribute to bringing inventories to their present
location and condition
o Distribution costs
 Cost of inventory of service provider
o CONSISTS OF: Labor + other costs of personal directly engaged in providing the service
including supervisory personnel and attributable OH
o Maybe described as WIP
o NOT INCLUDED but EXPENSED:: Labor and other costs relating to sales and general
administrative personnel

NOTE:

OWNER/
COST OF Actually
RM Freight
should pay account
pay
DES; COLLECT S B FO
DES; PREPAID S S FO
SP; COLLECT B B FI
SP; PREPAID B S FI

COST OF FG < SP Historical cost

COST OF FG > SP Replacement cost

SPECIAL SALES CONTRACT

1. PRODUCT FINANCING (sale w/ buyback agreement) : inventory of SELLER

2. SALE WITH RIGHT OF RETURN – if conditions aren’t met : inventory of SELLER
3. ISNTALLEMENT SALES : Inventory of BUYER
INVENTORY VALUATION

 Initially: at cost/ historical cost

 Subsequently: LCNRV

COST OF GOODS SOLD

Beginning inventory
+ Net purchases
= Cost of goods available for sale
– Ending inventory
= Cost of goods sold

Beg. RE COGS Gross Profit End RE

Beginning – overstated Over Over Under No effect
Beginning – understated Under Under Over No effect
Ending – overstated No effect Under Over Over
Ending – understated No effect Over Under Under