Annual Audit Manual
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7065 Testing final inventory records
Jun-2019
In This Section
Overview
This topic explains:
- The procedures to trace test counts to the final inventory listing
- How to use accept-reject testing to conduct tests of the final inventory listing
CAS Requirement
If inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by:
(b) Performing audit procedures over the entity's final inventory records to determine whether they accurately reflect actual inventory count results (CAS 501.4(b))
OAG Guidance
Subsequent to the physical inventory, perform tests to determine that all inventory counted (and only that inventory) is accurately and completely recorded in the final inventory listing. The test of the entity’s inventory counts may be treated as a separate test from the test of the summarization of quantities to the final physical inventory (tie-in of actual count quantities to final inventory summary). The tests generally have different risks and controls, so we do not necessarily need to trace all items test counted into the final inventory listing if this process is effectively controlled.
Conduct tests of the completeness and accuracy of the final inventory listing:
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Trace the quantity of the items selected from either our test count documentation or our copy of the count sheets to the final inventory listing.
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To address the risk that the entity may have intentionally or unintentionally recorded additional items in the inventory listing, we trace the quantity of the items selected from the final inventory listing to the tags or count sheets. Our test selection may include any item from the inventory listing and is not restricted to those items we test counted.
The above tests are performed using accept-reject testing. For example, based on the team’s judgment, 90 test counts were performed and recorded at the physical inventory observation (45 “tag to floor” and 45 “floor to tag”). The team required low assurance and expected no exceptions from the inventory summarization testing. Therefore, using accept-reject testing, the team traced the quantities for 16 items from our test count documentation to the final inventory listing. The team also traced the quantities for 16 items from the final inventory listing to the count sheets. The tracing of 16 items each way is in accordance with accept-reject testing guidelines for testing populations >200 (based on total population of counts to be summarized, risk, evidence from controls, level of assurance needed, and expected number of exceptions), see OAG Audit 7043.
When evaluating differences identified between the inventory counts and the final physical inventory listing, we consider the threshold management uses to record adjustments to determine if the difference represents an error.
We evaluate whether the results of the physical inventory are compared with the final inventory records and whether variances identified (“book to physical” adjustment) are investigated and resolved by the entity in a timely manner. We also test that the “book to physical” adjustment was recorded by the entity in the general ledger.