7066 Inventory count conducted other than at the date of the financial statements

Jun-2019

OAG Guidance

In determining the appropriate audit procedures to perform over the activity in the intervening period, we consider the following steps, consistent with OAG Audit 7015 to develop an appropriately tailored audit approach:

• Update our understanding and evaluation of controls, and where we plan to place reliance on controls, update our controls testing through period‑end to determine whether controls are operating effectively in the intervening period.

• Obtain the roll-forward/roll‑back schedule for activity in the intervening period and agree beginning balances (i.e., as of the date of our inventory count(s)) and ending balances per the roll‑forward schedule to the general ledger. As part of agreeing the beginning and ending balances per the roll‑forward schedule to the general ledger, we also reconcile the beginning balance to the results of our inventory count (i.e., the final inventory listing tested as part of our observation procedures)

• Perform procedures to conclude the information included in the roll‑forward/roll‑back schedule is complete and accurate. We test the completeness and accuracy of data from the inventory reports utilized in the preparation of the inventory roll‑forward/roll‑back based on OAG Audit 4028.4.

• Determine if additional procedures to test the intervening activity are necessary. We take appropriate credit for other audit tests of inventory purchases/receipts (e.g., testing of purchases as part of inventory cost testing, inventory cut‑off testing, testing the relief of inventory when testing sales transactions, controls testing, testing of non‑standard journal entries, etc.) when determining the nature and extent of substantive tests to perform over the activity in the intervening period.

We may test activity in the intervening period across inventory classes (e.g., raw materials, work‑in‑progress and finished goods) in the aggregate; however, we test each category of transactions (e.g., purchases, sales or other activity/adjustments) separately.

When we observe multiple physical inventory counts as of a date (or multiple dates) other than period end, we can perform our procedures over transactions in multiple roll‑forward/roll‑back periods in the aggregate for all locations for which the roll‑forwards/roll‑backs were prepared using the same process and system. If the roll‑forwards/roll‑backs are created using the same process and the data is derived from the same system, we still need to test the parameters of the relevant reports used to prepare each roll‑forward/roll‑back. In addition, we need to test relevant categories of transactions across the multiple roll‑forward/roll‑back periods. For example, assume we observe the entity’s physical count at location A as of 31 October and location B as of 30 November, and the entity uses the same process and data from the same inventory system to create separate roll‑forwards for each location. In this situation, we 1) separately test the information used to create each roll‑forward (i.e., location A 31 October roll‑forward and location B 30 November roll‑forward), 2) test inventory purchases across both roll‑forwards, 3) test inventory shipments across both roll‑forwards and 4) test other activity/adjustments across both roll‑forwards.

When a single roll‑forward/roll‑back is prepared for multiple locations where one or more of the locations was not selected for our testing (e.g., not subject to our inventory observation procedures), testing the intervening period is performed over the combined roll‑forward/roll‑back, inclusive of the activity at locations not selected for testing.

There may be situations where the entity prepares the roll‑forward/roll‑back using a beginning date prior to the inventory observation. For example, if the entity performs an inventory count on 15 October, the entity may use 30 September, as the beginning date for the roll‑forward. In this situation, in addition to testing the activity in the roll‑forward period, we trace and agree the counts from our observation into the final physical inventory listing as of the count date and check that the book‑to‑physical adjustment was included in the roll‑forward/roll‑back.

The nature and extent of our audit procedures to perform over the activity in the intervening period would depend on an evaluation of the considerations discussed above and engagement circumstances. If we determine that tests of details need to be performed, targeted testing of large or higher risk items would be the first consideration. We could also apply audit sampling if considered appropriate. Refer to OAG Audit 7015 for general guidance on the nature and extent of our procedures in the intervening period.