Module 4.1Audit of InventoriesStudents' Copy

The Use of Assertions in Obtaining Audit Evidence Assertions about classes of transactions and events for the period under audit: (COCAC)Completeness - all transactions and events that should have been recorded have been recorded. Occurrence - transactions and events that have been recorded have occurred and pertain to the entity. Classification - transactions and events have been recorded in the proper accounts. Accuracy - amounts and other data relating to recordedtransactions and events have been recorded appropriately.Cutoff - transactions and events have been recorded in thecorrect accounting period.Assertions about account balances at the period end:(RECV)Rights and obligations - the entity holds or controls the rights to assets, and liabilities are the obligations of the entity. Existence - assets, liabilities, and equity interests exist. Completeness - all assets, liabilities and equity interests that should have been recorded have been recorded. Valuation and allocation - assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. Assertions about presentation and disclosure: (COCA) Completeness - all disclosures that should have been included in the financial statements have been included. Occurrence and rights and obligations - disclosed events, transactions, and other matters have occurred and pertain to the entity. Classification and understandability - financial information is appropriately presented and described, and disclosures are clearly expressed. Accuracy and valuation - financial and other information are disclosed fairly and at appropriate amounts. INTERNAL CONTROL MEASURES 1.Authorityandresponsibilityforcontrollingtheinventories should be centralized management and inone person.2.There should be careful selection of inventorypersonnel and intensive training of such personnel inpolicies, objectives and system of inventory control.3.Adequate physical facilities for handling and storage of inventory should be provided. 4.Adequate system of procedures, forms and reports related to the management of inventories should be developed and implemented. 5.Quantitative controls through perpetual inventory records; book quantities verified with physical counts at least once a year and differences being investigated, promptly adjusted and reported to higher authority should be implemented. 6.Deliveries of materials, finished stock and merchandise should be made only upon specific authorizations emanating at authorized levels. 7.Slow-moving, obsolete and damaged stock should be identified and reported following periodic reviews of physical and book records by qualified employees. Valuation on the basis of approved cost-mark-down methods should be reviewed. 8.Safeguards against that action of the element and inaccuracies in recording receipts and issues should be adopted. Example-Maintaining adequate insurance coverage. SUBSTANTIVE AUDIT OF INVENTORIES Inventory BalancesExistence:Recorded inventory exist 1.Before the client takes the physical inventory, review and approve the client's written plan for taking it. 2.Observe the client personnel physically counting inventory. 3.Confirm inventories on consignment and held in public warehouses. Completeness:All inventory of the entity recorded4.Obtain a copy of prenumbered inventory tags used by the client in taking inventory and reconcile the tags to the listing. 5.For selected items, trace from tags to listing. 6.Perform cutoff procedures.Obtain the receiving report number for the last shipment received prior to year- end and determine that the item is included in inventory.Also, identify the last shipping document and determine, based on shipping terms, whether the item was properly recorded in sales or inventory. 7.Perform analytical procedures. Rights and obligations:Inventory is owned by the entity 8.Determine that consigned inventory has been excluded from inventory and that inventory pledged has been properly disclosed.Examine confirmations from financial institutions and read minutes of the board of directors' meetings.