ACCA F8 - Audit and Assurance Revision Kit 2016

(b)
Inventory count: procedures and reasons
Audit procedures
Observe whether the client staff are following
the inventory count instructions. This would
include the following:
Confirming that prenumbered count
sheets are being used and that there are
controls over the issue of count sheets.
Observing that counters are working in
pairs of two.
Confirming that inventory is marked once
it has been counted.
Confirming procedures to ensure that
inventory is not moved during the count.
Confirming that inventory held for third
parties is separately identified.
Confirming that the counters are aware of
the need to note down any items which
they identify as damaged.
Gain an overall impression of the levels and
values of inventory held.
Verify that all inventory sheets issued have
been accounted for at the end of the count.
Take copies of the count sheets at the end of
the inventory count and retain on file.
Obtain cut-off details ie record details of the
last sales invoice issued before the count and
the last goods in record before the count.
Discuss with the valuer the results of his
findings (eg that the diamonds are genuine
and any obsolete/damaged goods which
have been identified).
Make an assessment as to whether the
inventory count has been properly carried
out.
Reason
If proper procedures are not followed the auditor will not be
able to rely on the count as relevant reliable audit evidence.
Prenumbering of count sheets means that a completeness
check can be performed and any missing sheets can be
chased.
This helps to prevent fraud and error.
Marking of inventory helps to prevent double counting of
items.
If inventory is moved eg sold during the count the counters
may become confused as to which inventory has been
counted and which has not. Movements of inventory would
also make it more difficult to establish whether proper cutoff
procedures have been followed.
Customer jewellery held eg for repair should not be included
in the inventory figure.
Damaged items may need to be written down to their
recoverable amount. This will affect the overall value of
inventory.
This will assist the auditor in the follow up procedures to
judge whether the figure for inventory in the financial
statements is reasonable.
This provides evidence that a complete record of the results
of the inventory count has been obtained. If missing count
sheets were undetected inventory would be understated.
This prevents management from being able to adjust the
figures subsequently. It also enables the auditor, in his
follow up procedures to trace inventory counted to the final
inventory calculation.
This information will allow the auditor to determine whether
cut-off is correct. Items sold before the count should be
included as sales and not recorded in inventory. Items received
from suppliers before the count should be recorded as liabilities
and in inventory. Sales and purchases after the inventory count
should not be accounted for in this year's financial statements.
This evidence will support the subsequent valuation of
inventory.
This will help the auditor to determine whether the
procedure is sufficiently reliable as a basis for determining
the existence of inventory.
(c)
Factors to consider
The need for an auditor’s expert
The auditor must consider the risk of material misstatement and whether there is the required
expertise within the audit firm. In this case as inventory is material and this is the only client in the
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