Auditing Inventories: Definition, How It Works, Importance, Example

One of the critical areas during audits is stock and inventory. For most clients, these constitute a significant portion of current assets. On top of that, they may include items with complex accounting adjustments. Some clients also hold inventory that requires specialized valuation. These issues complicate the auditing of inventory during audits.

Auditing standards do not provide specific guidance on auditing inventories. However, auditors can use general suggestions to formulate an effective plan for auditing this area. There are several steps to auditing inventories. Although they may differ between clients, the process uses a similar approach. Before discussing the details, it is crucial to understand auditing inventories.

What are Auditing Inventories?

Auditing inventories refers to procedures that auditors use to ensure the accuracy of the inventory figure reported in financial statements. It also includes comparing a client’s records with physical inventories. Usually, this process is a part of the external audit performed by auditors at the end of each financial period. However, some companies may also conduct internal inventory audits under internal controls.

Auditing inventories is a crucial area within audits due to the risks involved. However, these only apply if auditors determine inventory to be a material part of the financial statements. In most cases, inventories differ from one client to another. Auditors must understand the processes used by clients for their inventories and design their audit procedures accordingly.

How do Auditing Inventories work?

There are several procedures auditors use when auditing inventories, including the following.

  • Ensuring inventory balances are a material part of the financial statements.
  • Examining the internal controls in place at the client associated with inventories.
  • Comparing the inventories recorded with the physical stock.
  • Using analytical procedures to ensure the reasonableness of the inventories figure in the balance sheet.
  • Using substantive procedures to examine the transactions occurring within inventories during the period.

Auditors can check inventories through other records as well. These may include examining the purchase figure in the income statement. On top of that, auditors can also compare stock balances with supplier records to ensure the accuracy of these figures. In that case, external confirmations may also be helpful. However, these procedures are not a part of auditing inventories directly.

What assertions do auditors check when Auditing Inventories?

Since inventories are a balance sheet item, auditors use the assertions for account balances when examining these items. However, the critical audit assertions for this area include the following.

  • Existence – Ensuring the inventory reported in the records physically exist.
  • Valuation – Ensuring inventories reported in the financial statements have been valued properly.
  • Completeness – Ensuring inventory records reflect the complete information.
  • Rights and obligations – Ensuring the client owns or has rights to the inventory records in the financial statements.

The most crucial of these assertions in auditing inventories is checking their existence. For that, auditors usually partake in the stock count at the end of each financial period. However, the auditors only observe the process and do not count the inventory. Besides this, auditors perform other audit procedures on the final inventory records.

Conclusion

Auditing inventory involves the audit procedures used by auditors to examine inventory records. It is one of the most crucial parts of audit assignments if inventory is a material part of the financial statements. Usually, auditors perform these audits in two stages. Firstly, it occurs during the physical stock count at the end of each period. The second happens by auditing the final inventory records.

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