What is the focus of an audit of inventory?

 

Inventories are assets:

(a) held for sale in the ordinary course of business.

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Inventory is a material item in the statement of financial position of some companies.  Auditors use assertions to consider the different types of potential misstatements that may occur when identifying, assessing and responding to the risks of material misstatements in the financial statements.

When auditing inventory auditors focus on obtaining evidence about the following assertions:

· Existence—inventory really exists and is in proper conditions. Audit evidence for Inventory

· Rights—the company holds or controls the rights to inventory.

· Completeness—inventory that should have been recorded has been recorded, and all related disclosures that should have been included in the financial statements have been included.

· Accuracy, valuation and allocation—inventory has been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described.

· Classification—inventory has been recorded in the proper accounts.

· Presentation— inventory is appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Usually, auditors do not obtain evidence about all assertions listed above, they determine the relevant ones.