The Audit of Inventories

The Audit of Inventories

Why is it important? Easiest assets to manipulate

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  • Misstatement affect reported profit: misstatement of inventory balances has a direct effect on reported profit.

  • Inventories identification: some inventories can be very difficult for an auditor to identify stock of gas reserve.

  • Inventories difficult to establish: the quantities of inventory held at a specific given moment may be difficult to establish. It may not be possible to cease inventory movements during the inventory count and cut off may be hard to establish with precision.

  • Valuation: difficult for certain products e.g. antiques-no active markets, hospital which is working 24/24 hours.

  • Inventory losses: from pilferage, wastage, obsolescence, damage, dormant stock.

  • Inventories may be intangible: some very significant work in progress balances may be intangible in nature.

Risks Associated with Inventory

  • Inadequate or inappropriate inventory held: to meet the demands of sales and production e.g. stock out

  • High inventory levels resulting in poor cash flow and financial loss.

  • Inaccurate or incomplete record of inventory movements resulting in lack of awareness of the actual inventory position and difficulties in meeting customer needs.

  • Lack of security over inventory resulting in loss, theft or misappropriation.

  • Obsolete inventory held or incorrectly supplied to customers, resulting in financial loss and damage to reputation.