Year-End Inventory/Purchase
Cutoff
• Primary Audit Objectives:
• The auditor performs cutoff procedures on the cutoff information obtained at the inventory count to:
• Existence | Occurrence | Completeness
• 1. Check that the inventory transactions are recorded in the correct period.
• 2. Determine that inventories are not double-counted or missed due to movements within the
plant/warehouse.
• Common purchase cutoff concerns:
• 1. Shipments received but purchase invoice received in the next period.
• 2. Purchase invoice received but merchandise received in the subsequent period.
• Cutoff procedures may consist of:
• 1. Examining a sample of receiving reports for inventory receipts immediately before and after the
inventory count.
• 2. Examining a sample of shipping documents for shipments immediately prior to and subsequent to the
count.
Example Illustration – Cutoff
Process
• Illustration: Cutoff Procedures
• Example showing how auditors check shipment and receiving documents before and after year-end to
verify proper period recording.
Reconciliation of Inventory
Summary Sheet with General
Ledger
• Primary Audit Objectives:
• Accuracy | Completeness
• Once physical inventories are counted and valued, the entity adjusts records to reflect actual inventories
held.
• Differences between accounting records and the physical amount are closed to Cost of Sales / Cost of
Goods Sold account.
• Reconciliation procedures:
• 1. Footing the reconciliation.
• 2. Reconciling book and physical inventory figures.
• 3. Investigating significant differences.
• 4. Reviewing reconciling items.
• 5. Agreeing reconciling items to supporting papers.
• 6. Verifying accruals for inventory received but not billed.
Example Illustration –
Reconciliation Process
• Illustration: Inventory Reconciliation Process
• Example visual of matching physical count totals with ledger balances and resolving discrepancies.
Valuation in Accordance with
Accounting Policies
• Primary Audit Objectives:
• Valuation | Accuracy | Presentation and Disclosure
• The auditor tests valuation of inventory per client's accounting policies and PFRSs.
• Key Questions:
• 1. What method of valuation does the client use?
• 2. Is it the same as prior years?
• 3. Is it consistently applied?
• Methods include FIFO, weighted average, specific identification, standard cost.
• Changes in valuation methods must comply with PAS 8.
Raw Materials, Work in Process &
Finished Goods
• Auditor verification procedures:
• 1. Raw Materials – verified with purchase invoice.
• 2. Work in Process & Finished Goods – traced to cost accounting records.
• 3. High-value items are selected for testing.
Lower of Cost or Net Realizable
Value (LCNRV) Test
• Primary Audit Objective:
• Valuation
• Inventories should be carried at lower of cost or net realizable value (NRV).
• To verify NRV:
• 1. Finished Goods – selling price less costs to dispose.
• 2. Work-in-Process – selling price less estimated completion/disposal costs.
• 3. Raw Materials – replacement cost less costs to complete/dispose.
• Write-downs or reversals are charged to expense (Cost of Goods Sold) per PAS 2.
Inventories Pledged and Purchase
Commitments
• Primary Audit Objectives:
• Valuation | Presentation and Disclosure
• Auditor should verify:
• 1. Whether any inventories have been pledged as collateral.
• 2. Any purchase commitments where commitment price > market value.
• Disclosure of such conditions is required.
Perform Test of Details on Cost of
Goods Sold
• Primary Audit Objectives:
• Occurrence | Accuracy | Cutoff | Classification
• Auditor examines recorded cost of sales transactions and reconciles with accounting records.
• Procedures:
• 1. Select total debits and credits to COGS.
• 2. Obtain supporting documents (purchase orders, invoices, shipping docs, proof of payments).
• 3. Vouch details to verify:
• a. Correct GL account used.
• b. Accurate amount recorded.
• c. Proper ownership and timing.
• d. Validity of cost based on payments.
• For manufacturers, test of labor component:
• 1. Verify time cards and labor rate.
• 2. Recalculate labor charge.
• 3. Compare recalculated vs recorded amount.
• 4. Conclude if material misstatement exists.
