Planning an Inventory Audit You will analyze a company’s current inventory setup
ID: 2453058 • Letter: P
Question
Planning an Inventory Audit
You will analyze a company’s current inventory setup and determine the course of action to take to audit the client’s inventory. In order to successfully audit inventory, a thorough plan must be devised to ensure all facets are accounted for.
The Crafty Craft Corner has been asked by its bank to perform an audit, which it has never done before. Part of this audit is to perform a year-end physical inventory. The store uses a periodic inventory system, as management does not feel it’s necessary to track every bead and button sold.
As the auditor hired to perform the inventory audit, what are your recommendations to the store management to prepare for the audit?
Would you suggest they implement a perpetual inventory system? What documentation would you request the managers create regarding their inventory?
What other steps would you recommend to ensure a smooth process?
Explanation / Answer
The recommendations to the store management to prepare for the audit by the auditor hired are :
i. The Inventory as per the periodic inventory report must exist.
ii. The report of periodic inventory system must include all the inventories.
iii. Keep in place the proper records of the inventory duly authorised by the designated person.
Perpetual Inventory system describes system of trading stocks where information on inventory quantity and availability is updated on a continuous basis as a function of doing business. The perpetual system is recommended because :
i. The period system relies upon an occasional physical count of the inventory, while the perpetual system keeps continuous track of inventory balances.
ii. It is nearly impossible to track through the accounting records under a periodic accounting system to determine the reason of inventory related error, while on the perpetual system errors are identified and rectified as and when they occur.
Documentation requested by the management regarding the inventory are :
i. Register of Inventory.
ii. Details of receipt and issue of the inventory.
iii. Report of the Physical verification.
iv. Letter from the Management certifying the periodicity of the Physical Verification.
Other steps recommended to ensure a smooth process are:
i. Identify the Inventory Location,
ii.review client procedures,
iii.tour the business,
iv.forbid the movement of inventory during physical verification.
v. Perform perpetual inventory system.
vi. Internal Control must be commensurate with the size of the business.