Audit Objective

Balance-Related Audit Objective Common Inventory

Inventory as recorded on tags exist (existence) Choose a random sample of tag numbers and
identify the tag with that number attached to
the actual inventory
Observe whether movement of inventory takes
place during the count
Existing inventory is counted and tagged, and
tags are accounted for to make sure none are
missing (completeness)
Examine inventory to make sure it is tagged.
Observe whether movement of inventory takes
place during the count
Inquire as to inventory in other location.
Inventory is counted accurately (accuracy) Recount clients counts to make sure the
recorded counts are accurate on the tags.
(also check description and unit of count, such
as dozen or gross)
Inventory is classified correctly on the tags
(classification)
Examine inventory descriptions on the tags
and compare with the actual inventory for raw
material, work-in-process, and finished goods.
Evaluate whether the percent of completion
recorded on the tags for work-in-process is
reasonable.
Information is obtained to make sure sales and
inventory purchases are recorded in the
proper period. (period)
Record in the audit files for subsequent follow-
up the last shipping document number used at
year-end.
Make sure the inventory for the above item
was excluded from the physical count.
Review shipping area for inventory set aside
for shipment but not counted
Obsolete and unusable inventory items are
excluded or noted (realizable value)
Test for obsolete inventory by inquiry of factory
employees and management and alertness for
items that are damaged, rust- or dust-covered,
or located in inappropriate places









Internal control
Internal Control How to Control
Fence and lock the warehouse.

The single most important inventory control is
simply locking down the warehouse. This
means that you construct a fence around the
inventory, lock the gate, and only allow
authorized personnel into the warehouse.
Organize the inventory It may not seem like a control to simply
organize the inventory in the warehouse, but if
you cannot find it, you cannot control it. Thus,
a fundamental basis for inventory internal
control is to number all locations, identify each
inventory item, and track these items by
location.
Count all incoming inventory Do not just take the word of the supplier that
the quantity stated on the delivery is the
correct one. Count the inventory before
recording it as received. This keeps errors
from being introduced into the inventory
records.
Inspect incoming inventory Verify that all incoming inventory is of the
correct type and is not damaged. All items that
fail inspection should be returned at once, and
the accounts payable staff notified that the
returned items should not be paid for.

Tag all inventory Every scrap of inventory in the warehouse
should be identified with a tag, which states
the part number, description, unit of measure,
and quantity. Otherwise, inventory items are
bound to be mis-identified.
Segregate customer-owned inventory. If there is inventory on-site that customers
own, the warehouse staff will likely count it as
though it is owned by the company, so have a
procedure in place for labeling these items as
customer-owned when they arrive, and
segregate them in a separate part of the
warehouse
Standardize record keeping for inventory
picking
When an item is picked from the shelf in the
warehouse, for use either in the production
area or for sale to customers, have a standard
procedure for recording the picks as soon as
they leave the warehouse (which is easier if
there is a warehouse fence, and inventory can
only pass through a single controlled gate).
Sign for all inventory removed from the
warehouse
If inventory items are being removed from the
warehouse for reasons outside of the normal
picking process, have the person removing the
inventory sign for the removal, so that there is
a record of who is responsible.
Audit the bill of materials The bill of materials is a record of the parts
used to construct a product. The bill of
materials is used to pick items from stock, so if
the bill is incorrect, pickers will pull incorrect
amounts from the warehouse. This calls for a
periodic audit of every bill, as well as
password-only access to the bill of material
records in the computer system.
Conduct cycle counts Have the warehouse staff conduct small,
frequent counts of a small portion of the
inventory, and investigate and correct any
errors they find. This gradually improves the
inventory record accuracy.




Audit Technique
Here are some of the inventory audit procedures that they may follow:

Cutoff analysis
The auditors will examine your procedures for halting any further receiving into the warehouse
or shipments from it at the time of the physical inventory count, so that extraneous inventory
items are excluded.

Observe the physical inventory count.
The auditors want to be comfortable with the procedures you use to count the inventory. This
means that they will discuss the counting procedure with you, observe counts as they are being
done, test count some of the inventory themselves and trace their counts to the amounts
recorded by the company's counters, and verify that all inventory count tags were accounted for.

Reconcile the inventory count to the general ledger.
They will trace the valuation compiled from the physical inventory count to the company's
general ledger, to verify that the counted balance was carried forward into the company's
accounting records.

Test high-value items
If there are items in the inventory that are of unusually high value, the auditors will likely spend
extra time counting them in inventory, ensuring that they are valued correctly, and tracing them
into the valuation report that carries forward into the inventory balance in the general ledger.


Test error-prone items
If the auditors have noticed an error trend in prior years for specific inventory items, they will be
more likely to test these items again.


Test inventory in transit
There is a risk that you have inventory in transit from one storage location to another at the time
of the physical count. Auditors test for this by reviewing your transfer documentation.

Test item costs
The auditors need to know where purchased costs in your accounting records come from, so
they will compare the amounts in recent supplier invoices to the costs listed in your inventory
valuation.

Review freight costs
You can either include freight costs in inventory or charge it to expense in the period incurred,
but you need to be consistent in your treatment - so the auditors will trace a selection of freight
invoices through your accounting system to see how they are handled.

Finished goods cost analysis
If a significant proportion of the inventory valuation is comprised of finished goods, then the
auditors will want to review the bill of materials for a selection of finished goods items, and test
them to see if they show an accurate compilation of the components in the finished goods items,
as well as correct costs.

Inventory allowances
The auditors will determine whether the amounts you have recorded as allowances for obsolete
inventory or scrap are adequate, based on your procedures for doing so, historical patterns,
"where used" reports, and reports of inventory usage (as well as by physical observation during
the physical count). If you do not have such allowances, they may require you to create them.

Inventory ownership
The auditors will review purchase records to ensure that the inventory in your warehouse is
actually owned by the company (as opposed to customer-owned inventory or inventory on
consignment from suppliers).


Field work
In Beras Faiza Berhad, we know that the inventory or stocks are keeps in the warehouse. From
our observation, we can conclude that company Beras Faiza Berhad has a mistaken in the
amount of the stock. Moreover, their internal control didnt have bar code or CCTV. From this
situation, Its could be a fraud among their worker.

From our observation, what we can conclude
How long does an inventory take?
o Preparation can take anywhere from 3-6 months depending on the scale of work.
The field inventory is typically conducted from spring through fall, depending on
the best time to document the presence and condition of each natural feature.
The whole process typically spans a 2-year time period which allows for suitable
survey conditions to be selected.
How much does an inventory cost?
o Costs are dependent on several factors including: size of the area to be
surveyed, degree of effort, number and type of species targeted, and number of
sites.















Conclusion on audit of inventory
In conclusion, overall is okay but it has something error which is in inventory of Beras Faiza
Berhad. The inventory and the amount must be similar or existence. It is because the auditor
will check and verify the amount must be the same as the document. Beras Faiza Berhad has
make sure that their inventory or stock doesnt have fraud and put the internal control for the
first priority.