Consider results of tests of controls relating to inventories and cost of production.

1. Obtain or prepare a lead schedule of inventories.

(a) Trace last year’s balances with last year’s working papers.
(b) Check arithmetical accuracy of the schedule.
(c) Trace totals of the schedule to general lodger and balance sheet. ‘ (Completeness)

2. Test details of inventory transactions.

(a) Inspect suppliers’ invoices
(b) Check additions to work in process with cost of production records
(c) Check additions to finished goods with completed production reports ‘
(d) Inspect material requisitions, for raw material used
(e) Agree control account with subsidiary records.. (Occurrence, accuracy, classification) Observe physical inventory count. (Existence, completeness) Inquire from management procedures for identifying
(a) Slow moving and obsolete stocks
(b) Stage of ‘Completion of work inj)rocess
(c) Stock owned by third parties (Existence, completeness, valuation) Investigate reasons for significant differences between physical and book records.

6. For inventories in the custody and control of a third party, obtain direct confirmation from the third party as to the quantity and condition of inventory held Ci>D behalf of the client.” (Existence rights and obligations, valuation)

7. On a test basis, re compute extensions and footings of the final inventory compilation for the clerical accuracy. (Valuation)

8. Check inventory pricing.

(a) Examine suppliers’ invoices for purchased inventories.
(b) Verify reasonableness of direct labor and overhead rates, and over / under applied overheads pertaining to manufactured inventories.
(c) Determine that inventory is valued using an accepted cost method CFIFOor average).
(d) Obtain market quotations to perform lower of cost and NRV test.
(e) Compare the inventory pricing with client’s current selling price lists.
(f) Review subsequent selling prices. (Valuation)

9. Obtain written representation regarding pledge of inventory as collateral, inter company sales, and other related party transactions. (Presentation, rights and obligations)

10. Check inventory cut off (Cut ojj)

11. Carry out analytical procedures.

(a) Review industryp.xp~rience and trends for inventory turnover
(b) Analyze inventoryjprnover by products.
(c) Review relationships of ‘lIY~ntory balances to purchasing, production and stdes activities

12. Inspect financial statements to check that inventories have been disclosed, classified and described in accordance with IFRS and comply with statutory requirements.
(a) Review agreements for assignment and pledge of inventories.
(b) Review purchase commitments.

Following matters are Instructions to be issued be inelu ed in inventory unt
entity for the guidance

( a) Date and timing
(b) Locations on wbicltaQllll take place.
( c) Identification by inventories.
( d) Pre numbering-of inventory count sheets.
( e) Accounting for all numbered records issued and used.
( f) Cut off recording
( g) Marking of items counted and re counted to ensure that all items are counted and duplicate counting is avoided.
( h) Identification of stage of completion of work in Process
( i) Recording of items on .count sheets including complete description, code and quantities counted.
(j) Method of determining quantities such as weight, count or measure.
( k) Description?f count unit such as numbers or dozens
( l ) Physical segregation of obsolete and damaged goods.
( m) Physical segregation of goods sold but not delivered.
( n) Verification of inventories held by others.
( 0) Summarization of count sheets.
( p) Investigations of differences between physical and b06k inventories.
( q) Control over movements of goods during Inventory count. Javid


1. Obtain or prepare a lead schedule of fixed assets and accumulated depreciation by major asset classification showing balances at beginning and end of period, additions, disposal, depreciation on assets disposed of, and other adjustments.
(a) Trace last year’s balances with last year’s working papers.
(b) Check arithmetical accuracy of the schedule.
(c) Trace totals of the schedule to general ledger control account and balance sheet.(Valuation, Completeness)

2. Select some assets physically and trace to non-current assets register. (Completeness)

3. Select some assets from non-current assets register and carry out physical inspection. (Existence)
4. Verify ownership documents.

(a) Inspect suppliers’ invoices
(b) Inspect tittle deeds or the lease
(c) Inspect registration books for motor vehicles (Rights and obligations)

5. Vouch entries in fixed assets accounts.

(a) Inspect approved suppliers’ invoices with related receiving documents for additions to fixed assets.
(b) Vouch entries f~rOisposal of fixed assets.
(c) Inspect board of directors minutes for authorization of sales and purchases of fixed assets.
(d) Trace preoeeds of’eeles-to-cash book.
(e) Re compute gain or loss on sale of fixed assets.
(f) A~e control account with subsidiary records.
(g) If assets are revalued, ensure that the entire class of assets to which that asset belongs is revalued.
h) Determine that the cost of fixed assets include:

Purchase price, including import duties and purchase taxes. Other directly attributed costs of bringing assets to working condition for its intended use e.g., cost of site preparation, installation costs and professional fee.

(i) Determine that costs of repairs and maintenance is properly allocated as to assets and expense

6. Check allowance for depreciation.

(a) Determine that depreciable amount of the asset is allocated on a systematic basis to the accounting period.
(b) Check that the depreciation method is applied consistently , from period to period.
(c) Determine that following factors have: estimating adequacy of depreciatie cmuge:
useful life of asset: considered in estimating expected physical wear and tear obsolescence legal or other limits on the use of assets.
(d) Re compute depreciation charge for year (Valuation)

7. Perform analytical procedures.

Review the following relationship for current and preceding year (and capital expenditure budget), and obtain explanations for significant fluctuations. ‘
(a) Accumulated depreciation at year end to cost of fixed asset.
(b) Current year charge for depreciation to fixed assets at cost.
(c) Additions to fixed assets with capital expenditure budget. (Completeness, valuation)

8. Verify fixed assets for impairment.

9. Verify assets under fmance lease.

10. Inspect fm~ial statements to check that fixed assets have been disclosed, classified and described in accordance with IFRS and comply with statutory requirements

Posted on November 3, 2015 in Verification (Substantive Procedures)

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