Question

What tests can an audit perform to make sure that inventory and accounts receivable on the balance sheet is fairly stated?

Answer 1

AUDIT PERFORMANCE RELATED TO INVENTORY

1) Examination of records: Auditor should check the records maintained by the entity with respect to inventory showing in respect of each major item the receipts, issues and balances with reference to the supporting documents like goods receipts note, materials issued notes

2) Attendance at inventory taking : a) It involves inspecting the inventory to ascertain the existence and evaluate its condition

b) Performing test count

c) Observing compliance with the management instructions and the performance of procedures for recording and controlling the result of physical inventory

3) Obtaining confirmation from third party : Where significant inventory of the entity held by the third party the auditor should examine that whether such holding is proper

4) Examination of valuation and disclosure : The auditor should satisfy himself that valuation of inventory is as per the normal acceptable accounting principles and disclosure of the value of inventory as per the disclosure requirements

5) Analytical procedures : It involves analyzing of inventory ratios and trends to identify any deviations for say comparing of current year gross profit ratio to the previous year

AUDIT PERFORMANCE RELATING TO ACCOUNTS RECEIVABLE

1) Direct confirmation from accounts receivable: The auditor should obtain the direct confirmation from the debtors to ascertain whether the balances are genuine, accurate and stated correctly particularly when the internal control is weak

While examining the balances of the accounts receivable auditor need to pay special attention to see whether the age of the receivables are correctly stated or not and in case of any provision is adjusted to the trade receivables he may not still pay the balance amount

In case of claims against insurance policy, Shipping companies, railway the auditor should examine the correspondence or other available evidence to ascertain whether the claims have acknowledged as debts and their reasonable possibility of realization

In case of bills discounted auditor need to see whether the amount is shown as contingent or not