Auditing and Accounting During and After the COVID-19 Crisis

Inventory audits can prevent inventory shrinkage (or when the actual inventory levels are less than accounting has them recorded as) and identify costly slow-moving products. This is ideal if you create your own products as it demonstrates when product is ready to be sold so an auditor can immediately value the inventory for the current accounting period. Auditors may test this inventory to ensure financial statements are accurate. Once you’ve set your inventory end date and properly segregated your inventory, you’ll also need to take a look at any invoices you’ve received and sent after that date. During this part of the process, you may also want to double-check your segregated inventory to make sure everything that has been set aside was received after that date.

Otherwise, you can use external inventory counting services to help you. Analysis of freight cost measures the shipping costs to transport products from one location to another, and instances of items getting lost or damaged during transit. For example, you transfer the products from your warehouse to your stores and monitor how much it costs, such as carrier by truck. In physical counting, you will go through every item in the warehouse to record the number of available products, usually with the assistance of technology. Audits take it a step further to confirm the correct quantity, as well as the quality and condition of your stock. If direct labor is included in the cost of inventory, then the auditors will want to trace the labor charged during production on time cards or labor routings to the cost of the inventory.

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Auditing inventory helps you understand current counts, but it’s another thing entirely to use data to make future business decisions. Demand forecasting is predicting future orders Inventory Rollback Procedures by using historical data. This enables a business to make better decisions around inventory planning, product storage, and marketing promotions while meeting customer expectations.

• So the recorded video option is a possibility, but I think there would have to be some really tight controls over that, and the evidence on authenticity would have to be pretty substantial.
• Magento is an open-source platform that helps retailers create eCommerce websites, released on March 31, 2008, by Varien and developed on Zend Framework.
• The high-value inventory item tests, also known as the ABC analysis, involve classifying your products based on their profitability.
• Since accounts like payables and receivables are the direct results of activities in the operations of the company, it is usually sufficient to show the credits and debits on these accounts.
• Edited by CPAs for CPAs, it aims to provide accounting and other financial professionals with the information and analysis they need to succeed in today’s business environment.
• Otherwise, you can use external inventory counting services to help you.

AU-C section 501, “Audit Evidence—Specific Considerations for Selected Items,” expands on the process of inventory observation that was summarized in AU-C section 331. The auditor should evaluate the inventory procedures, observe and inspect the inventory, and perform test counts. A similar process should occur if the count occurs at a time that the auditor cannot be physically present.

Inventory in transit analysis

Since this is usually a busy month with holiday shopping, you can use roll forwards and rollbacks to run the physical count before or after year-end. When transmitting materials between different locations, you need to track the lead time for the products to arrive. This audit analysis will ensure nothing is lost or damaged during transportation. Inventory auditors will review the transfer documentation to identify any problems. Of course, the generally accepted procedure that has been there for years has been stood on its head when you can’t actually get to the client’s site to observe the inventory. But I think it’s important for auditors to recognize that there are alternatives.

The inventory rollforward helps us understand beginning and ending inventory, purchases of materials throughout the year, as well as cost of goods sold. If you are using a FIFO or LIFO inventory valuation system, the auditors will test the inventory layers that you have recorded to verify that they are valid. The auditors must follow the lower of cost or market rule, and will do so by comparing a selection of market prices to their recorded costs. 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.

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However, they should be broken down to the most granular level of detail. Most P&L accounts do not require elaborate supporting documents because they consist of simple transactions. One sale, for example, requires only the supporting documentation of an invoice. However, it has become an umbrella term that’s used to describe different accounting activities.

The caveat there would be that you certainly couldn’t get sufficient, appropriate audit evidence about the existence assertion by only doing price-test and subsequent sales transactions. But it’s not as if the inventory observation is the only evidence that’s obtained with respect to existence. SAS 106.30, Observation, consists of looking at a process or procedure being performed by others; for example, watching the process of inventory counting or controls processing constitutes observation. The observation is only valid, however, for the point in time when it occurs and is constrained by the fact that being observed may affect how activities are performed.

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” One aspect is that Paragraphs .11 and .14 of AU-C Section 501 reference the requirement to attend the physical inventory counting unless it is impracticable to do so. This procedure uses the install add file activate commit command in privileged EXEC mode to install a software package, and to upgrade the platform to a new version. An inventory audit is defined as the process of checking a company’s actual inventory levels against their financial records to ensure accurate inventory accounting. Inventory audits can be performed by the company or an outside auditor to identify any problems with the inventory storage and accounting methods a company is using. The auditors want to be comfortable with the procedures you use to count the inventory.