How to Audit Inventory


Inventories are carried at a lower cost and net realizable value. Cost is calculated on a weighted average or specific identification basis as appropriate and comprises all costs of purchase, cost of conversion and other costs incurred bringing the inventories to their location and condition.

Net realizable value is the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale.

When the inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized.

Assertions of inventory testing

Existence: To ensure the physical inventory exists in place compared to the listing.

– To obtain the inventory listing as of year ended

– To obtain the client’s inventory count instruction

For the items selected from the stock listing provided, inspect them physically and agree to the count sheet. To complete the stock count sheet and report of attendance at physical stocktaking.

Accuracy and completeness: To check the unit cost of inventories stated in the final stock listing are reasonable and in accordance with the accounting policies.

Valuation: To check that the cost of inventories is stated at the lower cost and NRV.

Audit procedures

1. Quantities testing:

Confirm that the stocktake has been performed correctly and agree the items are physically counted at the period end to the final inventory listing.

Obtain, record, and check for any discrepancy between quantities as per the physical count and the final stock listing

Obtain, record, and check for any significant written-off or other adjustment recorded on the inventory ledger.

Based on inventory count observation, confirm the accuracy of cut-off between the dated count and after the year ended.

Unit cost testing: Ascertain the cost formula used for valuing inventories as below:

FIFO: First in, First out method: To check the purchase invoices for selection of items until sufficient supplier invoices have been identified to account.

WAC: Weighted average method: To extract the WAC before the last purchase transaction from the ledger and vouch for the last purchase transaction to supplier invoices.

Recalculation to ensure that the unit cost has been determined correctly in accordance with the WAC method.

NRV testing: To obtain the sale invoice from the client by taking the selling price compare with the cost of the inventories whether it is stated at lower cost or NRV.

2. Review on slowing moving/obsoletes stocks: To determine whether obsolete, slow-moving, and defective items have adequately been provided for.

– To obtain the Company’s policy for identifying slow-moving or obsolete items

– To obtain an explanation for observation during the physical count

– To obtain any provision made for slow-moving or obsolete items or inquiry the impairment of an asset.