Inventory memo audit

Inventory memo audit

The objectives of an inventory audit process are to prove the existence, rights, accuracy and realizable value of items in a company's inventory. An auditor uses multiple analytical procedures to verify a company's inventory methods and confirm that the financial records match the physical counts.

An auditor reviews the company's plans and procedures for counting inventory and often physically observes the actual counting methods to determine efficiency.

To verify the physical inventory counts, the auditor may randomly select samples from the warehouse or storage area and locate them in the count records. This also may be done in reverse, with the auditor selecting records from the count and then matching the figures to the actual items in inventory to verify existence.

Statistical sampling is one method businesses use to count inventory. Counting only a portion of the inventory and then applying the statistical results to the inventory as a whole can greatly reduce the time spent on the count.

When an auditor uses this method, he then checks to see that the results, if reasonable, have statistical validity and are properly applied across the entire inventory. The auditor determines whether the statistical methods would produce the same results as a complete physical count.

An inventory audit establishes that all inventory recorded by the business actually belongs to the company. For example, the auditor may reconcile purchase orders and vendor invoices with canceled checks to ascertain whether the inventory has been purchased.

During the inventory audit process, the auditor will determine whether or not any inventory belongs to customers and has not yet been shipped and if any products and items in inventory stand as collateral for a business loan. The auditor will match the inventory counts to records in the general ledger to ensure that the values are correct and conform to generally accepted accounting principles. In situations where the business carries high-value items in inventory, an auditor may do a physical count on these to verify value.

The results will then be reconciled with the inventory values as listed in the financial records. The auditor checks the quality of products and items in inventory and verifies that excessive or damaged products are accurately listed at realizable value. Vicki A Benge began writing professionally in as a newspaper reporter. A small-business owner sinceBenge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals.

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Photo Credits.The independent auditor who issues an opinion when he has not employed them must bear in mind that he has the burden of justifying the opinion expressed. This section relates only to observation of inventories and does not deal with other important auditing procedures which generally are required for the independent auditor to satisfy himself as to these assets.

In such circumstances, the independent auditor must satisfy himself that the client's procedures or methods are sufficiently reliable to produce results substantially the same as those which would be obtained by a count of all items each year.

The auditor must be present to observe such counts as he deems necessary and must satisfy himself as to the effectiveness of the counting procedures used. If statistical sampling methods are used by the client in the taking of the physical inventory, the auditor must be satisfied that the sampling plan is reasonable and statistically valid, that it has been properly applied, and that the results are reasonable in the circumstances.

This should be coupled with inspection of the records of any client's counts and procedures relating to the physical inventory on which the balance-sheet inventory is based.

inventory memo audit

He may, nevertheless, be able to become satisfied as to such prior inventories through appropriate procedures, such as tests of prior transactions, reviews of the records of prior counts, and the application of gross profit tests, provided that he has been able to become satisfied as to the current inventory.

If such inventories represent a significant proportion of current or total assets, to obtain reasonable assurance with respect to their existence, the auditor should apply one or more of the following procedures as he considers necessary in the circumstances. Skip supplemental navigation General Auditing Standards.

Page Content. Amendments: Amending releases and related SEC approval orders. General Auditing Standards. AS Independence.

inventory memo audit

AS Audit Risk. AS Audit Evidence. AS Supervision of the Audit Engagement. AS Using the Work of a Specialist. AS Audit Documentation. AS Engagement Quality Review.

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AS Communications with Audit Committees. Audit Procedures. AS Audit Planning. AS Substantive Analytical Procedures. AS The Confirmation Process. AS Audit Sampling.

AS Illegal Acts by Clients. AS Related Parties.Any inventory of Raw materials, finished goods as well as Intermediate in process inventory has an economic value and is considered an asset in the books of the company. Accordingly any asset needs to be managed to ensure it is maintained properly and is stored in secure environment to avoid pilferage, loss or thefts etc.

Inventory Control - Inventory Audits and Cycle Counts

First of all inventory of raw materials as well as finished goods can run in thousands of SKU varieties. Secondly inventory can be in one location or spread over many locations.

Thirdly inventory may be with the company or may be under the custody of a third party logistics provider. These factors necessitate inventory maintenance mechanisms to be devised to ensure inventory control. Inventory control is also required as an operational process requirement. Inventory is has two different dimensions to it.

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On one level it is physical and involves physical transactions and movement of inventory. While on the other hand, inventory is recognizable by the book stock and the system stocks maintained.

This necessitates inventory control mechanism to be implemented to ensure the book stocks and the physical stocks match at all times. Thirdly the inventory always moves through supply chain and goes through various transactions at various places. The number of transactions and handling that it goes through from the point of origin to the point of destination is numerous.

Therefore it becomes essential to control inventory and have visibility through the pipeline including transit inventory. Inventory control is exercised through inventory audits and cycle counts.

An inventory audit essentially comprises of auditing the books stocks and transactions and matching physical stocks with the book stock. Cycle counts: Cycle count refers to the process of counting inventory items available in physical locations. Depending upon the nature of inventory, number of transactions and the value of items, cycle count can be carried on periodically or perpetually.

Daily Cycle Count: Normally where the number of SKUs is very high coupled with high n umber of transactions and through put, daily cycle count is initiated, where in a certain percentage of locations or SKUs are counted on daily basis and physical stock is compared with system stock.

How to Write an Audit Memo

By the end of the month all of the stocks would have been covered once in cycle count. Inventory system throws up a count list based on an analysis of the movements of fast moving SKUs along with other attributes like value etc. In some of the system, inventory controllers can set up the attributes for each cycle count.

Wall to Wall Cycle Count: End of financial year and closing of books entails doing wall to wall cycle count of all stocks lying in all locations and tallying with books of account. This is a mandatory audit requirement and until stock figures are reconciled, certified by auditors and published, New Year books of accounts cannot be started a fresh.

Except for daily cycle counts, all other cycle counts entail counting hundred percent of all the stocks by stopping all transactions during the counting period.

System transactions are also frozen until the count is completed. Inventory system throws up count list with SKU number, description and location number. The operator goes to the location, checks the SKU, counts the qty available and updates the list, which is then fed into the system. The system reconciles the physical quantity with system quantity and throws up discrepancy report, which is further worked upon to tally and adjust inventory.

View All Articles. Similar Articles Under - Inventory Management.Conducting an in-house audit or an independent audit for another company requires you to delve into the finances and physical assets of the business to in order to balance the tangible with the existing records. The final step in the audit process is the audit memorandum which summarizes each phase of the audit and gives your reader recommendations for changes that will improve the accuracy of the records and profitability of the company.

Writing an audit memorandum requires in-depth knowledge of the business and the attention to detail required to compare records with reality.

Outline the financial results of the audit in your introduction. Explain to the reader whether the audit showed a higher or lower financial standing than the existing records. Write a summary of the physical audit of the inventory of the company. List the details of the inventory audit. Explain to the reader whether items were physically missing or whether there were more items than expected.

Draft an outline of the existing book inventory recorded by the company and how it compares to your physical count. Refer back to your comparison between the books and the physical count. Explain where the bookkeeping needs improvement. Explain the financial difference between the physical and book inventories. A shortage on the physical count would mean that the company has less assets than previously thought.

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Excess goods mean a surplus that needs to be tracked in order to learn its origins to make sure it has been paid in full. Outline your audit of the ongoing contracts in which the company is currently engaged. Explain the financial ramifications of the outcome of each contract.

Detail the labor audit with an explanation of work hours and productivity. Review the output of the company in relation to the workforce on a daily, weekly, monthly, quarterly and yearly basis for a complete look at productivity. Summarize the audit with a statement outlining the company's finances along with your recommendations for improvement. Explain to the reader where he can make improvements, which systems function perfectly and where massive overhauls must take place. After learning electronics in the U.

Navy in the s, Danny Donahue spent a lifetime in the construction industry. He has worked with some of the finest construction talent in the Southeastern United States. Donahue has been a freelance writer sincefocusing his efforts on his beloved construction projects.

Skip to main content. Warning Fraud is a felony. Conducting an audit for a company involves looking deep within its financial and employment records as well as its physical inventory. Never allow a member of a company to influence your audit in any way.

About the Author After learning electronics in the U. Accessed 17 April This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. The tried-and-true schemes these and other companies pulled have always given auditors nightmares. A CPA who recognizes how these fraudulent manipulations work will be in a much better position to identify them.

In a study, the Committee of Sponsoring Organizations of the Treadway Commission found misstated asset valuations accounted for nearly half the cases of fraudulent financial statements. Inventory overstatements made up the majority of asset valuation frauds and are the focus of this article. The valuation of inventory involves two separate elements: quantity and price. Determining the quantity of inventory on hand is often difficult. Goods are constantly being bought and sold, transferred among locations and added during a manufacturing process.

Figuring the unit cost of inventory can be problematic, too; Fifo, Lifo, average cost and other valuation methods can routinely make a material difference in what the final inventory is worth. As a result, the complex inventory account is an attractive target for fraud.

Dishonest organizations usually use a combination of several methods to commit inventory fraud: fictitious inventory, manipulation of inventory counts, nonrecording of purchases and fraudulent inventory capitalization.

All these elaborate schemes have the same goal of illegally boosting inventory values. The obvious way to increase inventory asset value is to create various records for items that do not exist: unsupported journal entries, inflated inventory count sheets, bogus shipping and receiving reports and fake purchase orders.

Since it can be difficult for the auditor to spot such phony documents, he or she normally uses other means to substantiate the existence and value of inventory. Observation of physical inventory. The most reliable way to validate inventory quantity is to count it in its entirety.

Even when this is done, little mistakes can allow inventory fraud to go undetected:. Management representatives follow the auditor and record the test counts.

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Thereafter, the client can add phony inventory to the items not tested. This will falsely increase the total inventory values. Auditors announce when and where they will conduct their test counts.

For companies with multiple inventory locations, this advance warning permits management to conceal shortages at locations which auditors will not visit. Sometimes auditors do not take the extra step of examining packed boxes. To inflate inventory, management stacks empty boxes in the warehouse. Analytical procedures. Compared with previous periods, the cost of sales will be too low; inventory and profits will be too high.

There will be other signs, too. Inventory increasing faster than sales. Decreasing inventory turnover. Shipping costs decreasing as a percentage of inventory.

Inventory rising faster than total assets move up. Falling cost of sales as a percentage of sales. Cost of goods sold on the books not agreeing with tax returns. Auditors must maintain adequate security over audit evidence. For instance, say the client receives a large shipment of merchandise five days before the end of the accounting period and picks up all copies of the receiving reports and invoices and secretes them during the audit.Audits can seem like overwhelming and frustrating business tasks, but they can help organizations to improve their finances, revamp their processes and increase their profit margins.

An audit memo provides a summary of the audit and the related recommendations to an organization. Businesses can either hire external auditors or use internal resources to conduct the audit. The format of the audit memo will vary based on the organization and the kind of audit conducted. Internal audits can focus on finances, operations and procedures. It's best practice for small businesses to conduct an internal audit annually to ensure all finances and processes are in check.

Conducting an internal audit can help your small business improve efficiency and prepare for tax time.

inventory memo audit

External audits are conducted by an independent party outside of the organization. If there's an issue, the auditor will share where discrepancies take place and provide recommendations for the business to improve their financial books. Begin the audit memo by providing context for the audit. Information to include in the introduction includes:. The introduction of the audit memo should provide the necessary information to inform the reader of the top-level goals and parameters of the audit.

The reader can then review the body of the memo to learn more about the findings and recommendations in relation to the goals. Review the process for the audit that the auditor has taken in the next section of the audit memo.

This may include the meetings the auditor has taken part in with senior members of the business and the topics they've discussed. It will also include the documents and financial statements that the auditor reviewed as part of the audit. As part of the process, the auditor may also list the members of the auditing team and their certifications.

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After the process section, outline the findings in the audit memo. This is the key information that the auditor has uncovered through their investigation. A sample memo for audit findings may include areas of significant risk and areas of great discrepancy between the financial statements and the financial standing of the company.

Be sure to be as specific as possible with dollar amounts and other numbers. Lastly, provide detailed recommendations that the business should undertake in order to improve any areas of risk or discrepancy. Relate these recommendations directly to the findings and the goals of the organization.

If one of the major goals of the audit was to improve the company's financial processes to reduce risk, for example, then the recommendations should show the organization how they can better accomplish that goal. The audit memo can also provide recommendations to make certain processes more efficient and accurate.

Anam Ahmed is a Toronto-based writer and editor with over a decade of experience helping small businesses and entrepreneurs reach new heights. She has experience ghostwriting and editing business books, especially those in the "For Dummies" series, in addition to writing and editing web content for the brand.

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How to Write an Audit Memorandum

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