Audit of Inventories

What is checked

• Physical existence — observing the stocktake or recounting a sample
• Correct determination of acquisition cost
• Consistent application of the cost formula
• Whether write-offs for losses, defects and spoilage are justified
• Slow-moving stock and the need to write down its value

Observing the stocktake

The auditor obtains the most reliable evidence that inventories exist by attending the stocktake. That is why its date is agreed in advance: this procedure cannot be performed retrospectively, and without it the inventory line leads to a qualification in the audit opinion.

Slow-moving stock

Inventories that have not moved for a long time cannot be carried at full acquisition cost if the real possibility of selling them has been lost. The absence of a turnover analysis is a recurring finding that overstates balance sheet assets.

Audit procedures

• observing the stocktake and test counts — the auditor is entitled to verify the physical existence of property (Art. 28 of Law ZRU-677 on Audit Activity);
• cut-off test for receipts and shipments at the reporting date;
• testing cost and the cost formula;
• analysis of turnover and slow-moving stock, testing write-downs to net realisable value (for IFRS financial statements — IAS 2).

Tax aspects

• shortages where the culprits have not been identified do not reduce profit tax (Art. 317 of the Tax Code);
• a discrepancy between the books and the goods actually on hand is a sign of concealment of the tax base (Art. 223).