[keppel]

Dear Gromit,

Thank you for your kind guidance. I benefitted a lot from it.

Regarding the inventories, if the stock level dropped sharply in the current year, despite an increase in turnover. There is then a risk of the inventory being understated. To address the risk, could I adopt the procedures like: (i) I would agree the balances per the inventory records to the inventories list and then to the ledger; (ii) carry out an inventory count; &enquire with the management why there is a fall in inventory; (iii) Check the unit cost of the inventories against the purchase invoice; Check the subsequent sales of the inventories to verify the NRV. (iv) Check against the GRN’s and GDNS near the year end? Am I correct?
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And if a company simply counts the inventory periodically, say every month and then draw up a list of inventory, without keeping a full inventory records showing the inwards and outwards of inventories is this a weakness in the system? Under this system, what other procedure shall we do to check against the inventory?

May I look forward to receiving your kind guidance again?

[keppel]

Dear Gromit,
Thank you for your kind guidance.

To ensure that purchases had been ordered and goods received before the liability was accepted, could this be verified only by performing transaction tests and cut-off test on purchases for testing against the occurrence of purchases and the complete recognition of liabilities respectively, whereas the trade payables balances, when checked against the suppliers statements, can satisfy the auditors as to the completeness of the purchases and the payable balance stated?

Am I correct in the understanding in applying the directional testing so as to achieve audit efficiency?

[Author]

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