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Hello,
I understood the point that prep count will take “control approach” with some substantive test and periodic will take “substantive approach”, but not able to differ them both,I know how to substantiate the inventory but how do auditor substantiate the “Counting process” like when the counting is taking place?
Thanks!
Perpetual inventory implies that inventory is constantly adjusted for sales and receipts. There should be control processes in place to ensure that the client does this accurately and those controls need to be tested.
The auditor will also do some substantive testing eg, select a GRN and trace to a change in the inventory balance; select a change in the inventory balance and trace to GRN/delivery notes.
Periodic inventory is like a count at year end. The auditor observes this to ensure that it is being carried out as it should be (eg labels being signed off on shelves as the contents are counted etc.). The auditor will also to some test counts (substantive) and agree this to what the client’s staff have counted. Similarly, the auditor will trace some items from count sheets to the inventory and count it.
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