Auditing Inventory Valuation – A Time Consuming Effort

Auditing a manufacturing company and a service providing company are not the same in both practical and tactical point of view. The auditos have to adopt different strategy for different companies. Audit checklist also vary from company to company. Let us have a look on what an auditor can see in a manufacturing company.

Inventory Valuation for Materials: An auditor should check whether inventory valuation is over or under stated or not. First, he has to excercise a pure stock-take at a cut-off date determined by the management of the company and himself. Then he has to be confirmed of the unit rates as fixed by the company. Now rates multiplied by the quantities will determine the total inventory valuation.

Finished Goods Inventory Valuation: While doing the valuation for finished goods, an auditor should check the related documents for 3Ms (Materials, Machines and Men). In other words, he should check for materials, labour and overhead. Labour records may come from Payroll and other employee related fixed expenses. Overhead rates will be a tricky part and may come from overhead budget and given volume for the auditing year.

A company may adopt actual or Standard Costing system. If standard, it would be rational to check for whether standards set for the year were practical and reliable. He must look for how the variances generated during the year were adjusted to come at actual.

An auditor must check for how the valuation for work-in process has been done. How valuation was done for partly completed products. Was the theory of equivalent quantity adopted in the valuation of partly completed work-in process inventories?

He has to validate the labour rates as attached to the product cost. For this reason, he must check for total labour hours associated with required or budgeted quantities to be produced during the year. Divide total expenses by total quantities to derive the Labour rate.

Auditing for inventory valuation is a time consuming part. Much care to the detail would be required for this job.