PQR Limited is engaged in trading and manufacturing activities and reports a substantial amount of inventories in its financial statements as at…

Audit procedure to establish the legal ownership rights over the Inventories claimed to be held by the entity and recorded in the financial statements: (i) Vouch recorded purchases to underlying documentation (purchase requisition, purchase order, receiving report, vendor invoice and cancelled cheque or payment file). (ii) Evaluate the consigned goods. (iii) Examine client correspondence, sales and receivables records, purchase documents. (iv) Determine existence of collateral agreements. (v) Review consignment agreements. (vi) Review material purchase commitment agreements. (vii) Examine invoices for evidence of ownership i.e. the invoices shall be in the name of the client. (viii) Auditor shall obtain confirmation for significant items of inventory. (ix) For instances of inventory held by third party, the auditor should insist on obtaining declaration from the third party on its business letterhead and signed by authorised personnel of that third party confirming that the items of inventory belong to the entity and are being held by such third party on behalf of and for the benefit of the entity under audit. Thus, by performing the above procedures, the auditor can obtain sufficient and appropriate audit evidence regarding the entity's legal ownership rights over inventories reported in the financial statements.