During the statutory audit of Very Good Electricals Limited for the year ended 31st March, 2026, S & Co., Chartered Accountants, considered the…

CA Intermediate · Auditing and Ethics · MTP · September 2026
During the statutory audit of Very Good Electricals Limited for the year ended 31st March, 2026, S & Co., Chartered Accountants, considered the company's inventory records and related verification procedures. As part of the year-end audit, the audit team reviewed the procedures followed by the company for determining and recording its inventories. The company maintained substantial inventories at its own premises, while certain inventories owned by it were lying with transporters, warehouses and port authorities. In addition, the company had received certain goods on consignment basis. The audit team noted that the company had conducted a physical count of inventories at the year-end and had prepared inventory records based on the quantities physically counted. During the review, however, the auditors considered whether the physical count alone would identify all inventories that should have been included in the financial statements, particularly inventories held by third parties and transactions occurring immediately before and after the year-end. The auditors also considered the need to distinguish goods received on consignment from inventories owned by the company. Accordingly, the audit team planned to perform analytical procedures, examine relevant non-financial information, carry out purchase and sales cut-off tests, verify inventory listings, reconcile physical inventory records with perpetual records and general ledger control totals, and obtain appropriate evidence regarding inventories held by third parties. The team also considered whether goods received on consignment had been properly segregated. Explain the audit procedures to be performed to establish the completeness of inventories recorded in the financial statements. In the light of the above circumstances, discuss the significance of the procedures considered by the audit team.

Suggested Answer and Working Notes:

Completeness of Inventories Only the inventories held by entity have been recorded in the financial statements and do not include any inventories that belong to third parties but does include inventories owned by the entity and lying with a third party. The auditor should perform the following procedures: (1) Perform analytical procedures (comparison tests with industry averages, budgets, prior years, trend analysis, etc.). (i) Compute inventory turnover ratio (COGS/ average inventory). (ii) Perform vertical analysis (inventory/ total assets). (iii) Compare budgetary expectations vis-à-vis actuals. (2) Examine non-financial information related to inventory, such as weights and other measurements. (3) Perform purchase and sales cut-off tests. Trace shipping documents (bills of lading and receiving reports, warehouse records, and inventory records) to accounting records immediately before and after year-end. (4) With respect to tagged inventory, perform tests for omitted transactions and tests for invalid transactions. (5) Verify the clerical and arithmetical accuracy of inventory listings. (6) Reconcile physical inventory amounts with perpetual records. (7) Reconcile physical counts with general ledger control totals. (8) Reconcile inventories which belong to client but are held with third parties like transporters, warehouses, port authorities etc. (9) Verify goods received on consignment basis have been properly segregated from other items of inventory. From the above circumstances, physical counting of inventories at the year-end alone is not sufficient to establish their completeness. The auditor should perform analytical procedures, examine relevant non-financial information and carry out purchase and sales cut-off tests. Inventory records should be reconciled with perpetual records and general ledger control totals. The auditor should also verify inventories owned by the entity but held by third parties and ensure that goods received on consignment are properly segregated.

Topics: Audit of Items of Financial Statements

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