XYZ & Co., Chartered Accountants, are statutory auditors of JKL Ltd., a manufacturing company, for the financial year ended 31st March 2026.…

CA Intermediate · Auditing and Ethics · RTP · September 2026
XYZ & Co., Chartered Accountants, are statutory auditors of JKL Ltd., a manufacturing company, for the financial year ended 31st March 2026. During the audit, the engagement partner emphasises the importance of verifying the completeness of inventories, as inventory constitutes a significant portion of total assets. The audit team observes that inventory is stored at multiple locations, including third-party warehouses and that the company deals in consignment goods as well. Further, there are concerns regarding cut-off errors and discrepancies between physical stock and accounting records. Having regard to above, explain the audit procedures to establish the completeness of inventories.

Suggested Answer and Working Notes:

Audit procedure to establish the Completeness of Inventories: Perform analytical procedures (comparison tests with industry averages, budgets, prior years, trend analysis, etc.). Compute inventory turnover ratio (COGS/ average inventory) Perform vertical analysis (inventory/ total assets) Compare budgetary expectations vis-vis actuals Examine non-financial information related to inventory, such as weights and other measurements. 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. With respect to tagged inventory, perform tests for omitted transactions and tests for invalid transactions. Verify the clerical and arithmetical accuracy of inventory listings. Reconcile physical inventory amounts with perpetual records. Reconcile physical counts with general ledger control totals. Reconcile inventories which belong to client but are held with third parties like transporters, warehouses, port authorities etc. Goods received on consignment basis have been properly segregated from other items of inventory. In the given situation, by performing the above procedures, the auditor can ensure that all inventory items have been completely recorded in the books and no material items have been omitted.

Topics: Audit of Items of Financial Statements

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