Non-documentary auditing (inventory audit) is an optimal auditing tool for generating evidence during the financial statement audit process, overcoming the shortcomings of documentary auditing in cases where the audited entity's financial statements are not properly prepared to legitimize the data.
The main steps involved in the auditor's inventory witnessing process are listed below.
1. Receive inventory information from the audit client.
As the end of the fiscal year approaches, businesses will send their auditors an inventory plan and a detailed inventory list of assets to be inventoried.
Based on the information received, the auditor prepares the relevant documents for the inventory count, compiles an inventory witness report, assesses materiality, and selects inventory samples at the enterprise.
2. Participate in witnessing the inventory.
Auditors will participate in witnessing the inventory count at the company after receiving the inventory schedule provided by the company. Note that auditors only witness the inventory count and do not perform the counting process themselves.
Witnessing means that a person attends, observes, sees, and acknowledges an event as occurring through their presence. Witnessing an inventory means that a person attending the inventory observes the process of counting assets and records the organization, execution, and results of the inventory.
Inventory is the act of checking each item individually to determine the current quantity and quality condition of the items being inventoried. The organization and implementation of inventory is the responsibility of the enterprise, as clearly stipulated in the Accounting Law.
For each location where the auditor participates in the inventory count, the auditor must observe and record the inventory procedures performed by the client as well as the procedures performed by the auditor to ensure the reliability of the inventory count, especially for finished goods, merchandise, raw materials, and work-in-progress.
3. Conduct the necessary audit procedures on the inventoryed asset item.
The auditor selects high-value items from the inventory list/inventory sheets and checks the selected items. The inventory is then conducted and compared against the quantities on the inventory list/inventory sheets.
In addition, the auditor randomly selects physical items at the inventory location. A physical inventory is conducted and compared with the quantities on the asset catalog/inventory sheet. Copies or detailed records of documents related to the accuracy of the inventory period at each inventory location are collected, such as the last goods issue slips (GDN) and last goods receipt slips (GRN).
Observe any damaged, obsolete, or slow-moving asset items discovered during the inventory process and ensure appropriate provisions have been made, or that such items have been excluded from the ending asset list.
Upon completion of the inventory, any discrepancies discovered during the inventory process are the responsibility of the business to explain and present in the inventory report sent to all parties involved.
Inventory counting is a very practical and well-suited non-documentary auditing method that aligns perfectly with the auditing function of verifying bookkeeping figures through factual verification. Therefore, inventory counting must always be closely integrated into the overall auditing process as well as the detailed procedures for the relevant items.
To better understand the steps needed to prepare for the year-end inventory, you can refer to the article on “Year-end asset inventory: things businesses need to keep in mind.” by EXPERTIS.