Responsibilities of Auditors in valuation of Inventories

Role and Responsibilities of Auditors in Inventory Valuation

Auditors play an important role in valuation of inventories. Their responsibilities in physical verification of inventories, Records verification, Valuation and confirmation are discussed as follows.

1. Physical verification of Inventories

1. The auditor may attend the stock-taking beforehand; The auditor may thoroughly evaluate the internal control procedure and verify the stock records. He may also examine the method of physical verification of stock adopted by the management. The extent of the presence of an auditor during stock taking depends upon his individual judgement in the efficiency of the stock taking procedure, maintenance of stock records and reliability of internal control system.

2. The auditor may evaluate the procedure followed by the management in identifying defective, damaged and obsolete items.

3. The auditor may ensure that the stock records are properly maintained and that the management adopt a system of physical verification in which all inventories are verified at least once, in every financial year.

4. The auditor should also satisfy himself that the discrepancies found during physical verification are appropriately dealt with and timely action is taken to prevent such occurrences in the future.

5. The auditor may apply test counts on high value items.

6. The auditor should ensure that goods purchased but not received are included and goods sold but not dispatched are excluded from inventories.

2. Verification of Inventory Records

The entries such as receipts, and issues in the stock records may be verified with the Goods Received notes, inspection reports, material issued notes etc. The nature and extent of examination depend upon the reliability of the internal control procedure and results of the auditor’s examination of stock records.

3. Confirmation

If the inventories are held by third parties, the auditor may obtain a confirmation from such parties acknowledging holding of stocks.

4. Verification of Valuation of inventories

1. It is the foremost duty of an auditor to ensure that the basis adopted for the valuation of inventories is appropriate.

2. The management must adopt a generally accepted accounting principle for valuing the inventories and the method adopted should be consistently followed year after year.

3. The management may follow the principles stated in Accounting Standard 2 (Valuation of Inventories) issued by the Council of ICAI in valuing the inventories.